Key News
* Euribor rates rise across the board (Reuters)
* European Consumer Prices Rise First Time in 7 Months (Bloomberg)
* Record fall in consumer borrowing says Bank of England (BBC)
* U.K. Bank Loan Write-Offs Hit Record Highs (WSJ)
The Event Agenda
Afternoon Run-Down
The dollar broke down in thin trading on Wednesday (the day before Thanksgiving) and the reflation story looked well intact going into the holiday. But when the world digested Dubai story, a restructuring of sovereign debt, the risk trade cracked wide open on Thursday and Friday in very thin markets.
At extreme levels of the two-day period commodity currencies (like Aussie dollar, New Zealand dollar, Canadian dollar) fell 4%, crude oil fell 7%, gold fell 5%, Chinese stocks fell 7% and US stock futures fell 4%. And currency market implied volatilities (a good gauge of uncertainty) exploded higher on Thursday and Friday…the biggest move in some pairs since January.
The bull market experts quickly come to the defense of the risk trade by explaining the “contained” nature of the Dubai debt situation. Perhaps the same experts that explained away the sudden fall in short term Treasury yields into negative territory in past weeks. Nonetheless, the markets have retraced from those extreme levels on Friday and have calmed a bit today.
I would be very cautious in accepting the arrogant appraisals of just how “contained” the Dubai problem is. See Russian default, 1998. No one knows the outcome of a shock to confidence (perhaps the most critical factor in financial markets today) and the potential waves that such news can cause in the global financial markets considering the tenuous economic climate.
Last week, I mentioned a bubbling fear indication in the Treasury market…
” Where there is smoke, there is usually fire. Safe haven demand has ticked up in the U.S. Treasury market. Short term U.S. Treasury Bill yields fell back to the zero yield line last Thursday for the first time since the credit freeze of last year. Today’s 5-year note auction drew the strongest demand in two years, and yesterday’s 2-year notes sold for the lowest yield ever.”
This scare should be enough to prompt managers to neutralize portfolios and call it a year….particularly those that are in the black. So markets will likely be thinner than usual in December —perhaps an added catalyst for more volatility/fireworks.
In China, Eurozone officials completed their visit and lobbied for a more flexible yuan, but to no avail. The Chinese have now hosted the US and EZ and have concluded the visits by stating that they want a stable yuan.
We get a rate decision tonight out of Australia. The market is expecting a third consecutive 25 bps hike. But with the uncertainty surrounding the Dubai event the probability has risen for a surprise (no change) out of the RBA. Also, we get the ECB rate decision on Thursday which will be unchanged on rates, but will likely indicate on phasing out the liquidity support for banks. Other key data to watch for the week: Eurozone preliminary GDP for the Q3 and employment data out of the U.S.
Key Charts
The biggest two day jump in implied volatility (1-month) since January as traders bought downside exposure and downside protection on the highest flying currency over the past nine months…
The yen has been one of the strongest currencies in the world in the last month, and the elevated risk situation boosted the yen vs. the dollar through the prior highs of last year…to 14-year highs. And the threat of intervention has been stepped up. I showed this chart below last week…the Nikkei at Friday’s low was down 12% since late October.
The cost of insuring 10 million dollars worth of Dubai debt more than doubled from early last week.
