Tuesday, 25 January 2011

Negative growth for UK

A shockingly bad number out of the UK dropped cable over 100 pips and lead to a rally in bonds. Short sterling was up over 16 ticks for the day with spreads edging slightly lower, Gilts spiked 80 ticks on the number to climb above 118 before falling back.
The number came out -0.5%, 1% lower the the expectations and this will have a big impact on whether rates will rise any time soon.
Last week, it seemed that a rate hike is inevitable as CPI reached an annual level of 3.7%.
Now the central bank’s dilemma is even more complicated – another quarter of contraction and we have a double dip recession. But leaving the interest rate so low means that inflation can rage. Troubled times.

Sunday, 23 January 2011

Stock buy : AGCO

I initiated a long position in AGCO on Friday. It reached the bottom of an upward channel and had been hit 7% in the past week. So think this is worth a little pop.
Entry: 51.24
Target: 60
Stop : 45

Date: Ticker no of shares Entry Exit
18/01/2011 long qlgc 60 18.14
21/01/2011 long agco 20 51.24

Thursday, 20 January 2011

Equities take a hit as Europeon uncertainties continue

Equities dumped along with bonds as the higher inflation putting pressure on bonds, and European uncertainties putting pressure on stocks.
The pullback was overdue and often it tends to happen quite fast. I think as the underlying trend is still bullish it will present some good opportunities if we get a bit more downside.
The schatz is down 17.5 ticks as I write despite equity weakness, and is down 70 ticks since last Thursday. This in tern has lead to flattening spreads as short term expectation for rate movement increase.
Euribor spreads seem to be steady on the far end of the curve, and that is where most of my attention has been of late. Just scalping the range, as it seems to be the safest strategy right now.
Tomorrow we have UK retail sales, a good number here would add to the chances of a early rate hike. Lets see how it pans out.

Tuesday, 18 January 2011

US Stock portfolio: Buy

I decided to buy into QLGC today as it looks like its breaking out of a narrow range.

Entry: 18.14

Target: 21

Stop: 17

Portfolio:
Ticker No.shares Entry Price Exit Price PnL

qlgc 60 18.14

UK inflation soars

UK headline inflation rose 3.7% y/y 0.3 higher then the 3.4% expected. Not surprising this as pretty much everything is getting more expensive.
Cable saw a 70 pip spike upwards and Gilts saw a 30 tick spike downwards. Some are saying rates could be raised before June to tame inflation, but will unlikely to be next month as data is still quite weak.

ANALYST REACTION

GEORGE BUCKLEY, DEUTSCHE BANK

"The numbers are obviously a lot worse than expected. I think it does raise the risk that the Bank of England will have to move interest rates in the first half of this year. We don't think they'll move next month because the data has actually been a little bit weaker during the start of this year, for example the PMI services, the trade figures, on average. But I think they will probably have to move towards the middle of the year and I think there's support to move towards that point, so for example at the May inflation report."

JONATHAN LOYNES, CAPITAL ECONOMICS

"December's worse than expected UK consumer prices figures will do nothing to comfort those concerned that the Monetary Policy Committee is neglecting its inflation-targeting remit.

"However, it is likely to have been reassured that the forces lifting inflation do not reflect underlying price pressures in the UK economy.

"With fundamental drivers like spare capacity, wages growth and money growth all still pointing to considerably lower inflation in the medium-term, we continue to think that the MPC should - and probably will - hold its nerve and continue to provide the economy with the strong support it will need to withstand the coming fiscal tightening."

HOWARD ARCHER, IHS GLOBAL INSIGHT

"Higher petrol prices, food prices and utility bills all contributed to December's spike up in inflation. It also appears that the severe weather in December did not push retailers into offering significantly more discounts and promotions to try to boost sales over the critical Christmas period.

"Despite the undeniably significant risk to growth coming from the fiscal tightening that is now increasingly kicking in, there is mounting pressure on the Bank of England to enact at least a token near-term interest rate hike to send out the message that it has not taken its eye off the inflation ball."

ROB CARNELL, ING

"More headaches for the Bank of England's monetary policy committee with the release of December inflation.

