2010 10 21

First of all, China data all came out pretty good. GDP is on a slowing trend (9.6% in Q3 vs 10.3% in Q2) but still at a very healthy level. Inflation remained reasonable (around 3.6%) which surprised some who thought inflation was spiking hence the surprise rate hike.

Europe preliminary PMI for October first came out and it also showed weakening trend except – guess who – Germany! It would probably be another month or two for stronger Euro to take effect, but it is really impressive that Germany is maintaining the strength. Rest of Europe is undoubtedly in a weakening path however. I expect Germany to follow that but at this point I push out the date yet again to January 2011.

Eurozone consumer confidence also came in pretty decent. I am now thinking Europe would remain OK through end of this year but the tipping point to be reached early next year when the austerity measures start rolling out.

In UK, retail sales surprising fell yet again for the second month. This is especially bad news since severe government spending cuts and tax raises have not even begun yet. There are diverging stances from UK government to BoE. Conservative finance minister George Osborne, dismissed fears today that his austerity drive is too harsh, and repeated his government's mantra that monetary policy can take up the strain as deficit cuts bite. On the other hand, One BoE policymaker, Adam Posen, has already called for more stimulus and there are signs others could be edging towards his view. BoE rate-setter David Miles said on Thursday there was still scope to help the economy if needed. I think we should add to short GBP and also initiate short GILTS.

In US, weekly initial jobless was mostly a non-news coming in right around at 450k.

Stocks were flat in US and up in Europe. Nikkei continues to outperform. Wish we shorted Nikkei instead of just getting out earlier in the month but hindsight is always 20/20. I think though it might not be a bad idea to split our stocks shorts 50/50 Nikkei/Eurostoxx.

Commodities were hit pretty hard pretty broadly even though dollar did not strengthen that much. USD, however, was up against all G10 currencies today.

It seems to me like QE is fully priced in FX and bond markets. I think yields are low enough – for the data we are seeing now – and negative sentiment toward USD has become too consensus. Tactically I would advocate to adding some long dollar positions.