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Morning Notes For July 28th 2010 at Trader’s Narrative

Morning Notes For July 28th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author’s comments are in italics. Please provide feedback in the comments:

  • Treasuries – 2s, 10s, and 30s are all up small today (following steep sell-off in last few days). We have a $37B 5yr auction today (results @ 1pmET) and we get Beige Book @ 2pmET.
  • China climbed 2.26% (highest gain since July 9th) and broke above the key 2600 level; China helped higher by 1) positive comments from the PBOC (fundamentals for the country remain “good”) and Senior Bank Officials (Z. Tao said that the government will maintain a moderately loose monetary policy through year-end), 2) strong profit growth (Corporate profits rose 72% YoY in 1H10); 3) the long awaited IMF review of China’s economic policies doesn’t say the yuan is “substantially” undervalued. – JPM

Shanghai composite Jul 2010

  • Financials update from Moody’s out after the bell on Tuesday – Moody’s is taking several outlook and rating watch actions on a bunch of banks following passage of the Dodd-Frank fin reg reform legislation; Moody’s is taking these actions b/c of the removal of systemic government support that it feels is codified in the reform legislation (Moody’s has warned this would be a consequence of the legislation)
  • US debt levels – the CBO issues a stark warning that the risks of a crisis in the US are rising as debt levels soar; debt burden becoming unsustainable – the CBO says the US is facing the risks of a Europe-like debt crisis. – CBO
  • Gulf oil on the water’s surface is “vanishing fast” according to the NYT; the oil appears to be dissolving much faster than any expected; the Gulf has an “immense natural capacity to break down oil”; despite the good news, concerns remain – NYT
  • The IMF says there are signs of slowing in the global economy although the recovery is set to continue. “The most likely prospect is for a moderate, multispeed recovery with significant downside risks.” Reuters – this is definitely the consensus view. I am not at all implying that this is wrong, simply that this is probably what the market is currently pricing. Thus, data that deviates from this view will likely cause change, but not data in support of it.
  • “World splits in two as East tightens while West stays super-loose” – the London Telegraph notes the recent spat of CB tightening in emerging markets (India, Brazil) while the West (esp the Fed) is maintaining its loose policies. – and this is a symptom of the ‘multispeed’ recovery referenced above by the IMF
  • Gold move today: gold fell ~1.9% today to its lowest levels since late Apr – some of the drivers behind the selling: 1) fear abatement trade (see the dramatic tightening in European sov CDS and European bank CDS); 2) CB tightening (the Indian hike today follows Brazil last week); 3) less worry about inflation (the PBOC today said inflation pressures are receding in China); 4) ETF liquidation (the GLD on Mon revealed that its holdings fell to 1,301.74 tonnes from 1,302 on Jul 22; the holdings hit a record of 1,320 on June 29). People are watching the 200day MA at ~1150 as the next big level. – Many claim that gold will perform well in a deflationary environment as well as a hyper-inflationary environment. But as the data increasingly supports a moderate recovery and a slightly inflationary environment, perhaps gold will continue to struggle.

Gold Spot $/oz
gold 200 MA Jul 2010

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