The Draghi put, our contrarian view on tapering, Hatzius and El-Erian weigh in and $GS top trades (or fades) for 2014

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By Brian Shepard

 

European Central Bank: *Classic Central Bank put:“There weren’t any surprises from the ECB last week. Policy remained on hold as expected, and in the press conference Draghi maintained a fairly dovish attitude. In particular, Draghi left the clear impression that, while not imminent, further policy easing could come quickly should the macroeconomic backdrop (both in terms of growth and deflation) deteriorate further. Conversely, the ECB’s forward guidance means that there won’t be any rate hikes for at least another year and a half if the outlook improves. This stance (do nothing if things go well and ease more if the outlook worsens) is a classic central bank put and is very supportive of risky assets.”

MOST OF THE WEEKEND PRESS AND THE PROFESSIONAL CREW OF ANALYSTS THINK THAT TAPERING IS ALREADY BUILT INTO THE MARKETS…. WE COULD NOT DISAGREE MORE…TAPERING IS NOT BUILT IN… MARGIN DEBT IS JUST 3.5% BELOW 2007 PEAK LEVELS. AND IF YOU MEASURE NYSE CREDIT YOU FIND THAT NEGATIVE CREDIT BALANCES OF ACCOUNTS ARE GREATER THAN 2007AND APPROACHING LEVELS CLOSE TO THE 2000 TECH BUBBLE…. SECONDLY, BEARISH SENTIMENT IS VERY LOW NO MATTER WHICH SERVICE ONE USES….AND FOR THOSE OF YOU THAT ARE OVER 40, IT PAYS TO REMEMBER WHAT STARTED THE 1998 MARKET COLLAPSE AND LONG TERM CAPITAL CRISIS, THE COLLAPSE OF THE THAI CURRENCY …THAILAND JUST DISSOLVED THEIR PARLIAMENT SUNDAY EVENING…WE DON’T SEE THAT AS A CATALYST, BUT MARGIN DEBT AND SENTIMENT ARE JUST TOO HIGH TO ARGUE THAT TAPERING IS BUILT IN…

THE FED…. WE EXPECT A BUDGET AGREEMENT OUT OF CONGRESS THIS WEEK. WHILE WE ARE NORMALLY SKEPTICAL OF WASHINGTON, ESPECIALLY WHEN THE ANNOUNCEMENT IS SCHEDULED FOR FRIDAY THE 13TH, THIS TIME AROUND WE THINK THAT RYAN AND MURRAY WILL HAVE SOMETHING… THE FED HAS SAID IN PAST SPEECHES AND MINUTES THAT THEY HAVE KEPT STIMULUS LONGER AND STRONGER THAN THEY WOULD HAVE LIKED, TO COMPENSATE FOR THE FISCAL DISTRESS IN WASHINGTON AND LACK OF BIPARTISANSHIP… IF THE BUDGET LOOKS LIKE IT WILL PASS, THIS WILL BE ANOTHER REASON FOR THE FED TO TEMPER QE….

WALL STREET…. TUESDAY COMES THE AGREEMENT AS TO HOW TO ENFORCE THE VOLCKER RULE…FROM WHAT I HAVE READ, MY WHARTON CLASSMATE, GENSLER, IS REALLY GOING TO PUT IT TO THE BANKS AND PREVENT THEM FROM BEING ABLE TO HEDGE A GLOBAL PORTFOLIO. THEY ARE GOING TO TRY TO ENFORCE IT ACROSS GLOBAL BANKS DUE TO THE GLOBAL NATURE OF TRADING…. THIS COULD BE VERY DIFFICULT TO ENFORCE, BUT WE EXPECT THE BANKS TO BACK AWAY FROM VOLATILE MARKETS AT THE WORST TIMES…. SO VOLATILITY COULD INCREASE SIGNIFICANTLY ONCE TAPERING IS REALLY BUILT IN….

Today started with 205k ESZ and 800 SPZ traded on Globex, ESZ trading range was 1810.00 – 1804.75. Friday’s regular trading hours (RTH’s), pit session trading range was 1805.50 – 1796.50 before settling at 1805.00, up 21 handles. In Asia, 9 of 11 markets quoted closed higher: Shanghai Comp. +005%, Hang Seng +0.29%, Nikkei +2.29%. In Europe 8 out of 12 markets were trading higher: DAX +0.40%, FTSE -0.03%. Elway (07:39) CS EUR may extend to 1.3833/35 they want to short it at 1.38 with a 1.3855 stop targeting 1.3415

