There seems to be nothing going on this week. I suppose I have been spoilt by all the action of last year. Incidentally, S&P’s recent downgrades of various European countries and the EFSF fall under my definition of “nothing”.

Periods of quiet are a good time to take stock of what is going on. In the US, leading indicators point to further improvement in the economy in spite of a mild fiscal contraction that looks set to last all year. With the economy improving, further QE looks unlikely, which means that monetary policy will remain overly tight and hence a strong liquidity-driven bull run in equities seems unlikely. Equally, a fundamentally-driven bull run (i.e. driven by rising earnings) also looks unlikely, with analysts downgrading their forecasts and economic growth likely to remain weak, but it is possible. Rate expectations are falling, which means there is scope for the USD to weaken further, although it will continue to benefit from any risk-off phases.

In Europe, the economy is heading into a recession that is likely to get ever worse as fiscal austerity takes its toll. The market perception is that the ECB is becoming ever more doveish, which should mean some benefit for Europe via a weaker EUR, although if the ECB pauses at 1% (Draghi has said that monetary policy is already accommodative) then interest-rate expectations could reverse and the EUR could rise. European equities are subdued relative to their American counterparts.

China is definitely slowing, although the magnitude of the slowdown has so far been small and falling inflation may give the government room to loosen monetary policy again (either by reducing rates and reserve ratio requirements or by spending its deposits at the PBOC — a de facto monetary stimulus). It has long been my expectation that the Chinese government will choose growth over disinflation if it comes to a choice. House prices are falling but as yet they have not fallen very far. It is unclear whether there will be a housing bust or a local-government financing crisis; neither is so far evident.

Inflation is falling globally but, where they are measurable (in the US and Europe), inflation expectations remain anchored at around central-bank target levels.

This picture is the messiest I have had to deal with for a while. Economies are becoming uncorrelated. Risk assets should be supported by the improving US picture and by the ECB’s monetary loosening; on the other hand, US growth is set to remain weak, the rest of the world is slowing or entering recession, and Fed policy remains relatively tight. This makes it hard to take a macro view on risk assets. Markets do not seem to be excessively optimistic or excessively pessimistic anywhere at present (except Japanese equities, where I do not have a good argument for going long). This argues for an approach that focuses on individual mispricings (ideas: gold vs. real rates, Argentinian GDP warrants, dividend options, high-yield credit) and opportunities that arise from technical factors such as government action (ideas: long EUR/CHF with the downside protected by the SNB, long Greek bonds).

Some of my biggest trading mistakes have been made in periods of quiet, when I felt that there had to be a trade somewhere, but actually there was not. I now need to guard against the same tendency. If you don’t have a view, you don’t have a trade, and that is fine. Markets are usually not predictable.

On a different subject, and further to yesterday’s macro thoughts, Bloomberg quotes European negotiators today as having talked about a “consensual restructuring” for Greece. Consensual ≠ voluntary. This could be further evidence of a move towards a non-voluntary restructuring.


Empire State 13.5 b.e. and rose.
China FDI 9.7% ytd/y d.e. Dec. Lowest since early 2010.
Italian trade deficit widened, d.e. Nov.
UK claimant count 1.2k b.e. Dec. Both beat expectations and fell for the fifth month in a row.
UK unemployment rate rose to 8.4%, d.e., Nov.

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US TIC report
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