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No Surprise in fact

October 17, 2012

I know it is a little more than a fortnight since I last wrote here but I was afraid all my views would be wrong and was looking for an elegant way out of this. A few days helped me. Sorry for the delay.

The Euro is recovering and $1.311 is a good level on which to step and jump further. I am also comforted by CHF1.21 being reached, as it will allow the Swiss National Bank to rest a little and concentrate, instead, on money supply and interest rate levels. Swiss mortgage rates this low encourage an already overheated housing market. Some fine-tuning may be necessary soon.

I have problems assessing the Japanese Yen: When I started in finance, back in 1988, it was at 250 to the US$ and it kept on strengthening despite the massive carry trades of the 2000’s and zero real rates. On the other hand, over the same period, the Nikkei 225 index melted from 39,000 to 8,700…I always wanted to buy Japanese equities and hedge the currency but never did the second leg, while was rarely right on the first…Maybe it’s time, now that global equity markets seem to rejoice on good American employment figures last week, that came to the rescue of an otherwise poorly performing Obama (in the debate at least).

Over the same fortnight, I was surprised by the price action of Gold. It has reached 1,796 last week but couldn’t hold it. It went down to 1,744 couple of days ago… but, if it was a “Buy” at 1,766, it remains one at 1,752, today.

Another surprise is the spread between Brent and WTI, which remained around US$ 20.00…Basher Al Assad still kills his citizens and tensions are much higher than in late September: Turkey not only retaliated, rather precisely on military targets, to sparse Syrian bombing on a Turkish border village (Akçakale), but also intercepted, in its air space, a aircraft full of Russian weapons. Surprise, surprise…Mr Putin avoided to comment. So will I. I believe the WTI-Brent spread should be higher, even if the American economy recovers faster from now. I don’t use commodities but I guess that on a relative value basis, buying Brent against WTI would make some sense. What do you think?

On my last fixed income comments, Spanish government bond yields came down 24 basis points just yesterday and reached 5.55%, tightening dramatically to 3.93% against the bund. This is purely linked to Moody’s affirming Spain’s Investment Grade status. In this “positive” (hum…hum…) environment, the put leg of the strangle will die worthless and time decay (call it Thêta for the sake of the exercise) will take care of the call leg as I believe this price movement reflects all bullish sentiment until further action while declarations, if any, won’t have much impact.

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