The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils. Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline. The problem is that they may have missed their window to get there.
While the folks clogging the US tattoo parlors may not have noticed, things are beginning to look a little World War one-ish out there. Except the current blossoming world conflict is being fought not with massed troops and tanks but with interest rates and repayment schedules. Germany now dawdles in reply to the gauntlet slammed down Sunday in the Greek referendum (hell) “no” vote. Germany’s immediate strategy, it appears, is to apply some good old fashioned Teutonic todesfurcht — let the Greeks simmer in their own juices for a few days while depositors suck the dwindling cash reserves from the banks and the grocery store shelves empty out. Then what? Nobody knows. And anything can happen.
Should markets fret, and ECB action becomes necessary then we think the markets will price ECB action well before highly stressed levels. If we for instance take it view of the monetary policy stance impact seriously then market moves that take real yields to levels that persisted before the ECB started easing policy (negative rates started in Jun 2014) may be a trigger point.
Confidence and trust in the government’s negotiating stance is one thing, but suffering through a depositor haircut is quite another and with a Greek bail-in looking increasingly likely by the day, we thought it an opportune time to recap the Cyprus experience.
Earlier today we commented that while stock markets across the globe, heavily influenced by central bank intervention from the PBOC to the SNB, are doing everything in the central planners' power to telegraph just how irrelevant Greece is, other indicators are far less sanguine. One example was copper, which plunged to a level not seen since February, and was in danger of breaching its 15 year support level. The commodity weakness today has persisted and is now crushing both WTI crude and Brent, both of which are in freefall, and WTI is now down over $3 on the session, or 6%, to a $53 handle, the biggest one day plunge since February to a level last seen in early April when there was much hope that the dramatic plunge in December and January was finally over. Turns out it wasn't.
"My concern is not just that markets are mis-pricing Greece contagion, mis-pricing deflation, mis-pricing street liquidity and mis-pricing the (now negative) trend in corporate (US) revenues and earnings (Q2 earnings season is upon us and may well show year-over-year earnings down 5%/5%+). My concerns are also that markets are way too optimistic about global growth (especially the US), about China, about the ability of policymakers to do anything new and/or effective to alter things meaningfully to the upside,"
Now that Yanis Varoufakis has metamorphosed from economist academic to controversial finance minister to political martyr, the eyes of the financial universe will turn nervously to newly-appointed Euclid Tsakalotos, who has led Greece’s negotiations with creditors since Varoufakis was sidelined after making a scene at an April Eurogroup meeting in Riga.
What do you do when two policy rate cuts, $19 billion in committed support from a hastily contrived broker consortium, and a promise of central bank funding for the expansion of margin lending all fail to quell extreme volatility in a collapsing equity market? You ban selling.
According to Colin Lancaster, senior managing director with Balyasny "we now have another 48 hours of calm before things really start happening", and the punchline: "situation could then break down as banks stay closed, ATMs will run out of cash Tuesday or Wednesday, uncertainty grows and rioting possible."
LEADERS OF GREEK RULING AND OPPOSITION PARTIES ISSUE JOINT STATEMENT BACKING EFFORTS TO REACH DEAL WITH CREDITORS
"The IMF has taken note of yesterday's referendum held in Greece. We are monitoring the situation closely and stand ready to assist Greece if requested to do so."
Futures opened 33 points lower a little over 12 hours ago because, well, nobody has any idea how the Greek fiasco would play out. And then, moments ago the entire gap lower was closed as ES stormed into the green...
"When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations. ... Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up... "
15 minutes ago we had a miss from the Markit Service PMI, and now it is the turn of the ISM's non-manufacturing survey to also miss, rising from 55.7 to 56.0, below the 56.4 consensus increase. The reason: trade (both - imports and exports - disappointed with Imports dropping into outright contraction down from 53.5 to 48.0, while employment dipped from 55.3 to 52.7. Finally, here are the respondents who after blaming winter, port strikes, drought and flooding have found a new scapegoat or rather scapebird: avian flu.