Notes From Underground

Little news has piqued our interest as the globe spins toward the end of the year. With Europe closed, the market has light volume and this is making prices move more erratically than usual. The year-end balancers are in control as they bring their positions into some type of risk-balanced profile. Treasuries have been the big mover as the jobless claims numbers were much better than expected, but interestingly, the curve has flattened rather than gotten steeper, which means that we are seeing some positions lifted ahead of the year end.The DOLLAR has been all over the board as there was early DOLLAR selling to offset the move into long DOLLAR positions earlier in the month.

We want to point out that the only major currency closing lower against the DOLLAR is the Japanese yen. The story going forward will be if the YEN returns to the funding vehicle of choice with the blessing of the BOJ and the ministry of finance. This will be a big feature of the first quarter and will be important for equity markets–especially the NIKKEI.We also caution that the Treasury’s NATIONALIZATION of Fannie and Freddie will have an impact on global investors’ views of U.S. economic policy. These efforts at slight of hand will not go down well as we believe investors will see this as a three-card Monte game in Central Park. The media establishment has not taken the Geithner team to task on these shenanigans but we believe that after digesting their holiday meals, the fog will clear.

Two quick stories out of Europe dealt with year-end credit problems. Iceland announced they have made a big move to resolve their conflict with the U.K. and Netherlands regarding the deposit losses in Icelandic accounts. The resolution can still fail but it does help relieve some of the negative issues in European credit markets. For those watching the Ukrainian situation, the IMF is allowing the Ukraine to tap into reserves to cover gas payments to Russia. “The IMF is mindful not to be the cause of Europe freezing again this winter.” Thus, we see that Russia will be paid with IMF money and the Ukrainian government gets a short-term reprieve ahead of the elections. The IMF, led by Dominique Strauss-Kahn, bails out the European energy sector. Putin gets his way again and Europe gets its heat. Yes, we know this is just business as usual and has minimal impact. But we guess that is why 2+2=5!

Tags: Dollar, Nikkei, Yen

This entry was posted on December 31, 2009 at 11:31 am and is filed under Currency, Equity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.