My, How the Markets Have Changed

Includes: DIA, SPY
by: Macro Man

OK, let's get this over with. No, Macro Man cannot confirm that the reason the USD fell so hard overnight is because Elin Woods asked for a bid in $500 million USD/SEK before she went to bed last night.

Seriously, what does it say about financial markets when equities surge after the close, apparently on the story that BAC will pay back $45 billion of TARP funds, when the news came out during yesterday's New York session? Peculiar, to say the least. In any event, every man and his dog has SPX 1121 on his radar, which is the 50% retracement from the crack-smoking subprime 2007 peak to the cyanide-swallowing 666 lows in March of this year.

Note the negative divergence of the last few months (as the index makes new highs, momentum does not). Actually, on second thought, don't look at it at will probably cost you money. Macro Man did a little portfolio review last night, and was surprised - but not very much - to discover that his hit ratio this year by strategy has been a paltry 33%. Fortunately, a lot of the losers were swiftly ejected from the book, but wonder it's been such a frustrating year for him.

Anyhow, today could be quite momentous, as two of the most important men in finance take the stage....for very different reasons. While the ECB will not change rates today, Jean-Claude Trichet is expected to provide at least some guidance as to the ECB exit strategy... if only by clarifying whether the forthcoming one-year LTRO will be at a fixed 1%, indexed to the refi rate, or with a penalty fee. Really, the choice is between the first two... and assuming the ECB doesn't move rates for another 6-9 months it should be largeyl irrelevant for currencies.

Not necessarily so for fixed income, where the market will look for guidance on the normalization of EONIA (and thus, euribor). There seems to be a school of thought that this is likely to happen in Q2; ERM0 is pricing in euribor of 1.2% currently, which would represent a "normal" spread to policy rates.

Somewhat strangely, the market is then pricing in a sequentially smaller quarterly rise in rates each quarter for the next two years. In other words, it seems to be pricing in more rate rises in H2 of next year than in H1 of 2011. From Macro Man's perch, the reverse would appear more likely. Similarly, there's nothing to stop the ECB from nudging EONIA higher at the beginning of next year, so the less than 15 bps priced into March looks a bit too low.

In Washington, meanwhile, Ben Bernanke will testify at his re-confirmation hearing in the Senate today. In the Greenspan years, this process represented nothing so much as a papal audience, but my.... how times have changed.

Krishna Guha notes in the FT that Bernie Sanders has raised the bar for Bernanke's confirmation through a procedural measure that now requires him to attain 60 votes. Macro Man was in college when Sanders was first elected to Congress, and remembers how anomalous it was to see a Socialist - a Socialist! - elected to the House of Representatives. My, how times have changed indeed.

Anyhow, given the fact that while Wall Street has the money, Main Street has the votes, BB looks set to come under the cosh from all directions today. "Record Goldman Bonuses" and "Record U6 unemployment" make uncomfortable bedfellows, a fact that the likes of Chris Dodd are likely to press home with vigor.

While Bernanke's public speaking has improved during his tenure, it's still not great, so he's likely to come across as pretty defensive. Whether this derails the risk asset orgy remains to be seen, of course. On the basis of what Macro Man has seen this year, he gives it a one in three chance.....