Notes From Underground

The unemployment data released on Friday revealed no great surprises as the nonfarm payrolls were right in line with consensus. The markets also offered up no real divergences from the norm as the S&Ps rallied but by day’s end the U.S. equities closed basically unchanged (although the NASDAQ continued to outperform all other indices.) The EURO currency dropped further and wound up losing 1.7% for the week even while the S&Ps gained 1.7%.

So as the week ended, we continued to see that the RISK-ON/RISK-OFF paradigm was indeed changing. The GOLD also added 3% for the week even with a DOLLAR rally, thus confirming that “may old acquaintances be forgot.” The U.S. Treasury market also rallied on Friday, which caused even more confusion as BOND BEARS find it difficult to pull on Ben Bernanke’s cape and spit into the powerful wind of the FED‘s buying program. Again, the markets are in flux and analyzing the changes correctly will enable us to profit by being prepared.

***The Canadian employment numbers were as consensus suggested but the surprise was the increase in manufacturing jobs, which had been a previous drag on the jobs picture. Friday’s blog discussed the need to do the technicals on the CAD/YEN and the action post Canadian employment led to  a sharp sell off of the Canadian Dollar as well as the CAD/YEN cross.

The power of the selloff was a surprise to me but it will allow for entering this cross at a much lower level, thus limiting my risk. It may be too early but it is still important to examine the technicals to find the lowest risk exposure. If the U.S. growth story has any traction then the commodity currencies should outperform, especially the Canada as it will do better than others as a barometer for North America. Everything we do as traders is an effort to limit our risk exposure for that is what keeps us with enough capital to fight another day.

***Europe will be the cornerstone of the global financial scene for a long time to come. There was talk over the weekend of GREECE not being able to make it as it will have to right down even more of its DEBT then recently thought. There will be no Greek resolution while Sarkozy is fighting for his political life and this week’s meeting between Sarkozy and Merkel is just another sideshow. If Greece were to definitively leave the EURO the result for FRENCH banks would be devastating and possibly cause a collapse in the French financial system, although France would move to nationalize the entire system. President Sarkozy will do all he can to prevent this before May and with IMF Managing Director Christine Lagarde in a powerful position to come to the aid of EUROPE.

While many may see the 10-YEAR ITALIAN BOND as the pivotal instrument, I believe that the 2/10 yield curves of all the GIIPS (former PIIGS) are the key to the markets in the short-term. When the EUROPEAN FINANCIAL MARKETS were previously might under stress, the Italian 2/10 had inverted. Now it is a very STEEP 200+ as the ECB’s LONG-TERM REFI OPERATION has pumped liquidity into the EU system and put a BID into the 2-year debt market, thus a BULL STEEPENER and the increased liquidity leading to a softening in the EURO. This is the basis of the nascent development of the EURO as a carry currency.

Tags: 10-year Italian bond, bond bears, CAD/Yen, Christine Lagarde, Debt, Dollar, Euro, Europe, Fed, French, Gold, Greece, IMF, risk-on/risk-off, Sarkozy, SPS

This entry was posted on January 8, 2012 at 4:55 pm and is filed under Equity, unemployment. 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.