Morning Run…July 15, 2009

Key News

 

* BOJ Holds Rates Steady, Extends Liquidity Measures (WSJ)

* European Consumer Prices Record First Annual Drop in June (Bloomberg)

* Bean Says Darling Can Lift BOE Bond-Buying Limit (Bloomberg)

* China’s Foreign-Exchange Reserves Surge Above $2 Trillion (WSJ)

 

The Event Agenda

 

The Morning Run-Down

 

The strong outlook for Goldman Sachs ignited a rally in stocks on Monday, and the risk climate has swung back in favor of risk taking.  The Goldman numbers however didn’t indicate strength in the economy or strength in the financial sector.  Conversely, nearly 80% of Goldman’s revenues were from “Trading and Principal Investments.”  With $10 billion of government money in the coffers, Goldman stepped up its daily Value at Risk by 33% from the same period last year.  More high risk bets with risks transferred to the taxpayer—not a recipe for a recovery in financial “services.”

 

Nonetheless, some better than expected corporate earnings in the US and some slightly hotter inflation data this morning and better manufacturing and industrial production numbers are bolstering the recovery theme.  Stocks are up 2%, 10-year Treasury yields are back to 4% (up 25 bps since last Wednesday) and the dollar is lower against just about every currency. 

 

Each strong move lower in the risk trade continues to be met with an equally strong reversal.  And ranges continue to hold putting implied volatilities (in stocks and currencies) in retreat.  This whipsaw trading environment has proven difficult for the trading community.  Out of 178 top CTAs and Hedge Funds, only 27% made money in June and only 31% are positive for the year.

Key Charts

Out of the 132 companies that have reported thus far, two companies are contracting for every one that is growing.

 

China’s foreign exchange reserves topped $2 trillion for the first time in the second quarter.  Though this headline is making the rounds, it’s not news.  China’s monthly reporting of FX reserves showed the $2 trillion mark breached in April.  Money continues to flow into China, boosting fx reserves as the Chinese central bank exchanges yuan for foreign currency denominated revenues and investments.   But the pace on a year-over-year basis has slowed materially.

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