Waiting for Godot

Bernanke's Jackson Hole speech is the main event.   The way the market has traded this week, despite most observers playing down the likelihood of a new policy announcement, many are positioned for something.  Disappointment would still seem to be the greater  risk.   The S&P 500 is up 1.6% on the week even after yesterday's decline of the same magnitude.

A new estimate of Q2 GDP will be delivered.  Estimates vary--depending essentially if one believes the drag from the trade balance is offset by the better capital spending/inventories in the durable goods report.  The CBO's new estimates for 2011 GDP is 2.3%, which would put H2 growth around 1.5%.  Its forecast for 2012 is 2.7%.

The strongest currencies among the G10 have been the dollar-bloc and the the Scandis.  The weakest have been the Swiss franc, sterling and the Japanese yen.    The 2-year US-German spread is about 3 bp in the US favor on the week.  The US 5-year CDS price rose fractionally higher on the week (0.3 bp), while the German 5-year CDS is about 3 bp higher. 

This price action took place in a softer vol environment.  3-month euro vol is quoted at the week's low presently, while yen vol is hovering just above the week's low.  Both are about 0.5% lower than a week ago.

It is also noteworthy the in the options market, euro puts are trading at a premium to euro calls by a historically wide amount.  Today that premium is near 3.42%.   Bloomberg data goes back to Oct 2003.  The widest premium was recorded on Aug 9 near 3.565%. In the past I often found the discrepancy between this (3 month 25 delta risk reversal) and spot to be often a warning. 

No banks took dollars from the SNB or the ECB in the past week, but funding nervousness continues as the benchmark 3-month LIBOR has continued to firm.  At nearly 33 bp it is the highest since last Aug and has risen steadily since early July. 

The US curve steepened in recent days.  The 2-year yield is anchored by the Fed's pledge, but the 10-year yield rose 14 bp (to 2.2%) and 19 bp in the 30-year (to 3.57%). 

Pressure in the European debt markets remained evident as the dispute over the Finland-Greek collateral deal threatened unravelling of support for the July 21 agreement.  Over the week, the Greek 2-year yield has risen 700 bp this week to 44.77%, new record highs.  My back of the envelop calculation of the spread between Greece and German suggests that the pricing is consistent with a 80% of a 50% haircut.

The ECB is believed to have continued to buy Italian and Spanish bonds this week, but it appears to have reached the point of diminishing returns.  The Italian 10-year yield has risen 13 bp this week to 5.06% and is a two week high in yield. 

Foreigners continued to be sellers of Asian equities, albeit at a slower pace than seen earlier this month.  Taiwan is a modest exception as foreigners were net buyers of about $55 mln of shares, but for the month as a whole nearly $7 bln has been liquidated.