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ECB Shock and Awe, FED march 2009 Redux!

|Includes: SPY, iShares 20+ Year Treasury Bond ETF (TLT)
Finally!
Our "Shock and Awe" treatment for which we have argued so long has finally come to pass.
 
The political leadership in Europe finally called and end to the fun and games, and put the every reticent monetary officials before their responsibilities.
 
 
The European Central Bank has thus joined its central bank peers, by accepting its role as buyer of last resort, a modern extension of the Bahegot criteria and an absolute necessity when markets are out of joint’.
 
Once again, market have imposed their solution, but let's not allow that to destroy our glee.
 
 
The devil may indeed be in the details, and we will be watching over the European plan's implementation, which may not be necessary, because what really counts is the ECB's bond purchases on secondary markets.
 
The price shifts were impressive this morning, with hikes of 20% to 30% in some Greek bonds, as the Eurostoxx climbed 9% on huge cash equity volumes.
 
Memories of the market rally following the announcement of equivalent measures in the US in March 2009, particularly the spread compression between the MBSs purchased by the Fed and Treasuries, will surely push investors to try and "surf the wave".
 
Check out the Fed programme's huge impact on spreads in the graph below.
As you can see, even MBSs are benefiting from the ECB's plan, with the significant narrowing of spreads this morning.
 
 
Yield spread between treasuries and 30- year mortgages
The central bank sets the price…
 
 
 
 
 
It will be interesting to see how the very Eurosceptical American investments funds react with the opening of US markets.
 
 
 
Asset allocation and option strategy
 
Unsurprisingly, we are positive on equities, negative on core debt, with a huge steepening bias, and positive on peripheral eurozone government debt.
 
Ride the bullet!
 
 
PS: Now that the situation in Europe seems to have stabilised, let's not forget China, where interest rates and the $/Yuan parity appear poised to move.
 


Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds