Posted by: Bevan | August 3, 2012

July 2012 Trading Commentary

July has seen a continuation of stress in Europe, with Spain’s yield’s climbing to record highs at around 7.57% late in the month.  As happened with the Spanish bank bailouts, the politicians in Spain continued denying a bailout was necessary until the 11th hour, when there were reports that Economy Minister Luis de Guindos had discussed a 300 billion Euro bailout with Germany’s Finance Minister Wolfgang Schaeuble.  Yields were temporarily relieved by Mario Draghi’s comments in London on the 26th of July.  A couple of comments drew considerable attention:

To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.

This comment for the first time seemed to indicate a way around the prohibition on buying Government debt, by indicating that this course could be taken where the ECB’s legitimate influence and control of interest rates was not being effectively transmitted to all areas (as indicated by Spain’s high yields.  And then, the now famous phrase:

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

And there the rally began.  It really was phenomenal to see yet another statement of loyalty and intention of action garner action from traders, after well over two years of such statements.  To be honest, it is quite unfathomable.  Some of the spin came off when Germany made clear that they hadn’t had a sudden change of heart over Euro QE, and in the end the ECB policy meeting today was a fizzler, sparking a quite remarkable 220 pip hourly move in EUR/USD.  This interesting analysis points out just how many fallacies are obviously still present in Mario Dragi’s analysis of the causes and nature of the Euro crisis.  So the news is that there isn’t any real sign of a sensible diagnosis of the problem by the leadership, let alone developing an effective long term strategy.

One interesting bit of local ‘colour’ on the crisis was provided by Erik Townsend on the Financial Sense Newshour, who has been travelling through Europe.  I loved visiting Spain a couple of times, but feared that the atmosphere there must now be very grim with the awful unemployment numbers and economic outlook.  It was fascinating to hear his impressions of a visit to the Basque region in the North.  The locals were in surprisingly good spirits, however it was definately a faux pais to discuss the debt crisis.  The Spanish just weren’t interested in talking about it – they were resigned to the fact that the Government would take care of their friends in the financial sector as they always had, and the general populace would be left to suffer.  It is an interesting attitude, but perhaps uncommon.  There seems to be a malaise in many countries of resignation to the reality that those who caused the crisis would not be punished, and in fact be taken care of while the rest would be left to suffer.

After a solid June, July saw a small loss in our trading programme.  Early in the month we entered long the USD/JPY, however this was a fakeout as the general withdrawal from risk supported the Yen.  Later in the month what had been a solid long 10 year Treasury’s trade turned into a small loss, as have a number this year.  We need to keep taking these trades to be consistent even though the upside appears limited.

As we entered the month although the open profits from the T-Note position were gone, two positions long the Eurodollar, and short the EUR/USD still offer significant open profits.  It will be interesting to see what August brings.  August is normally a quiet month, with little political action due to Northern Hemisphere holidays.  Trading wise thin markets can sometimes mean some unusual moves – hopefully we don’t get caught in any nasty whipsaws and can profit from any moves that eventuate.


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