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Friday, 21 June 2013

Dammit Jon, those Dec14 euros are 20bps too low, I tell you. Talk them up, there's a good chap !

The selloff in treasuries is on the brink of becoming self-propelled - classic VaR shock stuff. The Fed is trying to micro-manage the short end with these Hilsenrath articles. Volcker and even Greenspan must be quietly seething as they watch this farce, but the attempt to stop rate hikes being priced in only underlines the message that tapering is on the way. Steepeners are the path of least resistance : I like EDZ4/Z7 more than U4/U5 at these levels, but it does suggest selling 10s and bonds against red EDs. Pimco etc are long and wrong here, and clearly aren't out yet, so rallies in the long end are to be sold. 2.5% for 10y yields is too good a risk/reward balance to be sustainable (should be about 20bp higher I'd say). Everything will presumably rally out of sight on Monday after Hilsenrath's pronouncements, so maybe next week will be the window of opportunity to sell the long end before payrolls the week after. The real threat to tapering comes from an equity collapse, so I'm short SPX now.

Copper is increasingly interesting. LME stockpiles are at a 10 year high, and supply - expected demand is projected to triple this year from last. That can only get worse if China's landing turns out to be as hard as it's looking. Why would the new regime back off now ? They have one opportunity only to squeeze some excess from the system and blame it on their predecessors, and that isn't a 2 week process. There'll be false glimmers of optimism along the way, but it seems to me we're into a multi-month tightening in China. With high inventories, prices sitting on a multi-month support level and a hawkish Fed, copper should be set for a break lower. Short now, with a view to selling more if we drop through 3.00.

I've pulled out of Japan entirely (took profit on usdjpy longs and a small long in nikkei), but on reflection maybe usdjpy is still worthwhile, with the two central banks heading in opposite directions. I'll avoid the Nikkei as I don't think this is an equity friendly backdrop.  I'm flat in GBP and the eurozone, but keeping the short audusd trade, and reducing my gold short. It's dangerous to have too many moving parts when it's this volatile.

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