Something is rotten in state of Denmark, as Hamlet famously said, but I guess apart from a much needed comment on DKK from me, which most people seems to get wrong, there is also major divergence in the market:
The Stress Indicators are clearly showing more risk-on again, except a few exceptions, but the main chart for this week is this "stunning" chart showing Citigroup's Surprise Economic Index on Europe and the US: Yes, as expected Europe did stabilize even before ECB did QE – ironic, but a clear case of macro policy makers, again, missing the boat to do what they always should be doing as priority one through three: Nothing!
More evidence is creeping into Retail Sales in Europe – A twitter from this morning: (@RobertAlanWard)
Another "shocker" for the consensus crowd is the inflation expectations which is now headed north…… exactly when the deflation hype reaches its new peak!
The last couple of days there is also growing disbelief in weaker US Dollar – where is the follow through the impatient consensus asks? Well, looking at the risk-reversal an old rule says that "the trend" remains in place as long as someone is willing to pay more than 2% for having the PUT rather than CALL… risk reveral… so USD bears should get more gratification soon…
The Dynamic Danger Duo – Greece and Russia – remains a "wall of worry" everyone is willing to climb(ignore?) – You know my take on Greece: GREXIT – and on Russia, similar to Greece, I just don't see how a de-escalation of rhetoric is going to help a vulnerable Putin in domestic politics. A smart observer said this morning on Danish Radio that Russia have one intention only – to destabilize Ukraine enough to make impossible for Europe to extend EU invite and for NATO to step up. He may not even be interested land-grapping but "merely" to make sure it remains contested.
Russia CDS and 10 YR Greece rates remain elevated, but in time of writing "hope is in full glory again" – on this headline from New York Times: Greece to propose a debt compromise plan to creditors. Someone needs to explain how: Greece can promise to reinstate pension bonuses, cancel property tax, end mass layoffs and raise minimum wage in country with no funding, and then expect Europe to "bridge them more money"? I'm not making a case whether it's fair or not, only how does it works?
My "ultimate risk indicator" though AUD/JPY is reluctant to follow the lead from equity and stock markets:
Please see attached PDF for full range of Stress Indicators:
Conclusion/Comment:
Monetary Policy:
FED/FOMC is now looking at a June hike – it will probably almost be "in spite" as I doubt US economy is lift-off ready by June, although a number of bloggers and pundits are making valid claims it has already happened:
Matt Busigin, Macrofugue.com, "Say goodbye to the new normal" has some excellent work and charts to supports his view that we are already in lift-off:
The major issue, of course, being that this lift off has been called many time before and as the chart does show – the action has been sideways on this way to measure GDP – yes, we slight uptick now, the same uptick, by the way which happens every year, this time of year. Growth has constantly "turned down" as the year progress.
Here is same chart – January each year circled – Yes, its higher now clearly, but let's await full impact of energy collapse. Only 9.000 jobs was lost in January's count of oil workers, and with CAPEX collapsing globally there is more coming from this sector, clearly….
Furthermore consumer spending in the US is 70% of GDP, it's relative stable as the US consumers always likes a bargain, especially a fully financed bargain @ zero interest rate. What happens when/if Fed hikes in June?
But… you ask: If Europe is doing better, at least better than expected, and the US is at higher end of growth range what is then missing?
Well over the last eight years of this crisis growth have come from two sources only(60% from EM and 40% from the US): The US and Emerging markets. US has been 2.2% for the years 2010-2014, and in 2014 2.4% - right, so what is issue with EM?
It's the US financing:
Chart from Bridgewater courtesy of Jamie MCGeever:
The strong US Dollar is now a real issue. For growth, for emerging markets and for world to turn "up" we need lower US Dollar. Simply.
I guess my analysis really says: Recent "historic data" points to improvement which is NOT supported going forward due to the constraints of capital flow, increased volatility, and geo-political risk. It will NOT stop FED from hiking in June, but it will probably take the EURO below 1.1000 before this US strength move is over.
Now to something is rotten in the state of Denmark:
I have answered 100s of calls on the Danish peg so here is my take:
There are three main points to oberserve, but first lets acknowledge that the Danish peg has been in place since 1982. That is has served Denmark well to linking to the Deutschmark, and remain assured for Denmark its not the EURO we are peg to, its Germany been like that since day one!
1.) The Danish central bank is doing exactly what we expect from them and according to the book on pegs. Lowering, penalizing, cost of carry by taking rates down. For them it's a "time issue" – the feel they can do this longer than the market has time patience for. They have a good track record having spent 270+ billion DKK during 2010-2012 and of course several interventions since 1982. I would wager "everything being equal" they could intervene easily for six month but also 12 month except:
2.) The weakness of the DKK peg is not the DKK, but the EUR. Which make the analogy with Swiss central bank more acute. Should we see a Grexit and/or Brexit we would expect more pressure on the DKK. Foreign reserves is less than 30% of the balance sheet presently but could increase to none acceptable levels of 80-100% of GDP. The fight is basically: 'Time vs. Size of balance sheet of Danish Central Bank'
3.) The pertinent question however is: Why have a peg to EUR if Denmark never have any intentions of joining the EUR? There needs to political discussion in Denmark on this issue, but I will wager that of push comes to shove Denmark would rather join the EUR than allow a 10% revaluations. The reason for has multiple explanations but the simplest one is the size of the Danish financial system. The pension sector on its own is 160% of GDP rising to 200% in the next twenty year. The liabilities is in DKK, but most of assets in EUR. The yield curve is in EUR. Elementary Dr. Watson!
Yes, it's a free option. Yes, the loss potential is small, but I have to admit I don't lose sleep over the DKK, knowing that should we have real issues we would probably be replacing Greece in the EURO if everything becomes unhinged.
Strategy:
Still long 70% in fixed income. Looking to increase commodity exposure. Long Alpha Gold. Long US Dollar & Gold in FX. Short EUR. Very small exposure as discontinued pricing is my main concern. Market trades big intra-day ranges without real momentum. I need clarification on economics but also on Greece, politics and Russia. I doubt I will have it hence I expect more volatility – great opportunities to come but now… it's wait-and-see.
Safe travels,
Steen
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