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ECB on Hold Tomorrow

Takeaway: No change in interest rates as the ECB monitors sovereign yields and Eurocrats debate ongoing policy moves.

Positions in Europe: Long German Bonds (BUNL)

 

The ECB meets tomorrow. Our call is that there will be no change to its main interest rates and we will get no material update on when the Outright Monetary Transactions (OMTs) could be activated to buy sovereign bonds.

 

Our rate position is in agreement with consensus -- 48 of 54 economists polled by Bloomberg expect no change in the main interest rate.  On OMTs buying, we expect Draghi to continue to be tight lipped, mostly given the political climate and that while Spanish and Italian yields are elevated (the 10YR is currently at 5.88% for Spain and 5.08% for Italy) there below the critical threshold levels around 7.30%.

 

On the political climate we think there’s no reason for the ECB to act as the market is still sifting through such issues as:

  • If and when Spain will seek a sovereign bailout
  • The extent to which the ESM can directly recapitalize troubled banks, and
  • The terms around setting up a banking union

These will be some of the topics discussed when the Eurogroup holds its next meeting in Luxembourg on October 8-9.

 

ECB on Hold Tomorrow - aaa. rates

 

Keith covered our Real-time position in FXE (EUR/USD) on 10/1 at $128.53 with the cross at our immediate term TRADE oversold level. The EUR/USD continues to fail at its $1.31 TAIL line of resistance.

 

ECB on Hold Tomorrow - aaa. eur

 

Matthew Hedrick

Senior Analyst


Obamanomics: Crude Oil

WTI Crude Oil is up a whopping +133.4% since Obama took office in January of 2009. Anyone who drives an automobile has certainly noticed the increase in gasoline prices over the last three to four years. That pain at the pump will continue until oil comes down, which could happen soon. Our bearish thesis on oil sees the price of Brent and WTI Crude heading lower and the move could be kicked into high gear by a stronger dollar.

 

In honor of tonight's presidential debate, we've examined the performance of several different asset classes and their performance from January 20, 2009 to today to see just how well President Obama has done during his first term.

 

Obamanomics: Crude Oil - WTIchart

 


Obamanomics: Gold Performance

Obama can thank the Federal Reserve once again for inflating the price of gold during his time as President of the United States. Gold has put up triple digit returns to the tune of +106.7% since January of 2009. Should he or Romney take on a crusade to strengthen the US dollar, things can quickly change for gold and other precious metals like silver.

 

In honor of tonight's presidential debate, we've examined the performance of several different asset classes and their performance from January 20, 2009 to today to see just how well President Obama has done during his first term.

 

Obamanomics: Gold Performance - GoldChart

 


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Obamanomics: S&P 500 Performance

The S&P 500 has had a good run under President Obama's current term, increasing +69.9% since he took office in January of 2009. By comparison, George W. Bush saw the index falll -28.2% during his second term in office. Looks like Bernanke and Federal Reserve's nonstop quantitative easing have treated the President well.

 

In honor of tonight's presidential debate, we've examined the performance of several different asset classes and their performance from January 20, 2009 to today to see just how well President Obama has done during his first term.

 

Obamanomics: S&P 500 Performance - SP500chart


GOLD: The New Pawn Star

Takeaway: Q3 will be tricky for payday lenders but if gold can maintain its current levels, they can look forward to a positive fourth quarter.

Gold prices materially affect earnings at payday lenders like EZ Corp (EZPW) and First Cash Financial Services (FCFS). Q3 earnings for these types of companies will be challenging with tough comps and gold volume headwinds but things are likely to improve heading into Q4. 

 

In the third quarter gold averaged $1656/oz, which is 3% lower than the comparable period last year. That’s tough for Q3, but if gold continues to hold at $1777/oz,  that would mean a year-over-year increase of 5% in 4Q12 and a positive 4% year-over-year change in 1Q13. The higher gold goes, the better things are for payday lenders, particularly those who are exposed to gold the most. 

 

GOLD: The New Pawn Star  - Gold normal


Euro PMIs: Just Plain Bad

Takeaway: PMIs remain bombed out alongside weak fundamentals. Eurocrats continue to butt heads and markets gyrate on rumors.

Positions in Europe: Long German Bonds (BUNL)


European Manufacturing and Services PMIs for September (released on Monday and today, respectively) have shown little to no improvement over the last 7-8 straight months, stuck below the 50 line indicating contraction (see charts below).

 

Euro PMIs: Just Plain Bad - bb. pmis table

 

Euro PMIs: Just Plain Bad - bb. pmis chart

 

This comes as no great surprise given the larger Eurozone forces of slowing growth alongside fiscal consolidation and political consternation from Eurocrats on collective policy. To the latter point, we believe the runway to get to a fiscal union (including a banking union) is much longer than current expectations project. We see both the push back from stronger nations like Germany to “blindly” accept this risk (ie without conditions to benefit itself and/or limit reduction in its credit rating) and coordination to set up the logistics of a fiscal union inducing a protracted drag in this decision. 

 

To the point on timing, ECB Executive Board member Joerg Asmussen said on Monday that the ECB will not rush through “half-baked” plans for a new pan-European supervisor.

 

Remember that German Chancellor Merkel and Bundesbank President Jens Weidmann continue to butt heads on many fiscal issues. Eurobonds is one topic that Weidmann remains vehemently against while Merkel has not ruled out their use. However, if the Eurozone is to move to a fiscal union, Eurobonds are simply a natural extension of a fiscally united union. This is one hot topic to monitor as we move through the calendar year.

 

Interestingly, yesterday, Jin Liqun, chairman of the supervisory board of the China Investment Corporation (China’s $480B sovereign wealth fund), said that CIC will not buy bonds issued by debt-ridden Eurozone countries until their fundamental problems are solved. This point is of note because some over the last 12 months have suggested there’s a reduction in “risk” across Europe given the willingness of the Chinese to step in and support the region. Further, Jin said:

 

“The mass demonstrations in Greece and in Spain against fiscal tightening do not bode well for attracting investment into their debt… It's not realistic to expect any Chinese investor, CIC included, to buy the bonds, which are not safe…If the euro zone would issue a Eurobond backed by all of the countries - it is more attractive to international investors. Backed by all of the countries means backed by the core members."


We currently have a Real-time position in German Bonds via the etf BUNL.  Keith covered our Real-time position in FXE (EUR/USD) on 10/1 at $128.53 with the cross at our immediate term TRADE oversold level. The EUR/USD continues to fail at its $1.31 TAIL line of resistance.

 

Euro PMIs: Just Plain Bad - bb. eur usd

 

 

Matthew Hedrick

Senior Analyst


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