Archive - Oct 21, 2011

• The main focus of the market remained on the EU leaders' summit this weekend and next Wednesday, where participants look ahead for further details on the implementation of the EFSF
• News overnight that the EU leaders are considering to increase the lending capacity of the EFSF to USD 1.3trl boosted risk-appetite
• Fitch managing director, Riley, said that the rating agency has no plans to downgrade France, and the upcoming EU summit outcome is unlikely to trigger review of the Italian and Spanish ratings
• ECB's Nowotny said that the ECB discussed cutting interest rate in its last meeting. Also, IFO’s economist Abberger said that the ECB will likely cut interest rate towards 1%, however the timeframe is unclear
• According to German government sources, Eurozone members could tap IMF credit lines without the EFSF involvement

Gold prices are mixed today as markets remain on edge due to increasing divisions amongst European leaders on how to solve the intractable Eurozone debt crisis. There continues to be very strong demand for physical bullion globally and support is  strong at the $1,600 level due to this demand. The sharp fall of copper yesterday, by 6%, is an indication that the US, Chinese and indeed global economy is very fragile and may soon begin to contract. Physical demand in Asia, mainly India and China, has entered the traditional peak season with Indian festivals and the increasingly important Chinese New Year. This is reflected in premiums in Asia which remain good. There are reports of massive physical buying out of China on gold’s fall close to $1,600 yesterday. The most active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier today. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.

• France Likely to Lose Top Rating: S&P (Bloomberg)
• BNP urges EFSF to issue credit default swaps (FT)
• China municipalities to issue bonds (FT)
• Europe forced into second summit (FT)
• EU Said to Consider Wielding $1.3 Trillion to Break Impasse (Bloomberg)
• Hilsenrath: Fed Is Poised for More Easing (Hilsenrath)
• Fed debate about more easing heats up (Reuters)
• Obama Nominates Former Fed President Hoenig for FDIC Vice Chair (Bloomberg)
• ECB Said to Weigh Bigger Loans for More Collateral Disclosure (Bloomberg)
• Banks face penalties in return for bail-outs (FT)

Following a report overnight from the WSJ that S&P would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession, which many economists say is likely, the entire overnight session was dominated by yet another period of fear and loathing out of Europe, further pressured by escalating uncertainty over EU summit after another meeting is called for Oct. 26. The headline scanning brigade will focus on Belgium where at 2 pm local time EU finance ministers will meet in to hammer out groundwork for the Oct. 23 EU summit. The result of concerns that absolutely nothing is resolved led to spreads for everything blowing out: at one point, France 10-yr Yield was up +6 bps to 3.21% (the widest spread over bunds at 119.01 since 1992), Italy 10-yr yield rose +3 bps to 6.05%, highest since Aug. 5, and the spread over bunds widens to euro-era record of 402 bps or most since 1996 and lastly the 10-yr Spain spread over bunds was +4 bps wider to 5.57%, with the Bund spread at 355, just tight of the August record of 398 bps. Still this was enough for the ECB to intervene and as the chart below shows, to purchase Italian BTPs en masse for the fourth day in a row, this time with a sizable amount, even as it is now confirmed that ECB interventions hav a several hour half life. And since the EURUSD and thus futures are now driven off the BTP price, everything rose when at 4 am Eastern the ECB began its daily intervention. Alas, at this point even 8 year olds realize that these are short-term liquidity measures while the long-term solvency problem is merely getting worse.

All you need to read.

With MSM reporting the seasonally adjusted first time unemployment claims down by 6,000, it's time for a reminder that this number is fake.

This is the boilerplate: "The following is based on remarks at the University Club in New York at the ceremony for the 2011 Lawrence R. Klein Award for the most accurate forecast over the prior four years to the Goldman Sachs US Economics team. The award was sponsored by the W. P. Carey School of Business at Arizona State University and Blue Chip Economic Indicators, Inc., and was presented by Dr. Lawrence H. Summers, Charles W. Eliot Professor of Economics at Harvard University." Hmm. We assume the University Club in New York did not read the following post. No matter. The attached analysis, ignoring that it is from the team that was 100% wrong less than a year ago, and is 120% wrong now with its ridiculous Nominal GDP targetting proposal, does have its "finer points", and as such is worth of mockery by ZH readers.