FX Technicals by Marc Chandler of Marc to Market,
Guest post by Vix and more.
Since its launch in August 2008, the CBOE EuroCurrency Volatility Index (ticker EVZ, sometimes known simply as the “euro VIX”), which is based on the FXE ETF, has toiled in relative obscurity compared to some of the more famous volatility indices.
Given all the fears about the European sovereign debt crisis over the past few years, I find the lack of interest in EVZ to be surprising. After all, in thinking about the euro zone one of the most basic questions has been whether or not the euro will survive. Further, outside of the U.S. at least, the future of the euro zone is still considered to be the biggest risk to the stock market.
With all this in mind, I was looking at EVZ data this evening and discovered that today marks five years since the beginning of the historical EVZ data provided by the CBOE (reconstructed data fills the gap from November 2007 to the August 2008 launch.)
The chart below shows the history of closes in EVZ (blue line), as well as comparative closing prices for the VIX (red line.) I have annotated the chart to highlight two pieces of information:
While Sandy is causing problems in the US, Europe has its own little Sandy. Rajoy and Monti are meeting in Madrid today. This could prove interesting , as these gentlemen are not the best of friends. From Bloomberg.
While both have jointly argued against extra budget austerity as the price for help from theEuropean Central Bank, their interests diverge when it comes to whether they should ask for assistance together. A go-it-alone strategy by Spain would probably cut Italy’s borrowing costs while leaving Rajoy to weather the political flak of seeking emergency funds.
“Rajoy was probably pressed by Monti in August to accept a pre-emptive” bailout, said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “It would have made things so much smoother in Europe and for Italy as well. Rajoy is very much following his own route now.”
European officials are waiting for Spain to trigger a bailout plan unveiled by ECB PresidentMario Draghi last month and designed to draw a line under the region’s debt crisis. While Draghi’s plan to buy potentially unlimited quantities of government debt has soothed markets for now, a botched Spanish rescue could still trigger further turmoil.
Guest post via Marc to Market.
The US Dollar Index reached its best level in more than six weeks on Friday. Yet it managed to only close a couple of ticks higher, as if warning short-term participants against ideas that a breakout is at hand. This also appears to be the message of the yen’s dramatic recovery from four-month lows.
Caught between what appears to be renewed deterioration of conditions in the euro area and US electoral and fiscal uncertainties, investors are paralyzed. Key events this week include policy meetings by the Japanese and Norwegian central banks, the new month PMI readings, and the US jobs and auto sales reports.
The economic data is unlikely to tell investors anything new. The euro zone economy is experiencing a shallow contraction for the second consecutive quarter. The UK data is likely to lend to our view that Q3 growth exaggerates the strength of the underlying economy. Meanwhile the US should continue to post modest net job creation. The Bloomberg consensus call for 125k rise in non-farm payrolls, which would be smack in the middle of the 3-month average (145k) and 6-month average (104k).
When the European Union unexpectedly won the Nobel Peace Prize this month, the leaders ofGermany, France and Italy spoke of their pride. But the British prime minister, David Cameron, maintained an awkward silence.Before that, the British government said it wanted to exercise an opt out of an estimated 133 areas of European Union police and judicial cooperation to which it had once agreed.
And Mr. Cameron supported a plan for a new budget for countries that use the euro (which Britain does not), something that would place his nation firmly in Europe’s outer tier. The prime minister has been hinting that he could hold a referendum on Britain’s relations with the union, and one newspaper reported recently that a senior cabinet minister wants Britain to threaten openly to leave the 27-nation bloc. There was no official denial of the report. Full NYT read here.
At the same time, why not bringing back the old stability, the mighty DM?
We won’t bother you with explaining how good they are.
Below is a simply must watch video with Hugh Hendry and Einhorn from the Buttonwood Conference.
Guest post by Jessie.
“All war is based on deception. Of all those close to the commander, none is more intimate than the secret agent; of all rewards none more liberal than those given to secret agents; of all matters none is more confidential than those relating to secret operations.”
“Let Hercules himself do what he may,
The cat will mew, and dog will have his day.”
William Shakespeare, Hamlet
There is a currency war underway.
The international trade clearing mechanisms are tottering. Countries are using their economic power, their banks and currencies, as a part of overall foreign as well as domestic policy.
This is a huge source of the tensions and problems which are are seeing both economically and militarily in the world today.
The current trade system based on the US dollar reserve currency is not sustainable. It has had a good long run, but like the euro it has reached the end of its rope. The US cannot continue to print enough money and increase its debt balance through trade any further. See Triffin Dilemma. Yes I am familiar with Eichengreen’s counter argument.
Guest post by Peter Tchir.
Overnight we are hitting new lows with S&P futures touching 1414, a level not seen since early September and pre OMT and QEX. Nasdaq 100 futures are even worse, hitting levels last seen in early August, right after the “whatever it takes” speech finally got some traction.
Credit indices have been wider than this, even in October, so they are either about to take the next leg down or a sign of hope. I’m going with the view they are about to underperform since IG19 is trading 5 bps rich to intrinsic in a market where single name offers are hard to come by.
Crowded safe trades may be in jeopardy and high yield bonds seem particularly fragile. The total lack of fear about junk companies at low yields, issuing dividend deals while big companies are seeing hits to earnings is a little reminiscent of LCDX in 2007 (as I wrote on Saturday). There is still no obvious catalyst for a sell-off, but there never is. If retail has had enough and real default risk fears spark any selling, I can’t think of many institutions set up to buy rather than forced to sell to protect themselves.
With Google stealing a lot of attention, let’s not forget about the European mess. Latest out of the German think tank, via Spiegel.
A Greek euro exit on its own would have a relatively minor impact on the world economy, but if it causes a chain reaction leading to the departure of other southern European nations from the single currency, the economic impact on the world would be devastating, a German study warned on Wednesday.