Notes From Underground

The main story for the next two days will be Japanese Prime Minister Abe’s visit to the U.S. to meet with President Trump. Abe is coming to mend relations after Trump officially ended the Trans Pacific Partnership (TPP) agreement before Congress could even debate the trade treaty. The Japanese prime minister had expended a great deal of political capital in Japan to get various parties to accept a massive Pacific-based trade agreement. In an effort to forestall any discussion of Japan as a currency manipulator, the Japanese are offering all sorts of investment ideas in the context of getting Trump the negotiator to soften his stance on tariffs for Japanese goods, or sourced material from Asia for assembly in the U.S. Japan is a paramount promoter of the global supply chain paradigm.

Two weeks ago, Ford CEO Mark Fields called currency manipulation the “mother of all trade barriers.” The YEN had appreciated 4 percent after Field’s comments, which seems to have pressed Abe to “offer Trump more strokes.” (This reference to shots is golf parlance for gambling on the golf course.) Better golfers “give” strokes to lesser players in order to generate a more balanced wager. Since Japan has the trade surplus with the U.S. they are deemed the better “player.” So the Japanese are bringing promises of creating 700,000 jobs to quell the criticisms from the National Association of Manufacturers about Japanese currency manipulation.

It is difficult to handicap the outcome of this weekend’s golf and talk but if Trump stays true to form and gives Abe a SHOT about being a currency manipulator, expect the YEN to rally on Monday. We will wait for the BIRDIES to be TWEETING on Sunday. This is a high risk trade, especially because of the heavy load of short YEN positions. As for me, I will sit this out and wait for some clarification.

In a follow-up to Greece, it was reported today that its unemployment rate rose to 23%. Greece remains in a depression and the IMF wants to give them debt relief while the Brussels policy makers want to squeeze more austerity out of the Greek people. Greece and the IMF want a further restructuring of the debt to lighten the burden on Greece’s taxpayers and pensioners. But the Germans and Dutch — some of the largest creditors — do not want to write down their holdings, which will result in a substantial loss for the German taxpayers.

The Bundestag is leery of accepting losses on Greek debt before September’s election. The strident stance by the Germans and Dutch pushed the Greek 2-year note above 10% and the 2/10 curve was priced at negative 230 basis points. Also, note that the GERMAN/FRENCH 10-year spread settled at 68 basis points, the same level as December 31, 2012, the year that President Draghi promised “to do whatever it takes” to preserve the EURO. Well, the German/French spread is now testing the resolve of Mario Draghi. Pay close attention to this.

***U.S. Treasury yields rose today as the market was reacting to the continued rally in French, Italian and Spanish bonds. It seems that price is everything to the correlated algorithms but I opine that the rally was again due to ECB purchases to meet the demands of its self-imposed QE program. On Tuesday the U.S. bond market was the ultimate haven as yields of European peripheral nation debt dramatically increased.

Now that the ECB controls the market and has prevented more chaotic conditions the risk-on trade is comfortably in sync. I am cautious as I fear the European debt situation more than I value the superlative tax policies of the U.S. president. Trade to make money but be very aware that the financial landscape is fraught with great risks. Debt TRUMPS equity in the realm of Notes From Underground.

Tags: Abe, Euro, German/French 10-year spread, Greece, Japanese yen, Trump

This entry was posted on February 9, 2017 at 7:39 pm and is filed under Currency, Germany, Greece, Japan. 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.