Archive - Feb 19, 2010

As currency players have become more and more focused on bashing the Euro they are in danger of taking their eye off a potentially far bigger story i.e. how the FX market is as dangerously unbalanced as it was in 2008. Yet, after yesterday discount rate hike and resent FOMC comments we should be on notice that this precarious equilibrium is coming to an end and has the potential to turbo charge, as well as, significantly broaden the mild $ rally (the broad $ index is only 7% off the lows) we have seen to date. Even if you aren't a major player in the FX market this should concern you as a $ rally particularly a rapid one is potentially horribly corrosive for a whole swath of assets especially commodities that have a significant weak $ premiums already built into their price.

After some gyrations in both the 2s10s and the dollar, both are trading at the levels hit post the Fed announcement. The one outlier, of course, is stocks, which are trading oblivious of not only the Fed announcement, but everything that is happening in bonds and FX. Does it mean volume is horrendous and a few algos have again hijacked the market? Yes it does. Welcome to OpEx insanity.

This story gets more surreal by the day. First it was the Spanish CIA, and now Greek daily To Vima reports that the Greek National Intelligence Service, instead of focusing on such potentially more pressing issues as who may be bombing various offshore financial offices, or possible Cypriot unrest, is hot on the heels of those who were solely responsible for the Greek bond market collapse: four hedge funds who have had the temerity to buy and sell Credit Default Swaps (or, heaven forbid, GGBs). And they are not doing it alone: French and British intelligence agencies have also joined in the fray, actual people blowing themselves up all over the place be damned. Next up, after the obligatory sov CDS trading ban: selling of government bonds will only be legal during a full lunar eclipse, between the hours of 2:03 am and 2:04 am, when Mercury is in retrograde,and when Joaquin Almunia is not eating spam straight from the trough. In other words never.

25 basis point move on the Fed Discount Rate = Discipline, right? In the meanwhile, the Treasury is planning on running an epic fundraiser next week, of $180 Billion dollars. I'm afraid equities won't fall more than a few points, so how much fear bid can we have?

The FoF was musing and marinating ice cubes, post close, when conversation was suddenly interrupted. Blackberries and Iphones lit up with the flash that the Fed had raised the Discount Rate by a quarter point. The immediate response was a scramble to establish that it was the Discount Rate only. The second move was to gauge market reaction. Once they were sure that it was only the Discount, or “emergency”, rate the muted market response was understandable. The buzz about the rate hike drew questions from some none Wall Street types on the periphery. A quick lesson in central bank money mechanics ensued. It was explained that the Discount Rate only related to the Discount Window. It was further explained that the Discount Window was where banks came when they couldn’t borrow from other banks. The Discount Rate was traditionally higher than the Fed Funds rate and borrowing at the window usually carried a stigma since it indicated that other banks saw you as a weakened credit. During the banking crisis, the Fed took pains to eliminate both the stigma and the premium. So, to some degree, the hike in the Discount Rate was a signal that the crisis phase is over and banking was returning to “normal”. - Art Cashin

• Euro's unity bid hits fine print in Greek debt drama (Bloomberg)
• China finds new ways to buy US debt (Globe and Mail)
• Rumors heat up in Europe that Goldman Sachs and John Paulson are waging attachs on Greece (LittleSis)
• Buyers fail to materialise for IMF gold (FT)
• Consumer prices rose 0.2% in January, core down 0.1%, wages did not (Bloomberg)
• We need 18 million new jobs in the next 3 years (Nation)

From FRBNY's Bill Dudley "the big banks in the United States have been able to raise a large amount of equity capital to put themselves in a stronger position. I believe that Federal Reserve actions over the last year and a half have contributed very substantially to this improvement." No doubt. Also, "the Fed and Treasury did not intervene during the recent crisis to save the financial system (and with it, some big financial firms) for its own sake. We intervened because a collapse of the financial system would have done irreparable harm to Main Street." Not to mention banker direct deposit arrangements. Oh, and game over Puerto Rico: "Over the past ten years, the [New York Fed] Alliance has trained more than 400 [Puerto Rican] high school teachers in economics and financial literacy."

• Asian stocks, US Futures fall on concern Fed move signals stimulus exit.
• Australia has less room for growth without inflation: Australian Central Bank.
• Consumer Prices in US probably climbed in January on higher energy costs.
• Dollar touches 9-month high versus Euro after Fed raises discount rate.
• Fed raised the rate it charges banks for emergency loans by a quarter percentage point.
• Greece replaces debt chief Papanicolaou as deficit crisis batters markets.
• Japan stocks fall sharply on Fed emergency loan rate hike; Nikkei down 2.1 percent.

RANsquawk 19th February Morning Briefing - Stocks, Bonds, FX

Meeting the tip of the spear. The cycle of warfare is now driven by Moore’s Law (XLK), (CSCO), (GOOG). We can only afford to spend on winning current conflicts, not potential future wars. The war on terrorism will continue for at least 4-8 more years. Water (PHO), (CGW) is going to become a big defense issue. We may have to lose a few institutions in a cyber attack. Russia will never be able to field a million man army again. “We’re not going to be able to kill our way or buy our way to success in Afghanistan.”

RANsquawk 19th February Morning Briefing - Stocks, Bonds, FX etc.