the Fed at a crossroad

Plenty of political drama in Europe today that is only rivaled by the daily verbal barrage coming out of Obama's debt ceiling meetings. I was initially hearing that EU leaders are expected to give their approval before next week to a burden sharing agreement with private holders of Greek debt. Later I heard contradictory reports that Eurogroup plans to give Greece enough money to buy back its own bonds in the secondary market at an average of 50% of its face value. This would constitutes as a voluntary haircut and would render the participation of private sectors unnecessary. In any case I see Greece remaining as fragile as ever.

The other big story was Bernanke's testimony which turned out to more balanced than expected. On the hawkish side he seemed to discount the recent rubbish payroll numbers, attributing the weakness to temporary factors. On the dovish side Bernanke did not dissuade notions of further QE or other stimulus. Upon further questioning, the chairman emphasised the same point.

It's fascinating that he failed to rule out QE3. I would see initiating another round of buybacks as being rather silly and this is a feeling probably echoed by many. This time last year I asked Alan Greenspan in casual conversation whether he thought there should be any monetary stimulus at all and he gave a resounding no. last week I saw him again in Aspen. He laughed when I brought up the stimulus topic and he implied that the QE2 was rather pointless and unfortunately I agree. QE1 and 2 spent over 1.3 trillion USD and apart from inflating asset prices, I'm not sure it managed to achieve a whole lot more. The unemployment rate failed to fall in any meaningful manner so the message is there.

what's happening to the second i in PIIGS?

I was mostly absent from the market last week and coming back today turned out to be a bit of a nightmare. One of our main trading systems failed first thing in the morning and after numerous vain attempts to fix it, our IT decided to restore the entire file system from tape with an estimated completion time of 6 hours.

Everyone was in utter disbelief! I could not see the risk on my book, and had no access to my pricing system. It's practically like a blind person swimming in the dark sea at night alongside a group of sharks. (to be fair, when you are swimming with sharks, whether you are blind makes relatively little difference) I decided that less is more and managed to do as little as possible for the majority of today.

On the PA side, the risk situation is much clearer:) -  I have mostly been keeping a small short EUR position. While the US could be in better shape, the Eurozone continues to do an excellent impression of a deeply wounded organism entering its terminal phase of dysfunctionality. Greece is still in hot water but the hedge funds have moved on - Market seems to have decided that for the next stage of the peripheral punishment, all roads lead to Rome. With the 5y Italian CDS reaching its historical high, the second i is back in PIIGS. Personally I have a lot more faith in Italy - the country is not suffering from a burst property bubble, balance sheet restructuring or massive cuts in public spending. I'm not particularly biased even though I did spend a small but wonderful part of my childhood living in Italy. One thing worth noting is that a large proportion of Greek debt is in foreign hands. This gives rise to an obvious problem as foreign investors tend to pull out of a country a lot more quickly when "sh*t hits the fan". In Italy over half of the government bonds are actually held by the Italians. In any case I aim to take profit when EURUSD is around 1.4000.

Have a good week ahead and good luck.