I meant to post the day after ECB’s second LTRO to post this update but I was too busy. Four seminars of three papers in three weeks are a killer and I am still digging out of the hole due to the travels done in the three months till early February.
So what has changed? 1) ECB finally answers to the call of duty to its lender of the last resort responsibility and the risk of imminent breakup of Eurozone is greatly reduced. But ECB does not have clear plan for more large scale QEs unless things gets much better. 2) Bernanke announced the same intention in the last few days. The US first quarter GDP estimate consensus is likely to be revised down slightly. The US corporate earnings have peaked out. If it were not due to the blowout profit from Apple in the last quarter, corporate earnings would have pivoted then. 3) China will not loosen up as much as people have expected (of course they have always yielded to pressure of economic slowdown every time in the last ten years, which finally leads to the current dire situation).
On the eve of ECB’s second LTRO, the market has priced in all the great news (and likely more than the realistic level). Now some of the good news has not come as much as expected. So the market is a bit disappointed and is consolidating. It might still go up in more volatile environment than in the last three months but the risk has started to overweigh the return. The further gains can only rely on investors’ unrealistic overreactions to good news.
Is this a good time to set up shorts or buy long term T-bonds? I would wait at least another couple of weeks to examine the situation. Likely the biggest potential bomb is disappointment in earnings, which would happen after April 1. Even then, one has to see how much a correction it will be, if any.
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