February 11, 2011

Naufal Sanaullah

naufalsanaullah@gmail.comwww.shadowcapitalism.com

Oil rallies on Mubarak refusal to step down, while Swiss CPImisses estimates, BoE unchanged, and EM sells off further

Another day, another instance of EM underperformance as inflation worries persist. Not helpingmatters was the refusal of Egypt President Hosni Mubarak to yield to pressures for removal fromoffice. For now, developed markets remain strong, but the potential for EM spillover into DMexists. Perhaps it is the FX mode of transmission that catalyzes it, as the USD was bid today andlooks to be creating a significant cycle bottom. More rate hikes today out of China, this time in theform of RRR hikes for small- and medium-sized banks, with more significant ones in store for 2011in my opinion.

Concerns are resurfacing in Europe again, as Monday’s 5yr Portuguese debt continues to see poorsecondary market trading, sending yields higher (as noted in last night’s piece) and sending

EURUSD lower, adding to USD strength from EM FX outflows. With EM going from mereunderperformance to new lower highs & lower lows, perhaps it is time to look at some Europeanequity shorts, particularly in Germany, Italy, & Spain. After all, Spanish CDS are not seeing much of a reaction to recent POR weakness; this just a few months after highly publicized contagion risk

from Portugal to Spain. And let’s not forget Irish elections in two weeks.

Or the fact that the ECB isback to bidding on Portugal debt.I stand by my call for eventually unsterilized ECB monetization.The S&P rallied from a small gap down to close green on the day by 4bps today, creating a tightrange since the breakout above 1300. I continue to be bullish US equity on a relative basis versusEM, but we may see some more generalized risk aversion if EM continues selling off or if tomorrow

turns into another “Egypt Friday.”

Shadow Capitalism

Market Commentary by Naufal Sanaullah

February 11, 2011

On a positive note, more labor market recovery was exhibited in US jobless claims figures today,

printing at just 383k vs 410k expected. Meanwhile, today’s US $16b 30yr auction tails 2bps, withyields rallying even higher when the Fed’s POMO schedule showed a less

-than-expected MBSproceeds reinvestment into Tsys. Lack of QE bearish for bonds and stocks? Mortgage rates ralliedfurther to back above 500bps today, although the spread to Tsys is nearing post-recession lows.

10yr yields are back to levels prior to yesterday’s terrific auction, and I expect yields to c

ontinuehigher from here. With each bout of risk aversion, USTs get a bid, but I am considering these dipsto be bought on a secular/structural basis/timeframe. Indeed, a break through the 400bpsresistance level is bearish Tsys on multiple timeframes, and could mark the end of the secular bullmarket for USTs that has persisted for almost three decades. Be watching the 150 month movingaverage, as it has provided excellent long-term support and resistance in 10yr yields. It is currentlysitting just above 440bps. A breakout could see yields flying much higher.I went short some EURUSD today on the back of continued Portugal worries and as the cross madea lower high around 1.375. Contributor Qasim Khan out with some good research today, showinghow the US Dollar Index could be in the process of making a head & shoulders bottom on an hourly

timeframe, implying a move to about /DX 80. I’ve reprinted his chart below:

February 11, 2011

CHF has been selling off on the back of the weak January CPI print (-0.4% vs -0.2% expected MoM),and Swissie has now broken out of what appears to be a declining triangle. With the macroenvironment as it is and risk aversion back on for now, I expect the 9300 level to hold nicely and arun in USDCHF up to around 9850. Eurozone fears should keep the cross held below parity,

however. I’m long from 9650.

With the US yields breakout, USDJPY has continued its march higher, breaking out of a threemonth long triangle pattern. This cross could be in for a test of its 200d, so long as risk aversion

doesn’t spur a UST bit and a decline in US

JP yield spread. I’m back long from 8

300, as well as backlong CADJPY, NOKJPY, & SGDJPY.I booked some profits in my ags plays today (both at over 25%!), as USD strength and a generalrisk-off sentiment into the weekend sent wheat back to pre-Chinese import figures scare levels.Still, I remain very bullish ags and food commodities and will continue buying on dips. However, a

sizable dip hasn’t come since double

-dip worries from last summer, so unless & until we get one, Iwill likely keep position sizing at more moderate levels.