First, let’s update our Dollar/Euro Libor spread chart. That’s the one that really matters now because looking at the Libor curves in isolation won’t help us understand what’s going on:
Across all maturities, we saw rates increase about 1bp from Wednesday into Thursday. Not a healthy sign. Indeed, I along with others were wondering about the €310bn that didn’t settle and it’s looking more and more like the liquidity it provided is gone and now there’s a mad scramble – a tsunami of buying, if you will – for Euros:
But if you’re watching the Euro-Yen cross like I am, you still need to use the Dollar-Yen as a crossing pair to get a Euro-Yen quote. The last time I checked, the Euro-Yen cross was at 110.039. In a word, ugly. That cross has been the great carry trade cross for years, so any movements in this cross should be noted and heeded.
But I also wanted to take a look at some other trading activities in futures:
Surely with the correlations we’ve grown accustomed to, a rise in the EURUSD should mean stocks, commodities and well, everything that is not cash is headed higher. But right now, it doesn’t because of the banking issues in Europe. Gold collapsing the way it did was rather stunning, frankly. And the fact that crude oil, in the midst of the summer vacation/driving season coupled with a natural disaster of epic proportions, couldn’t maintain the trend line on the daily chart that would imply $80/bbl, is telling. And the message seems rather ominous and foreboding:
Meanwhile, two Treasury ETFs, SHY (iShares 1-3 yr Treasuries) and TLT (iShares 20+ yr Treasuries) have benefited from the safe haven bid. If you executed a bear flattener by shorting the SHY and going long the TLT, you would’ve had a very nice 6 months, in spite of the gains in the SHY:
My point in showing all of these charts? It’s to try and present/describe a macro level picture that shows one simple message: the problems in Europe can’t – and shouldn’t – be underestimated and the spillover/contagion/whatever buzzword you want to use that means “spreading” are the worst kinds of scenarios you can think of: higher probability and high severity. I characterize them as “higher probability” for two reasons:
- Never underestimate people’s ability to underestimate tail events.
- The probability of a spooky tail event occurring is increasing.
I don’t know how long the EURUSD “rally” lasts. It will last as long as banks in Europe are afraid their balance sheets are too illiquid. It could be over in days, weeks or months. I don’t know. But I do know that trade is not acting the same way it would have in the past for a reason.
This will be an interesting month…