The Beige book was far more upbeat than market expected - the evidence, though, would have been available at Jackson Hole meeting, but what remains is that the US at large in August were more 'fearing than feeling' the new paradigm of NO liquidity for banks.
I did however, stumle upon a very interesting note from a former colleague; Jessie Tay, UBS, Singapore, she noted that: "In a highly unusual move, FHLB, another GSE, revealed that they have lent 110 bln. $ in August, which I understand to be 6 month to 2 yr funding. They normally disclose quarterly. "The 12 Federal Home Loan Banks lend money to 8,100 thrifts, credit unions, insurance companies and commercial banks at below market rates in order to finance their holding of mortgages. The banks in the system, which was formed 75 years ago, also buy and hold mortgage related assets themselves"...
The irony as she also conclude; so this credit crunch happened DESPITE most financial institutions having access to funding in August. Maybe that's why the pain was not felt YET ?
Staying on credit I noted in FT's Gillian Tett piece yesterday that she qouted international monetary sources as saying : "What is happening right now suggest that the moves by the FED and the ECB just havent worked as we hoped" Interesting someone with sense of the situation?
BOE is unchanged today so is ECB anything else would be surprise. ECB is dogmatic so bigger risk for something ODD to happen there.
Another company goes under in New Zealand the RBA's Costello admits: "...sub-prime hurt confidence". RBA also widen the repos amid credit squeeze.
Basically, nothing have changed, the off-balance sheet to on-balance sheet continues, and in this light we should also see Citigroups closing down Tribecca, and internal hedge fund, which when launched was supposed to get 20 bln. USD under management!
Readers of my "analysis" know I think EVERYTHING in the world is connected to JPY volaitlity, to prove the point here is chart showing ABC/Wash. Post week confidence indicator and JPY vol 12 mos (inversed).... Hereuka! Its another match. (double click on chart and it enlarges)
So... according to correlation, if JPY volatility does not come down then there will be no improvement in US confidence.
Tatical approach
Fixed Income: Clearly the tug of war continues. Central banks can not solve this, there needs to be serious downsizing of balance sheets in the banks.
10y notes made new high and if 5.44% goes in yield, we have new BULL fixed income market. This is justified as duration analysis shows the heavy weights funds (real money) been building potentially forcing others to join them.
I am neutral as I want to see ECB and BOE lingo, plus get feel for unemployment number tomorrow, but I am on the side of the big boys here.
Foreign Exchange:
Between rock and a hard plate. US dollar if Fed is going to give the market its cut, then it become question of... 25?, 50?, 75? If less than 50 bps next few month, US dollar will have strong recovery. The talk of China abolishing US Fixed income does not really makes sense, but I am more prone to buy US dollar than selling them, as the improvement in trade deficit "normally" coincides with stronger US dollar.
High yielder NZD and AUD have seen their highs - reality is hitting them with tight money markets, and sub-prime issues.
Long CHF again from this morning on technical input, also got feeling ECB numbers going to be weaker than Swiss from here.
Long JPY, despite both weak Nikkei and economy. In times of crisis, the Japanse starts to repatriate we saw that in the Asia crisis, and from the price action recently I feel its likely again. Volatility remains elevated.
Equity;
Still mega long gamma downside.
Good luck with ECB and BOE.
Steen
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