Sept 22. New Fed “twist” program could backfire as dollar strengthens, stocks fall

Sept 22.  30 year bond yield fell below 3% as the Fed announced $400 bln in longer dated treasury purchases by June 2012 in a “twist” program.  The Fed cited significant downside risks in the economy and lower inflation expectations as previous price increases dissipate. (But you still can’t refi if your house is underwater). 2/10 treasury spread made new low of 167 (-13 bps).  Three dissenters, who favor no more stimulus.
–Prior to the Fed meeting there were rumors that capital infusions would be forthcoming to French banks either through France or Qatar.  BofA, Citi and Wells debt ratings were all cut by Moody’s, as perception of gov’t as a backstop is now questionable.  In keeping with the same theme, the House yesterday rejected a short term spending bill, threatening another govt shutdown fight, and highlighting the idea the gov’t spending will likely be a drag on GDP rather than a boost.
–After the Fed announcement, TYZ 130.5 straddle was sold heavily down to 2-57 (traded 3-08 in the morning).  Stocks accelerated a sell off late in the day, as did EUR, which quickly plunged from about 137.50 to 136. (now below 135, and EURJPY making new lows, as is copper). Immediately after Fed, two people mentioned the same thing to me: attention will now shift back to europe.  And the implications aren’t good.  China Mfg PMI fell to 49.4, signaling weakness.  China shares erased much of Wed’s bounce, now ready to re-test new lows.
–A breakout in the dollar, which appears to be in its beginning stages, has negative ramifications for stocks (as exports by multinationals have been a bright spot based on a WEAK dollar).  It would also be deflationary, and if combined with a slowdown in China, poses risks to world growth.  The Fed’s plan to support housing assets may backfire…the transmission effect of lower rates isn’t working well in a world of negative equity, and if stocks (and gold) tumble then “wealth effect” consumption goes into reverse.  Gov’t sponsored debt write-offs are part of the solution, but politically unlikely.
–News today includes Jobless Claims 420k and Leading Indicators, expected 0.

Posted on September 22, 2011 at 4:46 am by alexmanzara · Permalink
In: Eurodollar Options

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