Bears feeling the squeeze as quarter-end approaches

The market and pro-risk trades continued to climb a wall of fear into the early US session – giving the bears an uncomfortable squeeze indeed despite the lack of real progress on EU questions. On Sunday, we indicated the kinds of risks lurking in the markets when volatility goes haywire. On Monday, the bottom fell out in places, but since early yesterday, we’ve seen a vicious squeeze on risk averse bets, suggesting that fear had already gotten ahead of itself on the downside – at least temporarily.  The headlines trumpet that there are hopes growing that the latest plans EFSF rescue plans to circulate are offering a ray of hope for markets, but there has also been plenty of criticism of the latest plan as well, which rapidly becomes very opaque – though that might just be the whole point, as it is impossible to describe to a domestic political audience (who is against EFSF expansion, but won’t understand what it means that a “Special Purpose Vehicle will issue bonds and then use the money to buy sovereign debt”.) Normal people can’t understand that kind of thing – for good reason, as it doesn’t make any sense and is really accounting obfuscation – but if you can’t understand it, it is much hard to be against it, and from that angle, this kind of approach just might allow the extend and pretend game to continue that much longer.  Perhaps more attention should have been paid to the German constitutional court’s objection to expanding the EFSF unless a new German constitution is written. Um, that might take a little time…. The Telegraph’s inimitable Ambrose Evans wrote about this late yesterday. This is an important issue as the court can slow the progress of further measures if it decides to stand up against further action on constitutional grounds. Our sarcasm aside, a market move is a market move and EURUSD squeezed higher as bonds sold off, equities rallied and European sovereign debt spreads tightened appreciably. This pulled the pair back into the range and well back above the previous cycle low around 1.3500. The next focus will be the votes from the various parliaments on the “new” EFSF agreement from way back in late July that has yet to be ratified. 1.3500 looks like an important support and there is no well defined resistance until up in the 1.3800/40 area. The JPY crosses bounced even more than USD pairs today on the backup in bond yields. US data A tiny sigh of relief perhaps out there as the US Richmond Fed saw manufacturing in that region contracting more slowly than it was in Aug. (the critical regional survey seems to be the Chicago PMI reading this Friday just ahead of the ISM number next week). Consumer confidence essentially flatlined in September rather than bouncing slightly. US data is hardly the focus this week, however, as it’s all about headline risk. Looking ahead Remember that we have the end of the month and end of the quarter approaching on Friday – it could mean window dressing, but it will certainly involve large fixing flows, particularly given the very wide swings in bond markets over this month. In other words – as we said yesterday, there is the risk of ugly churning as the heavy positioning clashes with heavy headline risk and today we realize that it’s also necessary to throw end of month/quarter considerations into the mix. Watch for the Slovenian vote on the EFSF some unknown time later today – we assume passage fully priced in with EURUSD trading above 1.3600. Finland votes tomorrow and Germany on Thursday. There is nothing of particular interest on the economic calendar until tomorrow’s US Durable Goods Orders. Be careful out there. Economic Data Highlights

• Japan Sep. Small Business Confidence out at 47.2 vs. 46.4 in Aug.
• Germany Oct. GfK Consumer Confidence out at 5.2 vs. 5.0 expected and 5.2 in Sep.
• Switzerland Aug. UBS Consumption Indicator out at 0.79 vs. 1.28 in Jul.
• Sweden Aug. PPI rose +0.3% MoM and +0.9% YoY vs. -0.1%/+0.6% expected, respectively and vs. +0.2% YoY in Jul.
• UK Sep. CBI Reported Sales out at -15 as expected and vs. -14 in Aug.
• US Jul. S&P/CaseShiller 20-city Home Price Index rose +0.05% MoM and fell -4.11% YoY vs. +0.10%/-4.4% expected, respectively and vs. -4.4% YoY in Jun.
• US Sep. Consumer Confidence out at 45.4 vs. 46.0 expected and 45.2 in Aug.
• US Sep. Richmond Fed Manufacturing Index out at -6 vs. -11 expected and -10 in Aug.

Upcoming Economic Calendar Highlights (all times GMT)

• US Fed’s Lockhart to Speak (1630)
• US Fed’s Fisher to Speak on Dissent (1720)
• US Weekly API Crude Oil and Product Inventories (2030)
• Australia Aug. HIA New Home Sales (0100)