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Friday, July 22, 2011

22 July - Typical Friday Trading

The morning session of London trading has been very quiet so far, with estoxx sticking to a 12 point range. Bunds are marginally down on the day and peripheral spreads over Germany continue to come in sharply from yesterday - 10 year Italy and Spain are 10 bps tigher, and Greece is 200 tighter (still 3000+ to go though!). Currencies are holding a tight range with the exception of AUD and NZD which are strongly bid . . . note that they stayed fairly stationary while EUR and EURCHF were rallying last night, so this may be a catchup of sorts. FX vols are tanking dramatically across EUR pairs, 1Y EURCHF some 1.5 vols lower than pre-leak yesterday.

My view on the leaked meetings from yesterday is that the announced measures are enough to provide a sustained 6 months of relief from Euro crisis tensions, similar to the reaction post-June 2010 Greece and post-November 2010 Ireland. Keeping this in mind I think there's value in entering a long Eurostoxx position vs a short S&P500 position, via Sep futures. Estoxx is trading around 2800 where it was 3000+ only 3 months ago, whereas S&P is brushing up against its pre-2008 highs . . . I also expect this trade to be fairly well hedged and probably outperform in the tail-risk scenario of no agreement being reached on the US debt ceiling.

Charts and ratios to follow.

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