Different Week, Same Joke
Courtesy of Tyler Durden
From Nic Lenoir
The fed is probably the most morally "flexible" central bank ever, I will leave it there and that is about the most polite statement one can make. After serving us last winter concerns about asset bubble creation, dangers of building up expectations when it comes to rates policy, and the need to keep the market on its toes, we have now entered a phase when the Fed instead alley-oops every batch of bond purchases to the market in advance to make sure it doesn’t dip while they reload. It’s plain pathetic.
About as pathetic is the market’s reaction to today’s Fed’s minutes. Recent Fed speakers have done one thing and one thing only: pave the way towards QE 2.0. Before the last FOMC equity markets rallied based on hopes that QE 2.0 would surprise early. After the meeting they rallied further based on the fact QE 2.0 was now guarantied in November (which was not in the statement verbatim, not even close). Today the market rallied after the minutes because we learned that the Fed talked about QE 2.0 at the last meeting. I suppose the large number of shorts on NYSE is the reason why the machine keeps going, because other than that there is flat out no reason despite what can be said on CNBC. The towel is not thrown yet, the sell zone was 1,155/1,164, and until we get a daily close above 1,174 it is worth hanging around here especially given the fact that RSI hourly is diverging massively, we touched the resistance of the hourly channel on the highs today and EURUSD has broken the downtrend channel. That being said it is starting to look like the nightmare I warned about the last couple weeks if the resistance is not observed, meaning a remake of march/april 2010 when market levitates in ever decreasing volatility until we flat out crash.
An interesting way to play this market if you are skeptical about QE 2.0’s success or the fact it is overly priced in lies within the long end of the US Treasury curve. 10s/30s have steepened very aggressively since late August and are now at all time highs, very close to 146 which seems to be the key resistance. Where it gets very interesting is that 10s/30s conditional flatteners in US Treasury futures are getting close to flat. In other words one could buy a put on 10Y Treasury future and sell a put on 30Y Treasury future equally far out of the money in terms of yield for 0. If QE 2.0 delivers beyond expectation the market will certainly keep on rallying in which case both options expire out of the money and the trade is a wash. However if the market is disappointed and given that 5Y/7Y is where most of the buying is expected, 10Y futures (which have a 7Y duration) should bear the most selling pressure and the steepening in the long end would correct. Interestingly I had recommended the same trade for 5s/30s in early August and the day the structure traded at 0 was basically the day the curve topped after which it corrected over 40bps lower. The fact the strategy can be entered flat is key as it gives you staying power in the trade.
Good luck trading,
Nic
