Macro Views and Flows – The Taper is the least of our worries

  • FOMC and Taper

Standard Non Radical Views from the US Banks

“Expectations going into this meeting are wide and varied – but consensus distills to a $10bn reduction in UST purchases with no change in the timetable for ending QE. We think decreasing the amount to $5bn is unlikely; it is debatable how much greater benefit the economy would see, while casting uncertainty over the remaining 6 meetings before QE is forecasted to end. An increase to $15bn is largely unexpected at this point, would be considered hawkish, and negative EM and commodity currencies. It is more hawkish to act both on MBS and treasuries, than just on Treasuries.

We expect consensus on the taper, but it should also be accompanied by fairly dovish language. The impact of forward guidance is less binding – however, the Fed may seek to strengthen a reaction by lowering the unemployment rate threshold, lower economic projections or possibly introducing an inflation floor.” Source : Citi

” FOMC meeting delivers the first tapering — as we expect — the Committee may feel compelled to do something in their communications to anchor rate hike expectations and prevent the market from conflating asset purchase decisions with overnight interest rate policy. ….
Emphasize tapering is not tightening, etc. Tapering isn’t tightening; Future tapering decisions will be data dependent; Purchases can be decreased or increased. All of these messages have been said in previous press conferences, and we expect the same thing at next week’s press conference. Something may be gained from repetition, but we don’t see it as particularly newsworthy if the Chairman reiterates these points.” Source : JPM

Dissenting View by Stan Druckenmiller
““How in the world does anyone think when the actual exit happens that prices are not going to respond?” Druckenmiller said today on Bloomberg Television…The purchases have subsidized all asset prices, he said, and completely stopping them would mean “the market will go down.” ”

>> Sorry, Druckenmiller. We have to act dumb and blur. The Fed is as much a hostage as we are. US Treasuries perhaps oversold ? Coupled with reserve re-buying, we could be in for a rally into the quarter end.

Plus the breaking news this morning out of WSJ.

“Lawrence Summers, the former U.S. Treasury secretary, called President Barack Obama Sunday to say he is pulling out of the contest to succeed Ben Bernanke as chairman of the Federal Reserve.

“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery,” Mr. Summers said in a letter to the president that followed the telephone call.”

Looks like the Taper is the least of our worries.

  • Merkelections, Italy & Greece

EUR has gone largely under the radar even with the Syria pantomime starring Obama.

  • Greece

“Greece’s next tranche of bailout loans due in October may be delayed, an unnamed “senior source” told Market News. Greece sees a financing gap by 2016 of around EUR10-15bn, the source said, and is looking for maturity extensions and lower interest rates on its outstanding bailout loans. ” Source : Citi

“Greece is drawing on a EUR200 billion bailout from the euro zone and a EUR40 billion package from the International Monetary Fund. A team of international experts from the troika of supervising institutions–the European Commission, the European Central Bank and the IMF–are due in Athens later in September to check on progress. ”
The question of an additional package for Greece has played high in the German pre-election agenda. It has put Chancellor Angela Merkel in a difficult position as she has had to reassure her bailout-wary voters that they won’t need to put up much more cash to continue supporting Greece. ”

  • Italy

Italian senate panel voting on Berlusconi has reportedly decided to do so next week, alongside the FOMC, on September 18. If Berlusconi loses the first vote, he has 10 days to present a defense before the panel votes again. If that vote is lost, the full Senate floor will take it. All of this is expected to occur by October 15.

“Italy may have lost as much as a third of its overall industrial production in recent years, experts say.”

  • Merkelections -22nd Sept is highly anticipated to bring about a sea of change but will be a non event.

“the biggest opposition parties (the SPD and Greens) have already given most of Merkel’s eurozone policies their stamp of approval. Major legislation must pass through both the Bundestag and the Bundesrat, but the current government only has a majority in the former. In the latter, there is an SPD-Green majority that has approved the German government’s policies on the eurozone.

Germany will continue to do just enough to keep the eurozone from fracturing, but is unlikely to do much more. There will continue to be foot dragging on banking union, political union and fiscal union. The German government — whatever its composition — will most likely continue to offer small-scale programs for the weaker countries, such as its apprenticeship scheme and loans for small and medium companies (SMEs) (via German government development bank KfW). These policies will help on the margins, but will be a drop in the bucket compared with what is necessary to tackle soaring unemployment and difficult borrowing conditions for businesses in the periphery.”

  • France – German ally, downgrades growth but ignored

“France is to trim its growth forecast for 2014 from 1.2 percent to 0.9 percent and hike its budget deficit projections for this year and next, reflecting a slower-than-hoped recovery, Les Echos newspaper reported on Wednesday.”

>> EUR has enjoyed overrated anonymity. Time to take profit.

  • EM Outflows and Inflows

Positives : “One other issue of note this week has been the ability of
governments to tap external debt markets for funding despite the
recent re-pricing of emerging market debt, albeit at higher
spreads than before. Most notable in this regard was the US$2.0
billion twelve-year bond issued by South Africa, with a yield of
6.06% (bids totaled US$7.4 billion), and the US$1.5 billion 5-1/2
year Sukuk (sharia-compliant bond) issued by Indonesia at a yield
of 6.125%. Russia does not have the same need for external
financing but it also took advantage of the opportunity to issue
US$7 billion in new debt, the largest sovereign issue so far this
year.” Source : Citi

Bond Outflows – Holding Cash (Source : Citi)

    • EM Bond funds reached their 16th consecutive week of outflows this week, since the trend began in May-end…..The pace of outflows has been steady and significant on the local currency side, while the hard currency outflows have taken a back seat. Local currency bond funds have so far lost about 10% of AUM, since the EM bond outflow wave started in the beginning of Jun….
    • Large inflows in money market funds, confirming our view that investors have been biased towards shorter-duration instruments for some time now. Money market Funds saw USD 7.5bn worth of inflows this week.
    • Flows into US bond and global bond funds continued to see large outflows as well – US bond funds saw USD 1.8bn in outflows and Global bond funds saw USD 1.9bn in outflows.

Equity Inflows – Significant (Source : Citi)

  • EM equities saw their first big week of inflows since Feb 2013
  • Inflows streamed into Japanese equities as well, at USD 1bn, biggest inflow since May13
  • US equities that saw inflows return this week after 4 weeks of big outflows
  • Stream of flows into European equities continued relentlessly

>> Sit back and enjoy the correction while making plans for the next exit.

  • Political Turmoil Besides Syria


“Thousands of opposition supporters have marched through the Cambodian capital of Phnom Penh, vowing to rally for several days in a bid to overturn Prime Minister Hun Sen’s disputed election win.”


“Egypt extends state of emergency by 2 months”

“Egyptian troops and helicopter gunships attacked Islamist militants in the Sinai on Friday in a drive to crush a security threat now spilling over into the rest of the country.”


New Bumi aid a blow to Najib’s reformist image, analysts say
“He has carefully crafted his image as a reformer since taking office in 2009 but Datuk Seri Najib Razak may have dealt this façade a blow by unveiling a slew of additional pro-Bumiputera affirmative action seen to shore up his position ahead of the Umno polls, political analysts said.”

>> Things will only get worse and worse before they get better.