Written Commentary

The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Sterling under more pressure

Tuesday March 9, 2010

Ongoing speculation that profits earned overseas by Japanese companies is finding its way home before the fiscal year-end is lifting the yen on Tuesday. At the same time Asian stocks are commemorating the one-year anniversary of the lowest closing point of the bear market for stocks with a down day, also providing a knee-jerk bid to the Japanese yen. Other Pacific region data suggests, however, that risk appetite is likely to remain on the agenda and may provide the Australians with another reason to lift rates. But the main story today surrounds the British pound where the bad news just keeps piling up.

03-09-2010 04:40 PM EST	Current Price	Put Open Int	Weekly Change in Put Open Int	Call Open Int	Weekly Change in Call Open Int	Put/Call Open Int Ratio	30-day Historical Vol (%)	Implied Volatility (%)
Euro	1.3564	25,576	-1,046	14,417	273	1.8	11.0	10.5
Yen	89.8425	7,492	1,132	3,156	-2	2.4	12.6	11.3
Pound	1.4994	14,898	2,772	4,657	1,391	3.2	11.9	12.6
Canada	0.9728	4,450	590	10,837	597	0.4	11.0	10.2
Aussie	0.9140	4,530	-7	24,267	101	0.2	14.4	11.9
Swiss	1.0750	2,129	4	2,358	24	0.9	11.1	10.1

British pound – Comments from two ratings agencies helped keep the pressure on the pound today while warmer words from one of the MPC members helped stem some of the pessimism. Kate Barker addressing an NIESR audience said that recent data provided grounds for optimism that the British recovery was “broadly on track” and pointed to the gradual disappearance of several of the negative factors holding back the recovery. While admitting that the economy still looks fragile Ms. Barker noted that the downside risks to growth had diminished leaving a still bumpy road ahead.

Speaking on a day when data proved a further weakening of the U.K. trade deficit for January on account of lower chemical and commodity sales, Ms. Barker said that the British economy was failing to feel the potential impetus from weaker sterling. She noted that the British economy was faring no better than either German or French manufacturers presented with the onset of recovery. Her fear is for significant ongoing weakness in Britain’s trading partners that would prevent any benefit from a cheaper pound.

Meanwhile the pound fell against the dollar to $1.4971 and above last week’s 10-month low after Fitch Ratings agency advised that the government needs to accelerate its plans to reduce the budget deficit. Reflecting momentarily on that prospect, investors quickly connected the dots to see that a rudderless government is the most likely outcome in the forthcoming election, further hampering sterling.

Moody’s Investor Services separately cautioned that as the tide of government support for the U.K. banking system slowly ebbs out, it will leave exposed those financial services companies that have failed to improve their funding position. The reports together were taken negatively by sterling today which also fell to 90.61 pence against the euro.

Euro – Having risen to $1.3700 on Monday, the euro is back on the defensive today and retreated to an intraday low at $1.3550. Most recently the single European currency traded at $1.3558. It also shed ¥1.3 to stand at ¥121.73. Friday’s low against the dollar was at $1.3530 and only if the euro can hold above here will it start to look constructive.

U.S. Dollar – A Manpower Inc. survey suggests that the recovery in employment is expanding into the second quarter, while jobs growth across emerging markets is also likely to continue its expansion. The world’s second-largest temporary employment agency said that of 18,000 surveyed companies, 76% leave hiring intentions unchanged between April and June while 16% said they’d expand the number of workers. The most optimistic response came from companies located in the North East. Within emerging markets it’s no surprise to learn that hiring intentions were strongest within nations such as Brazil and India, while they were the weakest in Italy, Spain and Ireland. Some analysts claim that without the adverse impact of winter snowstorms, the February reading of U.S. employment would have shown jobs added. Previous data during disrupted winters have shown sharp rebounds in job additions during March. The ongoing U.S. economic recovery is bolstering the dollar under current conditions.

Japanese yen – We’ll just have to wait and see how far the yen rises in response to the seasonal impact of repatriation. With global equity markets around 60% higher than this day a year ago, the world is in far fitter shape and the recovery remains encouraging. And so the premise that the yen is rising on a risk aversion theme has to go down as a somewhat bogus claim today. We await any word from the Bank of Japan, which is supposedly mulling ideas on how to breathe life into the Japanese economy. The impact of further quantitative easing via additional government bond pressures should serve to weaken the yen, which currently stands at ¥89.75 against the dollar.

Aussie dollar – A buoyant ANZ job survey for February made the previous month’s downturn appear to be little more than an aberration. The measure of newspaper advertisements and Internet job listings increased 19.1% - the largest jump in the reading since it was first compiled in 1999. The data comes days ahead of the February employment report, which might prove so strong that it will prevent the RBA from taking a breather after its February interest rate hike to 4.00%. The Aussie unit jumped in the immediate aftermath of the data and reached 91.17 U.S. cents. However, a reversal in attitude towards risk later saw the dollar and yen both rally sending the Aussie back to a low at 90.56 cents. The Aussie is currently trading at 90.76 cents, while it’s lower on the day at ¥81.50 against the Japanese unit.

