Comments: The Fannie Mae 3.5% bond hit our previously mentioned price target of 103.00 this morning. It has hit this price target without the benefit of a "Risk-Off" trade in equities...but this "RIsk-Off" trade may be fast approaching. Technically, there is a good argument to be made that equities are completing a counter-trend rally going back to the October 2011 lows, and completing this counter-trend rally essentially right now
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Fannie 3.5%: Nice little trading pennant, the chart appears to want to go higher. We discussed the immediate 103.00 target yesterday, and I wouldn't be surprised to see it achieved today.
10 Yr Treasury 1.95: The 10 Yr popped above 2% on ADP (+325,000 private sector jobs) and an Initial Jobless Claims beat (surprise! /sarcasm on), but is coming back to earth on European news, more on that...
Euro: The Euro is sinking like a stone at 127.97...very disturbing news coming from Europe...D-Day for Greece appears to be March, link, and now the current Greek bailout package has been delayed until, you guessed it, March link . The only word that comes to mind is FUBAR. A massive game of chicken. Add on top of that, we have the halting of trading on Italian banks just now occurring, link
Comments: The Fannie Mae 3.5% chart hit 102.94, within a whisker of the 103 target we have previously mentioned over the past several week.
Moving into the realm of further speculation, I think equities are in the process of topping out in a counter-trend move going back to the lows in early October, and that we should see that process complete itself in the 10 trading days or so. There are two extraordinarily large items overhanging the market: the European banking and sovereign debt crisis, and the potential of legitimate conflict with Iran and the blockage of the Straits of Hormuz and it's impact on oil prices.
Both of these items create a massive "Risk Off" environment, which it would seem to me would indicate an initial move into US Treasuries and hence, higher prices on the Fannie Mae 3.5% coupon, i.e. lower mortgage rates. At this point, I'm looking for prices to exceed the September 22, 2011 intraday high of 103.91.
However, I do not believe that the breach of 103.91 is going to be long-lasting. One needs to be prepared to lock-in rates.
I bolded the words initial move above for a reason. The reason is I do not believe that the rates will be long lasting because the reaction to current events could be quite drastic: 1) QE3 by the Federal Reserve, probably leaked in early to mid February with an official announcement at the March meeting, the market is now trained to understand that any Quantitative Easing by the Fed means higher inflation and higher interest rates, and 2) the conflict with Iran brings along with it a conflict with China. Iran expots 22% of it's oil to China, and the US has just imposed an embargo on Central Banks dealing with Iran. Do we really expect China to go along with such an embargo for very long? Not. Going. To. Happen. There is deep conflict with China (and Russia) embedded in our embargo of Iran. Remember, China has been pursuing separate bi-lateral trade agreements with it's trading partners to back away from trading in dollars. This will only further accelerate this trend that's already in place. As this conflict with Iran progresses, we could see a hardening of positions on the part of China, and as a retaliatory measure towards the U.S. an overt selling of U.S. Treasuries as a part of a response mechanism by the Chinese.
A few key dates for Europe From Calculated Risk Blog
Jan 6th: Euro-region November unemploymentfrom Eurostat.
Jan 9th: German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Berlin.
Jan 24th: EU finance
Jan 30th: European Union leaders meet in Brussels on debt crisis.Feb 9th: ECB holds rate meeting.
Feb 19th: Proposed date for Greek general election.
Feb 20th: Euro-area finance ministers meet in Brussels.
Feb 29th to March 1st: Italy redeems 46.5 billion euros of bonds.March 1st and 2nd: EU leaders meet in Brussels.
March 8th: ECB holds rate meeting
March 12th: Euro-area finance ministers meet in Brussels
March 20th: Greece redeems 14.4 billion euros of bonds.
March 30th: Euro-area finance ministers meet in Copenhagen.April 22nd: France holds a presidential election.
ZeroHedge | http://www.zerohedge.com/news/exposing-american-banks-multi-trillion-umbilical-cord-europe
European banks could do a lot more damage (to American economy) than expected as they pull back
Manufacturing in the U.S. grew in December at the fastest pace in six months, remaining at the forefront of the expansion entering 2012.
The Institute for Supply Management’s factory index climbed to 53.9 last month from 52.7 in November, the Tempe, Arizona- based group’s data showed today. Fifty is the dividing line between growth and contraction, and economists surveyed by Bloomberg News forecast the gauge would rise to 53.5.
