Archive - Sep 29, 2010

We have no chance. The regulators are stacked up against us.

The recent decline in the futures is attributed to a 40 pip move lower in the EURUSD (yes, it is pathetic that the entire market once again is merely a tick for tick xerox of the FX pair, which in turn is driven almost exclusively by excess liquidity expectations/QE on either side of the Atlantic) which is attributed to the just released September issue of the EU Banking Sector Stability report. In it, the central bank opens up fresh wounds, by reminding just how fragile the European banking system is. Which should be a stark reminder for all who believe the euro will go straight up without interruption, that Europe is currently panicking and will soon gladly retract everything said recently in the Stress Farce about how stable the banking system is, if it means a drop in the euro and a resumption in exports.

As concerns over Green Mountain, well, mount, here are the first two sellside responses following last night's GMCR 8-K announcement of an SEC inquiry into its "revenue recognition practices and the Company’s relationship with one of its fulfillment vendors."

There is no debating that the FOMC announcements and liquidity injections are if not the key factor that drives stocks then certainly one of the main ones. Yet for those who wish to frontrun the Fed without participating in the stock market, which these days would be pretty much everyone, as the risk of a market crash increases exponentially with every single day that equities ramp ever higher not on fundamentals but merely liquidity, Morgan Stanley has found another cheap FOMC-coincident trade that at least on the surface allows for a quick and painless pick up in a few bps, and can be conducted without touching stocks at all.

• Asian stocks rise to five-month high, Japanese bonds rally.
• Central banks of SKorea, S'pore, Thailand & Indonesia suspected of intervening in foreign exchange markets.
• China’s manufacturing activity accelerated in Sept - the second straight month.
• Gold for December delivery rose to a fresh record above $1,313.00 an ounce.
• Japan's Tankan Index rises least in 18 months as Yen gains, Economy slows.
• US Home prices rose for the 4th straight month in July, but at a slower pace.
• AOL acquires social software start-up Thing Labs; Terms were not disclosed.

Today the ECB completed a €104 billion 84 day liquidity providing LTRO, which saw the participation of 182 banks, receiving an allotted 1% fixed rate as part of the refinancing. Importantly, this amount was far less than was expected to be refied, as nearly €225 billion of 3, 6 and 12 month ECB loans were set to expire today and tomorrow, implying that the eurozone saw the extraction of about €120 billion in liquidity out of the system. As a result OIS has spiked on liquidity concerns, as well as expectations of future interbank borrowing to cover the lost liquidity. As per Market News: "The three month euro LIBOR/OIS spread narrowed sharply Wednesday, as a result in the spike of the OIS rate following the much weaker than expected demand at the European Central Bank's 3-month Long Term Refinancing Operation. Banks borrowed much less than widely expected, borrowing E104 billion in the 3-month LTRO, and driving predicted future lending rates sharply higher. There is E225 billion in ECB loans expiring this week, and the low take up at today's 3-month implies, on the face of it, there is going to be reduced liquidity in the euro area, although banks could use alternative central bank financing to get through the year end or wait until ECB conducts its 6-day fine-tuning operation on Thursday." The immediate result of this news pushed the EURUSD 50 pips higher, as it implied, at least on the surface, that European banks are in less need of ECB handholding than expected. Of course, it is also possible that European banks have simply found less obvious ways to use ECB backstops to prop their daily operations.

It’s all Fedspeak today after this morning’s weekly report on mortgage applications as three regional presidents weigh in…

The EURUSD was last seen well north of 1.36. The reason for this strength certainly was not based on news flow out of Ireland, where Anglo Irish just saw its Tier 2 debt downgraded to CCC, on what the rater called a "clear and present risk" of a restructuring of this debt. Yet this is likely irrelevant in the grand scheme of moral hazard things: after all, as the FT reports, Ireland is about to unveil an "additional capital injection expected to be about €5bn (£4.3bn). That would bring the bail-out costs for Anglo Irish to €30bn, shy of the €35bn forecast by credit rating agency Standard & Poor’s." Nonetheless, Ireland’s cost of borrowing on Tuesday hit record levels with yields on 10-year government bonds jumping 25 basis points to 6.72 per cent. And to make things delightfully surreal, the Irish unemployment rate was reported to jump from 13.0% to 13.7% in one month.

There goes the markets for a day, or two, or seven hundred and twenty, or however long it will take for rational and sane investors to trust these markets, ever again.

Now that the Case Shiller index has been the housing sound bite du jour, many would benefit in knowing that the index was designed to filter out the vast majority of the factors that are dragging down home prices today. That means that despite the fact that this most recent CS reading shows prices on the decline again, it in no way captures the whole picture. Even more pertinent, the parts that it doesn't capture are the worse parts. The Case Shiller index makes the housing downturn look downright rosy in comparison to the data on the streets - but you won't hear this from the mainstream financial media!

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 29/09/10