"With the bulk of the government's public spending cuts yet to be fully felt, many on the MPC will no doubt argue that more time is needed to assess the impact on the economy, before responding to high current inflation - after all, the MPC targets inflation two years ahead, not today's rate.

"Nonetheless, pressure on the doves to change their views is building. Markets will increasingly price in tightening this year.

Thursday, 13 January 2011

US Stock portfolio

As well as periodic commentary, on bonds, I've decided to post my US stock buys/sell. Ill post them as I make them, and will update weekly.
Disclaimer: These will be for informational purposes only and in no way an indication to buy or sell.

Inflation talk tanks Euribors

In today's ECB press conference, Jean Claude Trichet gave the first hints of a change in stance in policy after he says that there are short term pressure on inflation, and upward pressure mainly due to energy prices. Other key points:
ECB's Trichet says bond purchase programme is ongoing
ECB's Trichet says interest rates are appropriate
ECB's Trichet says inflation expectations remain firmly anchored
ECB's Trichet says expect price stability over medium term
ECB's Trichet says governing council will continue to monitor all developments very closely
ECB's Trichet says our non-standard measures are temporary in nature
ECB's Trichet says recovery is expected to be dampened by balance sheet adjustment
ECB's Trichet says downside risks to growth from renewed tensions in some segments of financial markets
ECB's Trichet says risks to economic outlook are still slightly tilted to downside, uncertainties remain elevated
ECB's Trichet says monetary policy stance and liquidity provision and allotment modes will be adjusted as appropriate

Euribors came of at one point 15 fat ticks in the afternoon session, as the curve began to steepen as traders anticipate a rate hiking cycle. The Eur/Usd was one of the biggest benefactors gaining over 200 pips in the afternoon.
Despite these massive moves, I personally feel we are very far from any rate hikes. With Ireland still going through bank troubles, debt issues in Greece Spain and Portugal, it is unlikely given the fragile state of these countries that any rate hikes will be forthcoming.

Stocks continue its advance higher, as we enter Q4 earnings season. An interesting stat:
As part of the most recent observations on the boil up (melt up is so QE1) in the S&P, we find something quite interesting. A quick glance at the chart below shows the general market 45% climb since Bernanke's leak of QE2 in August, as well as the market's 10 day (purple line) and 50 day (green line) moving averages. As a point of reference the S&P has been above the 10 day average for 30 days straight, and above the 50 day average for 92 days straight. What is remarkable are some statistical findings as pertain to the average's movement with respect to the SMAs. Sentiment Trader points out that while as part of the recent surge in the S&P, the market has gone for "92 days without closing below its 50-day average, which has been matched only 17 other times since 1928." Where it gets scary, is that as pointed out, during this time the market has not closed below the 10 DMA once during the past 30 days. And as Sentiment Trader notes, "this has never happened before, in 82 years of history." Congratulations to the Centrally Planned Socialist States of America: its Chairman has just made the Guinness Book of Manipulation Records.

Friday, 7 January 2011

Non farm payrolls fall below expectations

So much for a strong ADP report, non farm payrolls rose by 103k, less then the initial estimates. Alot of volatility ensued after the number as the dissapointment was offset by the improvement in the unemployment rate, which went from 9.8 to 9.4. The drop was due to a 297,000 increase in employment on the separate household survey and a 260,000 decrease in the labour force. Household employment had fallen sharply in both October and November, so some bounce back always looked likely (the three month average is -57,000).
Bunds spiked up 28 ticks on the news, but was not a big a reaction as I expected given we came off so much on Wednesday. I stayed on the sidelines for much of the afternoon action as there wasn't really any high probability plays.
Next week we have ECB and BoE rate decisions, which are almost certainly going to be left on hold.
Have a nice weekend.