Canadian dollar – The Canadian dollar remains just a fraction of a penny above 97.00 U.S. cents this morning and has lost some impetus on account of a gentle decline in key crude oil and gold prices. Gold has slipped by $11 per ounce while crude at $80.25 per barrel remains north of psychological support at $80.00.

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Political pressure on CDS instruments rises

Tuesday March 9, 2010

You can almost see the headlines coming now. European politicians are crying foul over rogue derivative bets that helped derail the Greek fiscal wagon. But while the picture is there for all to see, even the German financial regulator BaFin says that there is a lack of evidence of how investors built positions using credit default swaps. The furor is likely to get louder following German Chancellor Merkel’s appeal to President Obama to “act now” to prevent further pressure, or worse still a redux but this time with Portugal running the risk of being forced off the track.

As of: Tue, 9 Mar 2010 03:57 PM EST

Eurodollar futures - On the anniversary of the weakest point in the bear market for stocks, investors across the Eurozone pared their appetite for equities following a couple of less upbeat earnings reports. Germany’s Angela Merkel voiced fierce concerns at a Luxembourg press conference with local Prime Minister Jean-Claude Juncker, asking for the swift implementation of measures aimed at tackling the undesirable elements of credit default swap trading. The CDS trades insure bond investors against the default of a bond issue, but there are no rules preventing investors from taking on insurance without an underlying position.

It’s widely expected that Greek Prime Minister George Papandreou will address this issue with President Obama at a visit this week. Conceivably it would be possible for market villains to build a stack of positions that would benefit if a country or company defaulted. The crux of the matter, however, is whether the demand for insurance played out by rising insurance premiums, causes or accelerates default in its own right. According to BaFin, the German financial regulator, there are no signs of a build up of new positions that might have caused a run on Greece.

The urgency to implement such restrictions was put in the spotlight earlier following fears over a Fitch downgrading to debt issued by Portugal. Although its bond prices and yields were unchanged on the day, they did miss out on a sharp Eurozone bond rally, which saw core German bund yields slip from 3.18% to 3.12%. Weakness in stock indices and the shift of emphasis from Greece to Portugal helped spur a bond rally.

Portugal has already announced plans to award sub-inflation pay increases to civil servants, has delayed major infrastructure spending plans and has plans to sell €6 billion in state-owned assets as it tried to trim its budget deficit. And while the situation is less tenuous than that of Greece, investors helped widen the premium over German bunds today by six basis points to 94 basis points.

European short futures – Words from the market chief at the New York Fed have soothed money traders’ fears that the Fed might lighten up on some of the debt it has purchased as part of its asset buying spree. The official picked up on previously announced measures by Fed Chairman Bernanke who indicated that at some point the Fed would seek to reduce its balance sheet. But the words today provided further groundwork on the timing and indicated that the recovery needs be “more firmly established” before the Fed would start to incrementally sell previously purchased securities. To do so in one big jolt would send yields at longer maturities sharply higher. Eurodollar prices are displaying enthusiasm over this communication with yields down by four basis points along the strip. June treasury note futures are paring earlier gains but are higher by four ticks at 117-01 where the 10-year yield is at 3.69%.

Canada’s 90-day BA’s – The rally in Canadian government bonds is petering out with yields only lower by a basis point at 3.48% as June bonds rise just five ticks to read 118.18.

British interest rate futures – Gilt prices rose pretty sharply after a well received auction of government bonds. Yields fell at the 10-year to 4.03% spurred on by comments from a Fitch Ratings spokesman who argued that the “pedestrian pace” of spending and revenue adjustments might put the nation’s credit rating at risk. However, dealers interpreted the words as meaning that the Bank of England might need to step in to buy more government paper and depress yields artificially. Short sterling prices at further maturities rose by seven basis points. Investors were also discouraged by a reading of 17 in the balance of home surveyors reporting higher rather than lower U.K. home prices. That’s the second droopy piece of housing market evidence this week – and it’s only Tuesday.

Australian rate futures – Bill prices at short maturities slipped in response to a rather bullish reading of job advertisements from ANZ. The 19% jump in vacancies printed in newspapers and listed online was the strongest pace of increase in the 11-year history of the index. Still, 10-year bond prices rose enabling a two basis point decline in yields to 5.53% as the curve flattened. Speculation is still swirling that the March meeting of the RBA will deliver a quarter point rise to 4.25%.

Japan – A successful auction of 30-year maturities totaling around $6.6 billion at the highest coupon rate since August last year helped provide a positive tone to bonds on Tuesday. Yields fell to a five-week low ahead of Wednesday’s Bank of Japan report on consumer prices. In line data would leave the annualized pace of decline at 1.5%.

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.