Weekly Commentary on Financial Markets: 17 October 2011
by Jacob H Schmidt
Waiting for the Bazooka
News of the week: HF manager Rajaratnam serving 11 years for insider trading; politicians promise substantial bail-out for Europe; markets have started year-end rally
Europe – Euro
While politicians have finally realised that the situation in Europe is really serious and no time to lose, the markets are still waiting for a package. The code word is now “bazooka”, a term coined by US Treasury secretary Henry Paulson in 2008, which shall be so big that speculators and markets will have no more doubts about the political and economic will to bail-out the debt ridden countries. Expectations have risen and the equity markets have started the year-end rally. If there is any reason for disappointment, the markets could collapse again, but it seems that we will see some kind of bigger package, basically a leverage of the EFSF. Deadline next week, when Eurozone minsters meet. My Grade: B-
No progress in Greece, PSI on hold, discussions regarding a bigger discount. It seems that a last minute short term fix is likely, to avoid a default now, but the focus of the bail-out for Europe is now the banks and avoidance of contagion with Italy and Spain. My Grade: D
US macro data and company earnings are mixed, but markets seem to look through the confusing data and see upside in the data and hence markets have started to rally, as part of the Q4 – year-end rally. My Grade: B+
The equity markets had a very good week, and we believe that the rally could have some more legs until the announcement of the European bail-out plan. We believe that a buy on the rumour (happening now), sell of the fact (when package will come out) scenario is likely. Afterwards the markets will probably refocus on the US debt problem, China and company data. My Grade: B+
US rates higher on the long end (10 and 30 year rates) and markets awaiting start of operation twist. The bold move of PIMCO’s Bill Gross to go long the long end is a purely speculative trade, and we shall see whether the FED will buy the bonds and help him by buying the maturities he just went long. In a way this is a very dangerous trade for PIMCO, but also posing a conflict for the FED. My Grade: C-
Slight recovery in commodities, but in consolidation mode. My Grade: C+
The news of a 11 year prison term for hedge fund manager Raj Rajaratnam shows the determination of the US authorities to prosecute insider trading and other cases of market abuse. However we believe that the problem goes much deeper than with hedge funds and we will also see involving many other market participants such as banks and corporate getting prosecuted. Europe might have to get more serious and start actions rather than using the soft touch and looking aside. Hedge fund performance very dispersed, mean performance disappointing. My Grade: A-
The Christmas rally in equities has started and shall run for one or two more weeks, with a sell off after the announcement of the package likely and then some consolidation, unless there is no substantial bail-out package.
Markets have started discounting good news and assume now that the politicians will release a substantial package. The solution will be a short term fix, but good enough to take the fear away for several months, before getting into trouble again. My grade: C-
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