Does too much calm mean it’s time for a little storm?

The market activity has been positively glacial over the last several days, but is suddenly kicking into gear ahead of US equity trading today on no readily discernible catalyst. We should all be reminded that quietude and complacency often flag danger ahead.

We began this piece a while ago bemoaning the lack of volatility today, but an hour or so ahead of the US open, the market is kicking into high gear, lead for whatever reason by heavy selling in GBPUSD that is dragging the USD stronger against other currencies as well.  While interest rate differentials of late have pointed to a lack of fundamental support for the GBPUSD rally back above 1.5600 of late, there was no readily apparent catalyst for today’s big move other than perhaps the 20/20 sense that things were simply getting too quiet out there.

Italy’s debt auction today went off relatively smoothly, with the country able to unload some EUR 9 billion (the full target) of 6-month bills at a bid-to-cover ratio of almost 1.7, while it also sold EUR 1.7 billion (short of the maximum target) of zero coupon 2-year debt at about 4.850%. The two-year Italian bond benchmark yield was about -12 bps lower and close to the lowest level since late October. The 10-year yield fell some -25 bps earlier, but was only about -5 bps lower just ahead of pixel time for this report and remains close to 7.00% and toward the higher end of the range for the last month.

Tomorrow sees an auction of longer term Italian debt (up to 10-years) and the open question is how far the market will want to go out on the curve, particularly during the quiet period ahead of the new calendar year. This auction could finally break the precedent of virtually zero volatility established over a week ago in the EURUSD cross, for better or worse.

Japan’s new budget has made headlines in recent days as the country plans to spend twice as much as it takes in from tax revenues for the first time, widening a fiscal gap even as the national debt continues to set records. Yet another sign that fiscal credibility is unattainable (it already has been mathematically unattainable for a long time now) was the news overnight that PM Noda’s plan to shore up the budget with a doubling of the sales tax to 10% is finding his own party members abandoning him in protest. It will be interesting to see if interest rates turn higher on sovereign debt in 2012 and how Japan deals with such a development. The likes of Kyle Bass have been warning about what happens to Japan in the even interest rates rise a mere percent or two. Of course, he has been warning on this for some time now and it seems at this point that the world is treating his ilk like the boy who cried wolf. If the wolf of bond vigilantism does arrive for all developed countries in 2012, Japan will be the easiest target. Don’t tell that to those entering today long GBPJPY, on the other hand…

The widely followed KOF Swiss indicator plummeted once again in December, to a two-year low, continuing the recent pattern of very ugly Swiss data and suggesting that the SNB and Swiss government will be chomping at the bit to make a move somewhere in 2012.

Nothing of interest on the economic calendar overnight, but tomorrow we have the Italian bond auctions, US weekly jobless claims (more focus now with confidence rising (important coincident indicator for employment) and claims having registered a seasonally adjusted multi-year low last week) and the final large US manufacturing survey of the month ahead of next Tuesday’s nationwide US December ISM survey, the Chicago PMI. So far, only the Dallas Fed survey has spoiled the parade of strong manufacturing surveys this month, though the December Richmond Fed release yesterday, while positive, did come up slightly short of expectations.

Another event on the radar within the next week is next Tuesday’s US Iowa caucuses, considered the kick-off for the US presidential race as it is the first official endorsement of candidates in their respective primary runs. The Republican primary is the only one of interest of course as the Democrats have the incumbent, but there is intense interest now in whether dark horse Ron Paul can take the victory in Iowa. Although the Iowa caucus is of little official consequence, it could mean better momentum for Paul for the New Hampshire primary – the first official state primary – a week later. Mr. Paul is close to tied for the lead now in the Iowa race, though he is tied a distant second with Gingrich in New Hampshire. The point here is that Romney victories are status quo, no surprise affairs, while any whiff of a Paul victory beyond Iowa keeps the door ajar for cataclysmically different politics in the US. Though Paul is nominally a Republican, his libertarian leanings are virtually unique within the party and many of his convictions are essentially beyond the pale of mainstream political discourse and platforms. In short – Paul represents revolution. If Paul wins and the polls begin to shift in New Hampshire, we could even see the market responding at this early phase of the US election season.
 

• Sweden Nov. Household Lending rose +5.3% YoY vs. +5.5% in Oct.
• Sweden Nov. Retail Sales out at +0.8% MoM and +0.7% YoY vs. -0.3%/-1.0% expected, respectively and vs.  -0.6% YoY in Oct.
• Switzerland Dec. KOF Leading Indicator out at 0.01 vs. 0.23 expected and +0.34 in Nov.

• US Weekly API Crude Oil and Product Inventories (2130)