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RGL Daily Thinking

September 19th

Two binary events in front of us:

1. Troika to decide on Greek's compliance with the program. Conference call is scheduled later for today (7pm local time) between Greek FM and Troika reps. Actual decision expected to be taken on Oct 3d. Greece is clearly having hard time meeting the requirements but at the same time it is easy to see that "the fudge" will continue for at least one more time given that since most recent measure been passed, not enough time passed to assess their effectiveness. Greece still has not reported on the acceptance rate for debt exchange (one week past the deadline) and Greek PM cancelled Washington visit, both being the signs of things not going well. On another hand most recent call between Merkel, Sarkozy and Papandreou ended on a positive note, so not all hope is lost.

This is a binary event in a sense that NO tranche disbursement equals immediate default by Greece. Positive result pushes the whole drama another 3 months forward. I am not sure it is worth positioning either way for this event at this point.

2. FOMC is to announce it's decision on Wednesday. Market consensus is for some form of duration extension in the portfolio. Even though that is a consensus, obviously there is plenty of room for surprise either way as details (amount and tenor) are important. Personally I think the risk on the side of disappointment. After all core inflation is at target and rising and there FOMC members who are concerned with that. However history is against me here, as in the time of stress FOMC tended to "over deliver" lately.

This is also binary, hence best is probably to stay away, position wise.

Other observations.

There is ongoing sell off in EMFX. It is pretty indiscriminate and off significant magnitude. Dollar funding stress by European banks is an easy explanation, but re-assessment of EM/DM growth differential seems more plausible to me. Also, short dollar theme was a popular theme over last couple of years, and lack of further B/S expansion by the FED is probably putting it in question. I am focusing on some other dollar shorts - namely commodities. If global growth is indeed slowing down and $ accommodation is limited, I would expect oil and metals to come down significantly from this levels.