Seven Thoughts For Thursday's Capital Markets

Capital markets have been buffeted by a number of different forces and volatility is rising.  Here is my sense of their significance. 

1. Misunderstood Bernanke:  I think the market misunderstood Bernanke to the extent that he was understood to break any new ground or signaled an increased likelihood of QE3.  He essentially repeated the main thrusts of the FOMC statement and minutes.  Although his text his the same today, look for him to find opportunities in the Q&A to balance the perception.  Bar to QE3 remains high.  Risk of deflation has ended. 

2. Moody's joins S&P:  Moody's joined S&P in putting US on credit review, so not really as signficant of an event, but what strikes me most is the different reaction between the Europe and the US.  European officials complain about recent rating changes, as if a country getting international assistance ought to be considered investment grade.  Some officials have also been disingenuous in calling for a European rating agency as Fitch is a wholly owned subsidiary of a French company.  US Treasury has embraced both S&P and Moody's moves and said they were useful reminders of the gravitas of the issue and why its needs to be resolved quickly. 

3. Risk of BOJ Intervention Low: Speculation that the BOJ intervened sent the dollar from about JPY78.60 to JPY79.60.   There does not really look to have been intervention.  In fact, I would continue to suggest the risk of intervention is low.  First, given the track record, unilateral intervention would be a last resort if Japan fialed ot get intertnational support.  Seocnd, intervention is, as I have often stated, more about volatility than levels.  Volatility has moved higher, and is worth tracking, but is only now rising above its 50 day moving average and is below the 100-day moving average.  At 10.4% (3-month implied) it is the highest level since June 16, fairly recently.  Other indications from the options market also suggest market conditions are not consistent with BOJ intervention. 

4. SNB Verbal Intervention:  Like the BOJ, SNB officials have stepped up their rhetoric as the Swiss franc makes new record highs vs the US dollar and euro.  However, one thing less likely than BOJ intervention is SNB intervention.  It has had its fingers burnt in a very public way.   Swiss exporters are of course bieng squeezed and there are some reports suggesting some Swiss exporters may consider paying employees in euros. 

5. Italy: Italian bond auction was regarded as fairly good reception but it has done the peripheral bond markets little good.  Ten year obnd yields are up 14-15 bp in Italy and Spain.    Yields are up half as much in Greece and Portugal.  Irish bonds are firmer--though CDS prices are firmer.   The Italian Senate is to vote on austerity today, lower house tomorrow.  

6. Euro Price Action: The US discount to Germany on 2-year notes, that tracks the euro-dollar exchange rate fairly closely has narrowed to 87 bp today, the narrowest since late Feb/early March.  It is down 19 bp this week after falling 11 bp last week.  It is almost 50 bp off its peak on May 4th.  In the sport market the euro is flirting with is trend line support on the hourly charts drawn off Tuesday and Wednesday's lows.  It comes in near $1.4175.   A convincing break could spur a move back toward $1.4050-$1.4100 near-term.   

7. Sterling Price Action:  A similar trend line for sterling comes in near $1.6050 and a break would open the door for another cent loss.    Sterling has rallied 4 cents in 3 days and looks to have topped or nearly so.  A close near $1.6100 today or lower would create negative candle stick pattern (hanging man).