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Previewing The Week Ahead

I'm going to keep this as succinct as I can. The final French polls are going to close in just abit so there's no use speculating and haranguing over who's going to win. There will be long term implications for the Euro project/current Troika (ECB/Germany+France/IMF) trajectory in dealing with the debt crisis if the socialist wins. Expect status quo to continue and Merkel to quickly tighten her grip over the grand situation. I've already mentioned about how this event risk will filter down and impact the European markets. I don't think the European equity markets have priced in a watershed victory of Hollande. This isn't an event of high contrast; more rather one with a grey tone. The market's shouldn't tank nor rally much regardless of the electoral results. It is not akin to a rate hike by a central bank... there is no immediate implications but a change of winds if you will.

The Greek polls are also currently open and are about to close. Results will be out around 2000 Greek time. Consensus has it that there isn't any party that will win with majority of the votes. If indeed so, the top party (highest votes) will be given 3 days to form a coalition and ultimately construct a government. If they fail to do so or reject this right (not the obligation), the baton is pass to the party with the next highest votes... and so on. If all else fails, a temporary government will be formed with the task to hold another election. The risk for Greece that of national funding/bank recaps. Remember that Greece hasn't actually got all the bailout money from the Troika. Future outlays from the Troika are contingent on Greek compliance with budgetary austerity targets and overall debt/GDP targets. Whatever the case, I feel Greece is a gone basketcase.

It seems the elections are serving as good distractions, able to satiate the market's appetite for uncertainty... and lots of nonsense.

Other than the elections, there is nothing much other than the residual earnings releases of the 18% of so firms (by market cap of the S&P500) and Q1 GDP figures for the other important economies.

I think risk will be generally off in the coming few weeks. The markets' (US equities, corporate credit, FX complex, TSYs, PMs, Oil) reaction to the dismal 115K NFP print on Friday was telling. It seems that such a headline is interpreted as risk negative; have QE hopes have been subjugated by negative sentiment of weak data? Here's a count so far: Weak retails sales, weak housing prices/starts, weak employment, weak GDP growth, modestly "strong" ISM figures... if QE hopes have indeed been shelved (quite hard to contemplate since this notion of constant QE expectations have been etched into the market's structure), the market (risk assets) have quite alot of room to fall; partly because the relentless meltup in equity prices were a result of lack of outright supply rather than willing buying (think about the consecutive weekly retail outflows from managed money and equity trusts and funds since Aug '11).

I hence expect the US Dollar (DXY as proxy) to outperform risk in general. I expect the Yen to outperform almost all risk-inverse assets (on a beta adjusted basis) and TSYs to rally with a curve flattener. I suspect equities will be the biggest looser among the popular risk assets, along side with the Aussie carry (AUD basis swap positions will have to be unwound in this risk off scenario, and especially exacerbated by the 50bp-lowering of RBA rates. IG credit will outperform equities as the latter will play catchup to the former's prolonged underperformance. Copper will be very much tied to China growth risk (so wait for Chinese Q1 GDP growth).

On the commodities side, WTI got smashed on Friday dropping under $100 in months (only due to NYMEX margin hikes?). I don't think WTI is stongly co-related to general risk. It has its own actors (mainly geo-political risk). Art Cashin has been warning of much more trouble from the Middle Eastern region (in particular, Egypt) while WTI has been much more sanguine. I have no directional biases in Oil. The PMs outperformed risk on Friday, a big surprise. It can only mean one thing, QE hopes are still present. Notice Gold isn't rising but also isn't falling. I saw how the investment community as mistreated Gold's lack of ebullience as though Gold has fallen in price. Perhaps they were too used to rising Gold prices that a lack of positive returns in this 4 month period has messed with their psyche. It is possible that QE hopes have been detached from equities but remain attached to the PMs. It is still too early to conclude.

In the FX complex, I expect the Yen to be the stark outperformer. Technically: Bullish USD (underweight long EurUsd, AudUsd, NzdUsd); more bullish JPY (short UsdJpy, AudJpy). Keep an eye on the loonie. The Canadian Dollar was dragged much lower on Friday's WTI takedown.

Bonus charts:
10Y Bunds, 10Y JGBs
Where has all the Yen and JBG bubble callers retreated to? Where's Andy Xie when you need him? I'm happy to say that I warned against bubble calling. I presented the case for a weaker Yen but I never soothsaid about a JGB collapse. "Caveat emptor" also applies the other way round.

10Y JGB: Proves people suck at timing, once again...

10Y Bunds: The ultimate firewall incognito...