Global Macro Commentary

Hold Onto Yur Bootstraps

Friday, January 16, 2015

Guy Haselmann
(212) 225-6686
Director, Capital Markets Strategy
John Zawada
Director, US Rate Sales

Market Comment
Greater mistrust and huge volatility will benefit Treasuries.
A G-5 central bank just broke its promise to the market. Market participants have increased
efforts to monitor their counter party risk. It is likely several other central banks will follow
as many are highly-likely over-promising on what they can ultimately deliver.
CHF moved 40% in 10 minutes before settling around 20% stronger. A few FX exchanges
have stated they are going out of business. Several currencies have moved more than 30% in
the past 6 months and oil has drop over 50%. It is possible some smaller energy related
firms could default on payments.
Higher volatility in markets prudently and generally leads to paring of risk by portfolio
managers.
For many, quick and enormous moves (like in CHF) lead to large losses and margin calls.
Margin calls lead to selling of risky assets. Many second order ripple effects occur in this
environment. Sub-prime in 2008 is an example.
The pace in the demand for Treasuries has accelerated and this demand will persist a while
longer.
Some banks said they no longer meet capital requirements. Adjustments back toward
meeting those requirements will benefit Treasuries over illiquid, risky, or credit securities.
Central Bank Comment
The ECB has been promising sovereign QE for 7 months. It is probably fully priced in. Its
main goal has been and remains to depreciate the Euro. EU country rates have already
converged, so the goal in proceeding with QE is unlikely to be to try to converge them
further. On the contrary, should the structure of QE indicate less EU integration, such an
anti-union move should significant widen periphery spreads (despite the ECB buying them)
Draghi rarely disappoints markets but he will have his challenges not doing so next week.
Some believe that SNBs removal of its QE is being replaced by ECB QE. I dont entirely
look at it this way, because the ECB QE is priced-in and has been well-telegraphed and
expected for so long (7 months). Therefore, the market is losing SNBs support that it had
believed was going to continue as a core policy.
Hidden risks and uncertainties are growing. Negative sovereign yields and a depreciating
Euro creates added problems. USD securities, particularly Treasuries that offer more yield
and a strong currency, look attractive to Europeans and foreigners.
Oil Comment
Oil oversupplies will not end or be worked off anytime soon. Oil will remain under pressure.
I can see it test $40 per barrel in the near term. Lower oil causes significant stresses in
various areas and elevates geo-political risks.

The people I distrust most are those who want to improve our lives but have only one course
of action. Frank Herbert

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