Another throwback to the trading days…
23rd Jan 2014
Inexplicable correction to yesterday’s sell off with the market again finding this wall of money that has kept supporting gilts in the last 10 days. We rallied hard in 10 years, back above the level pre-employment data and up to early dec highs. The move in the front end was as surprising with the strip cutting back ¾ of yesterday’s loses, pushing 10bps higher on no real news, rumours or data. It is difficult to grasp what exactly has pushed assets back to these levels but the move in the UK was driven by bunds and probably helped by the sogginess in equities seen throughout the session (most European indices down 1%). We are puzzled by these developments and are looking to re-instate shorts up here as our view regarding rate hikes remain unchanged. Carney was on the wires late on the London session obviously trying to play down his self-created forward guidance noting that the 7% figure was ‘only’ used to capture the idea than unemployment would have to fall considerably and that breaching that threshold didn’t mean that the MPC would ‘even begin to think about’ rate hikes. Again it seems that the MPC don’t really know where to go from here so we would expect the market to come off in the short term…
11th Nov 2013
The inflation report came in slightly more hawkish than the market had expected with the BoE changing their unemployment forecast to 7% by Q3 15 and growth forecasts were also revised higher (2013 growth up to 1.6% vs previous of 1.4% and 2.9% for 2014 vs 2.4% in the previous QIR). The subsequent press conference was pretty uneventful albeit for a slightly more dovish Carney probably trying to stop the market from overheating. This, combined with the very positive unemployment data published right before the report (jobless claims down 40k vs exp of 31k was the most surprising number) pushed sterling fixed income markets into a tumble with the front end of the curve under strong pressure (greens quickly off 5/6bps); we however rallied hard and relentlessly over the course of the whole afternoon as the strength in bunds managed to stop the gilts’ weakness as comments from ECB members about possible negative interest rates (the never ending rumours) came once again into the market helping euribors push deep into black territory. We close unchanged in sterling whilst we keep risks tights as we look for further dislocations to re-instate positions…
22nd Oct 2013
Eventful day in the European markets with the morning session seeing some very odd flows in the sterling market. 3s6s was bid from the off with Sonia/libor being paid massively through the screens as all offers were being lifted straight away. 10y Sonia/libor was 1.25bps wider at one point in what we can only interpret was some kind of collateral hedging going through. All eyes in the conventional markets were on the payrolls figures which came in at 148k vs expectations of 180k (past revisions added up to a meagre 9k) with the unemployment rate edging lower down to 7.0%. It seemed like a mixed bag to us but the market saw it as a negative and rallied very destructively after the print with greens shooting 10bps higher and gilts gapping 50 ticks. The surprising strength in core bonds pushed shorts into stopping out of positions (possibly caught on the back of the gilt syndication) and we grinded higher through the afternoon with gilts up almost a point going into London close. Equities remained surprisingly strong with most indices remaining in the black so it is difficult to make up what exactly is going on and where the market are headed from here. Market dynamics seem to have dislocated and we could be entering a new world of low liquidity and choppiness on the back of all the uncertainty regarding the US as data, monetary policy, tapering and budget concerns are still surrounded by a dark cloud of uncertainty. We switch focus to tomorrow’s MPC minutes which we expect slightly hawkish and hopefully will bring some relief into this tense market…
Pablo F. Alonso Caprile 