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Daily Close (Pumping Iron into the Close)

Stocks traded nervously for the whole day on Friday and “were rallied” towards the close, ending 1.5% higher after an explosive last half hour. Bond yields ebbed back with 10 year yields falling 6-7bps for both US treasuries and Bunds with some notable underperformance seen in peripheral European markets. Not everything smelt exactly as rosy as the late rally may have led us to believe going into the week end amidst a further rise in the libor/ois spread which historically has heralded problems in credit markets. This time may be different and some argued that dollar pipeline strains have been building from dollar repatriation of corporates that are busy buying back their debt (corporates previously borrowed against their earnings hoarded abroad to fund buyback programs) but weakness was palpable in credit markets yesterday. We noted earlier this week that the Fed would not take too long before taking a more dovish stance and having B. Dudley talking about the possibility of more QE (, one day after the Fed talked about excessive leverage and possible “serious” strains in labour conditions, was more than we expected. It accounted for a large part of the equity and bond rally yesterday and the feel good factor going into the week end caused by 1.5% late squeeze that replaced  the pattern of failed rallies seen earlier this week. The dollar index climbed +0.3% but the dollar was mostly weaker against EM currencies. EM markets rallied strongly as well. 

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