Wednesday, 5 January 2011

Bunds fall on strong ADP

A very strong ADP number pushed bonds down hard across the curve as signs the labour market may be picking up. Bunds traded down 80 ticks from pre release and is currently trading at 125.49. Euribor spreads as you would expect rose slightly too, with the front end spreads moving up the most. ADP the precursor to the main US non farm payrolls, however has been off the mark in recent readings, so still waiting to see if this is confirmed on friday. Anything other then a good topside number should see some profit taking, but as pointed out in the previous post, given the decline in weekly jobless claims coupled with ADP suggests we could get a very big number. Here are two different views from Knight capital and Goldman Sachs:
From Knight's Brian Yelvington:

ADP, the best (and really only) predictor of Friday’s monthly jobs data, printed at a very high 297K gain for December versus expectations of a 100K gain. We have noted before that “best” here is a pretty low bar and the ADP report should be considered in its own right, and not just a forward look at the official numbers. ADP overestimated November’s jobs data (by 43K), but underestimated the prior 6 months (average difference of 55K).

That being said, the 297K print is hard to argue with. 270K of the jobs were in the services sector, so this raises expectations for the ISM Non-Manufacturing number due out at 10AM. We will closely watch this number for confirmation of the ADP data, but there is historically not a huge basis to argue with the number. Even adjusting for holidays and noting the service bias, it is not out of line. Service jobs accounted for about 97% of ADP December job gains and 84% of all ADP prints over the past five years. A confirming ISM number at 10AM will significantly raise expectations and estimates for Friday.
And from Goldman:

MAIN POINTS:
1. The monthly ADP employment report surprised sharply to the upside in December, posting a gain of 297,000 jobs versus consensus expectations of 100,000. This is the best ADP reading currently on record (the official data go back to January 2001, though the series has only been released publicly since 2006). Notably, the initial report for June 2006-since revised-was +368k, which substantially overstated the comparable BLS first print of +90k.

2. The bulk of the December 2010 surprise came from small- and medium-sized service sector firms (+120k and +123k respectively, up from +48k and +30k in November). Goods sector employment growth was still soft, with manufacturing up 23,000 (vs +15k in November) and construction up 6,000 (vs. +10k in November). ADP's estimate of financial sector employment was down 6,000, versus a gain of 2,000 in November.

3. The ADP data have a special quirk that could have affected today's report. ADP records payrolls based on the number of names on the payroll-regardless of how many hours they work during the week. Not every firm immediately "cleans" payrolls when an employee quits or is laid off; in some cases, it can take until the end of the year for the payroll list to be officially updated. This creates a lot of volatility in the December report in particular. In theory, one would expect greater purging in payrolls in bad years (like 2008 and 2009) and less in relatively better years (2010 was hardly spectacular, but at least payrolls were up on the year). Of course, the official report attempts to adjust for this behavior, but if 2010 saw relatively less purging than the sample period, it's possible some of today's improvement could be the result of this data quirk rather than genuine acceleration. Given the potential for an overstatement, we have put a -1 judgmental adjustment on our US-MAP reading, which still records a significant upside surprise.

4. Luckily, we will have a useful cross-check of the ADP report later on this morning. If service-sector employment really is accelerating sharply, we'd expect to see the employment index of the ISM non-manufacturing survey (which was 52.7 last month) post a meaningful increase. This report will be released at 10am and will help us gauge how much weight to put on the very strong ADP report.

Tuesday, 4 January 2011

New year starts with a bang

2011 has started of on a positive not for stocks, as we hit triple digit gains on the Dow and as of now we are higher once again.
Bonds as you expect have come off, Euribor spreads have been fairly flat as of now, with a slight bias on the short side as the front end is seeing most of the selling.
I've started of my trading on the cautious side as I try evaluate where we stand. I managed to short 25s in dec11-mar12 short sterling to nick a tick, and sold some 29s in the sep12-dec12 spread. It all seems a bit flat now so going to wait for the afternoon, to look for more opportunities.
I think Fridays non farm payroll report will really set the scene for this month. I would expect a much better number then last month as we have been seeing improving weekly jobless claims, and last week we hit below the 400k mark for the first time in over a year.

In other news, it looks like facebooks world domination continues, as they have added Goldman Sachs to their list of investors. This puts Goldman in prime position should facebook do an IPO this year. Clever thinking indeed. The Goldman investment values FB at 50 billion dollars! A bit far fetched it seems, but it doesn't look like the growth of the company is slowing down any time soon.

Short Sterling spreads nudge higher on hawkish Fed; Walmart blowout

As most must know trading Short Sterling is a bit of a bore, and has been for a while. Having managed to get out of my 2 month hold before,...