Today’s regular trading hours pit session gapped 4.5 handles higher to 1809.70 – 1809.30 and basically trading sideways throughout the day between an early low of 1806.70 and a high of 1811.20 before getting weighed down in the tall grass either side of the opening range in light volume.

dboy (08:40) Global Viewpoint: 13/05 – Top Ten Market Themes for 2014 Global Markets Daily: Top Trade Recommendation #1: Long S&P 500/Short AUD Global Markets Daily: Top Trade Recommendation #2: Go long 5-year EONIA vs. short 5-year US Treasuries Global Markets Daily: Top Trade Recommendation #3: Long $/CAD on external deficits, tapering risks Global Markets Daily: Top Trade Recommendation #4: Long China equities/Short Copper Global Markets Daily: Top Trade Recommendation #5: Go long risk on 7-year CDX IG21 junior mezzanine tranche Global Markets Daily: Top Trade Recommendation #6: Long DM (Japan, US and European) Banks.

S&P 500 was trading 1808.50 / retesting the opening range when [GS] iceChat (10:09) HATZIUS SAYS HE WOULDN’T RULE OUT FED TAPERING IN DECEMBER. *HATZIUS: U.S. INDICATORS LATELY BEEN MORE LIGHT THAN SHADOW. *HATZIUS SAYS EMPLOYMENT DATA LAST WEEK WAS A GOOD REPORT. *HATZIUS SEES A LOT LESS FISCAL DRAG ON ECONOMY IN 2014. *HATZIUS SAYS 7% FED QE GUIDANCE ON JOBLESS RATE WAS UNFORTUNATE.

Skim through the below because I can sum up the Fed speakers – Tapering is coming and it is NOT tightening!  Know thy speakers http://graphics.thomsonreuters.com/F/10/scale.swf

Just after noon the Fed speakers hit the tape: Fed could do ‘small’ QE3 taper to recognize job gains /Bullard SMALL TAPER TO QE3 MIGHT RECOGNIZE JOB MARKET GAINS, STILL ALLOW FED TO MONITOR INFLATION IN 2014 / IMPROVEMENT IN LABOR MARKET SINCE BOND-BUYING BEGAN IS ‘MOST POWERFUL PART’ OF CASE FOR TAPERING / AS LABOR MARKET INDICATORS IMPROVE, LIKELIHOOD OF TAPERING QE3 WILL CONTINUE TO RISE / INFLATION HAS SUPRISED TO THE DOWNSIDE / FED NEEDS TO CONVINCE MARKETS THAT TAPERING IS NOT TIGHTENING, OR LIVE WITH FACT THAT MARKETS LINK THE TWO /  LOWERING UNEMPLOYMENT FORWARD GUIDANCE THRESHOLD FROM CURRENT 6.5 PCT WOULD PUT CREDIBILITY OF THRESHOLD AT RISK /  SAYING THAT RATES WILL STAY LOW EVEN AFTER UNEMPLOYMENT FALLS TO 6.5 PCT MAY BE AS EFFECTIVE AS CHANGING THRESHOLDS /  FED CHAIR SHOULD GIVE PRESS CONFERENCE AFTER EVERY FOMC MEETING TO KEEP OPTIONS FOR ACTION OPEN – BULLARD / ST LOUIS FED & 2013 VOTER.

At 2:00 the S&P index was trading 1808 area when (14:00) MrTopStep MiM Closing Imbalance was showing a big 83%, $506M to the sell side. At (14:20) the MiM was showing a large 81%, $624M to sell while the index continued to quietly trade in place. At (14:40) while the MiM was showing 77%, $565M to the sell side and I rubbed my eyes three times and said “tell me it ain’t so”… as 1808 area was still trading… By 2:47 the imbalance backed off to a small $175M. On the cash close the futures traded 1808 area before settling at 1809.00, up 4 handles on the day.

*PIMCO’S EL-ERIAN COMMENTS ON GROWTH IN BLOOMBERG INTERVIEW *EL-ERIAN SEES U.S., EUROPE LEADING GAINS IN WORLD GROWTH *EL-ERIAN SAYS FED TAPERING BY END-MARCH IS VIRTUALLY CERTAIN *EL-ERIAN: FED TO CUT INTEREST ON EXCESS RESERVES AS IT TAPERS.

Coming events: http://www.investing.com/economic-calendar/

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December seasonality strong: http://marketsci.wordpress.com/

December liquidity – a different view: http://bit.ly/IAKvtn

Posted on Friday: elway (09:32) watch the big money center banks [JPM], [BAC] are near flat and [GS] was slightly red. After first hour a new low may be a go with on more profit taking. The USD is clearly still being sold with strong data. We have seen MOC for sale every day this week and big liquid names are not leading today either. Something to watch…

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