The Economissed: The Running of the Bulls….

On Monday, in the small Spanish town of Pamplona there was the annual running of the bulls – a sport that takes no prisoners with a few players usually ending up in hospital as the result. Mondayʼs running of the Bulls, as it turns out, was nowhere near as brutal as Tuesdayʼs in Italy.

Bunds – the proxy hedge for all of Europeʼs woes – blasted off from the open to see more than a 2 point gain at one stage, making the recent rally over 5 full points in just over two & a half sessions. From the 11th April the front month was up over 10 points (119.36 – 130.91) in what is far from a normal move in terms of gamma.

What to do:

1. have a trade on for a EU super-hero-political fix, preferably with a short volatility profile after the recent jump… 125/124/123 put fly is worth approx. 5 tics for those willing to take the 19:1 shot.
2. Perhaps look for higher levels still & invest in the ineptness of the powers that be? safe trade indeed – sell itm put spreads to finance the future education of your children – if only because the EU bond market will not be around if this continues through the Euro Politicosʼ summer holidays.
3. Lick wounds or continue celebrating the random walk of jobbing the headlines and await the ; New, we kid you not, this time itʼs for real EU Summit on Friday.…no wait, conf. call today could be better….no wait….over the weekend so the market doesnʼt have a chance to run or manage risk… so much for Euro-Fiscal Policy in action…..& therein lies the real issue.

Italy did not need to go in to free-fall. The desperate bulls, however, were simply chased in to a street fight following the ECBʼs astounding decision to raise rates despite the recent shift in sentiment & without other Central Banks who are clearly offering a totally different assessment with regard to inflation.Nothing could have compounded Trichetʼs decision like the weak NFP then seen on Friday.

Italy was telegraphed – as have the German Banks been by Moody’s – but itʼs the fact that Politics keeps playing a bigger role than is warranted, especially when collective failings have been quite staggering in terms of any political cohesion shown. To threaten to sack ones own Finance.

Minister on the eve of a e40bln (albeit back ended) budget was all the markets needed – an excuse to run the bulls towards the triggers that currently mean rates hit the safety valve & clearing margins increase, raters get jittery and hey presto – of course the cash market like Italy collapses…this was supposed to be a relatively stable, liquid market….an example of economic prudence and sense through the crisis…Where contagion strikes, policy fails. Italian stocks down 15% in 6 days & – 25% from the March highs.

There are two ways to trade this market….OTM view in options suit me where both bulls and bears can be right on any given day but keeping the risk light with low delta plays or simply job the headlines as they hit – iʼve seen decent money made on both styles but equally none lost from those on the sidelines. Technicals are in an exponential phase here & anyone pretending to have a handle of this political lunacy will no doubt get badly caught married to any view that is longer than it normally takes to kiss the bride.

Of course, right in the middle of this experiment comes the real test which is being played out in great detail – the importance of majuscule Aʼs & minuscule cʼs.

NO FISCAL POLICY & ONE MONETARY POLICY – when Mervyn Kingʼs knighthood seems to scream that the 2 policies go better hand (or cap) in hand (& a collapse of inflation to boot – good week for the Sir Swerve). The biggest unqualified gamble of all time has not seen any long term results but we do know confidence was pumped back in to the system at a price – surely that billʼs not due yet?…not unless you cripple growth prospects in the periphery by raising rates & bringing forward the debt collectors. Trichetʼs gamble is that Europe as a whole can survive – a little Darwinism from an Economist.

The price as Keynes knew well, was to be off-set by saving in the good times…otherwise it would be a little like going in to a war without an exit plan….like Libya. The central argument of The General Theory is that the level of employment is determined, not by the price of labour as in neoclassical economics, but by the spending of money….

…but he argued that it is wrong to assume that competitive markets will, in the long run, deliver full employment or that full employment is the natural, self-righting, equilibrium state of a monetary economy. On the contrary, under- employment and under-investment are likely to be the natural state unless active measures are taken. The hurdles to QE3 are higher now in the US (and UK) but the consequences for not fully following through on Plan A globally – when markets, banks & all levels of trade are global seems collective negligence in many ways….

….take your time Ms. Merkel, perhaps that Japan related PMI bounce & the China spending bonanza along with the solid IMF German GDP estimates is enough for your electorate, but for Europe – the more time – the bigger the final cheque will be…

Time to get a room?

(click for sharper image)

The Economissed is produced by Paul Wiggins head of Futures & Options at Market Securities in London.

Charts courtesy of Bloomberg

Related posts:

1. Inflation now running at double the BoE target
2. The Economissed: Thank God it’s Friday!
3. The Economissed: Vorsprung Default Technik….
4. The Economissed: Widow maker Vrs Euribor
5. The Economissed: Hawks Casting Shadows

Link to this article: : http://www.goldmadesimplenews.com/markets/the-economissed-the-running-of-the-bulls-4545/

Posted by Paul Wiggins on Jul 13 2011. Filed under Analysis, Markets. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry