Last week was docile compared with the fun and games we were treated to earlier this month; no imminent Lehman moment at a major European bank and no flash crash in the GBP or other G4 currencies. Still, we had a number of interesting moves in the major asset classes and indices. The continued squeeze in yields probably was the stand-out move. Starting with the benchmark, the U.S. 10-year yield broke range and a move to 2% is starting to look like a good bet in my view. For once, it appears that can we apply relatively plain-vanilla macroeconomic narrative here. Inflation in the U.S.—and indeed globally—is nudging higher and the Fed intends to act accordingly. The slightly more cynical interpretation is that the Federales are desperate to get another hike in before the end of the year, but that underlying fundamentals haven't really changed that much.
Read MoreWhat a week it has been here in the U.K. The turmoil at Deutsche Bank was set to remain the topic du jour. But Prime Minister May's promise to trigger Article 50, and the remarkable party conference in Birmingham, took centre stage. Another Bashing Betty session ensued, which reached its zenith overnight Thursday as GBPUSD was pushed to 1.14 on some platforms before recovering to about 1.22-to-1.24. A fat finger, corporate hedges hitting "stops", or a systemic lack of liquidity; take your pick in terms of rationalisation. I think the whole thing is absolutely ridiculous, given that this is a G4 currency. The rhetoric by the new Tory doyens was startling, and as I type this, the back-pedalling has already started. In any case, I have a podcast about the whole thing, which you can listen to in this post. Elsewhere, the carnage in sterling is a nuisance to me. I am a GBP earner, and my portfolio is held in GBP. In short, foreign assets now look dreadfully expensive unless you start trawling for the turds of the turds.
Read MoreIt is a public holiday in Germany on Monday and that is probably a good thing. But that won't prevent the hot takes on Deutsche Bank from piling up faster than Donald Trump's tax liabilities. I have a lot of friends on the buy side as well as strategists at major sell side shops, and the debate between us has been lively in recent days. But we are no closer to a solution and neither, it appears, is the market given the ridiculous price action on Friday. The grapevine has it that the DOJ will lowball the fine, which should allow DB to stagger along in accordance with its original 2020 plan. But the results on October 27th will be a key event in either case. A bad downside surprise could bring coupon payments on the COCOs in danger, at least as far as I understand. I concede, though, that I have no strong take on whether this is indeed likely to happen.
Read MoreA number of interesting stories are being groomed at the moment in financial markets. First off, investors looking for a “Reverse Twist” story at the BOJ were partly vindicated by the introduction of yield curve control, but the details were underwhelming. In the end, the BOJ opted to commit to the maintenance of status quo.
The most interesting aspect of this policy move, however, has been the interpretation of its significance and what indeed it is trying to achieve. The main story, as I see, is that the BOJ wants a steeper yield curve, and they’re trying to achieve that by playing chicken with the momentum chasers in duration. They are sending a signal to the market that they will continue to do QE, but that they won't buy as much duration as before. They are betting on herding and front-running here. That has worked before for central banks, but will it this time, and will investors start to discount a similar move in Europe? The initial evidence doesn’t really suggest that this theme will have legs.
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