Moving to NEUTRAL from RISK-OFF: SNB as an indication that next policy response from G-20 is imminent:

 

The move by SNB today to move towards QE is clear warning signal to me that the policy risk has become too big for global policy makers – there are several reasons why I am now neutralizing my negative call from

Mid-May called: No Silver Bullets. (please insert link for me)

-          The move by SNB is key as it will take Switzerland to zero-interest rates and de facto quantative easing. SNB will increase the monetary base by approximately 50 billion CHF and narrow the target rate for 3-mth Libor from 0.0-0.5 per cent to 0.0-0.25 per cent. This is major help to risk-on as EUR vs CHF has become major benchmark and leader for risk on and off

-          The second reason is technical – our internal models for cyclical and relative value is now moving towards neutral to cheap risk. This is indication for us to take profit on the May trade short trade – however we are nowhere near a high-risk rewards trade yet which will need S&P cash at the 1200/1210 area (This morning low in S&P could be close enough, but prefer S&P cash and US trading hours to confirm this)

-          There is high risk reward trade present in US fixed income – on the back of the debt ceiling deal there is ample ammunition for the S&P to downgrade US debt – I think it will happen and ultimately it should be negative for fixed income and lead to higher US interest rates. The cycle and trend of having higher and higher marginal cost of capital is here to stay – this short-term relieve rally was based on the predictable move lower in growth assessments.

-          My very negative view on GDP growth across the G-20 has been confirmed – I see stabilization at this lower level for now – and the mere fact that most PMI's is now below or just above 50 indicates that the policy response is not far behind. Jackson Hole  this month will yet again become key for change in Fed outlook. Expect strong communication on keeping rates lower for longer, the willingness to explore further asset buying (Operation Twist or QE3) and a tone of urgency to be present.

-          Finally, the ECB and Non-farm payroll and the Italian contagion are event risk but as someone who has been pounding the table on the risk of "domestic agenda being the real risk" – I find the moves erratic and too fast for now.

All this added up makes me move to neutral on risk – awaiting further confirmation on stabilization in economic data and policy response. This will be first time since May. Let me stress that I firmly believe all of above is well inside the Crisis 2.0 scenario I have outlines a few times, the trend of ever higher marginal cost of capital will continue to debtors and the credit nations will all, like Switzerland, have to move towards QE in order to curtail the in-flow of capital. The world is serious disharmonious in assets, in social trends and in equilibrium. Being patient and awaiting clarification could be the best trade for this summer.

I am sending out longer note on debt ceiling debt later today where I outline why it could have been a good start but it ended up as always up being an exercise of buying more time.