Archive - Dec 2, 2011

• Liquidity remains thin as market participants await release of the Nonfarm Payrolls data from the US. Early market talk has been for a number as high as +200k
• The Eurozone 10-year government bond yield spreads remained generally tighter across the board, with the exception of the French/German spread
• Eurodollar and Euribor futures traded under pressure during the European session on continued bank funding fears
• According to reports, EU finance chiefs gave go-ahead for work on central bank loans, and ECB lending via IMF is seen in the EUR 100-200bln range

When we observed yesterday that the ECB's deposit facility usage has passed €300 billion for the first time in over a year, we took it with a grain of salt: after all the data may have been compiled before the announcement of a global liquidity intervention by the Fed and central banks. Specifically, we said "Needless to say tomorrow's deposit facility update will be critical because unless there is a major drop in usage, it will confirm that in addition to a USD-funding shortage which should have been ameliorated even if very briefly, other EUR-based risks are being observed by Europe's banks, who better than anyone know what the interbank system risks are, and the Fed's USD liquidity injection will have failed to achieve anything except to ramp risk higher for a day or two." Today we got the update for the two key ECB liquidity lines for the day after the bailout. And things are actually much worse than even we expected. While the cash flight continued, indicating that absolutely nothing was fixed from the banks' perspective, and the ECB deposit facility rising to a multi-year high €314 billion or €10 billion higher overnight, another key factor was the ECB's Marginal Lending Facility - the last ditch "discount window" equivalent - which saw its usage explode from €4.6 billion to €8.6 billion overnight, or the highest since March. It appears that in addition to a dollar funding crisis, there is a broad EUR liquidity crisis as well, with the bulk of the banks continuing to pull cash from the domestic interbank market (even if USD funding issues are resolved briefly), forcing the weakest links to resolve ever more to the ECB to recycle the very same cash that other banking peers dump with it. Naturally, this means that the funding situation as seen from the lens of the key market participants - Europe's banks - just deteriorated materially after the so-called bailout. It also explains why this morning we are getting a repeat rumor (soon to be denied) that the ECB has proposed to loan €270 billion to the IMF, as nothing has been fixed and the authorities are well aware.

The only thing that matters is the November Employment Report and a few comments from Fed officials.

• Merkel Says Joint Euro Bonds Unthinkable as EU Faces Marathon (Bloomberg)
• Draghi hints at eurozone aid plan (FT)
• Europe prepares oil imports embargo on Iran (FT)
• RIMM cuits guidance.... again (Marketwire)
• Sarkozy Says Euro Zone Risks a Breakup Without Further Fiscal Convergence (Bloomberg)
• King warns of ‘spiral’ into systemic crisis (FT)
• JPMorgan Follows UBS Cutting Carbon Jobs (Bloomberg)
• Merkel fights for euro she says is stronger than D-mark (Reuters)
• Hilsenrath: Fed Officials Don’t See Central Bank Cutting Discount Rate (WSJ)

There are those today who would claim that the lifeblood of a nation is dependent upon the graces of its government.  That government is the focal point of cultural growth, and that we as citizens should respect it as such.  I would be more inclined to agree if the public did not so easily confuse the ideals of leadership with the actions of criminals.  That is to say, regardless of what we wish our government to be, bureaucracies rarely, if ever, embody the spirit of the common man (a necessity for any system that purports to defend the citizenry).  Instead, bureaucracies almost inevitably deteriorate into vehicles for the perpetuation of tyranny driven by the very worst of all stewards; elitist minorities with delusions of godhood.

Unfortunately, despite this fact, the masses often treat these industrious vermin and the plagues of society that they build with the same reverence as they would a sincere and honorable body politic.

Despite the very short term bounce in markets on yet another soon to be failed experiment in global liquidity pump priming, UBS' Andrew Cates refuses to take his eyes of the ball which is namely preventing a European collapse by explaining precisely what the world would look like if a European collapse were allowed to occur. Which is why to people like Cates this week's indeterminate intervention is the worst thing that could happen as it only provides a few days worth of symptomatic breathing room, even as the underlying causes get worse and worse. So, paradoxically, we have reached a point where the better things get (yesterday we showed just how "better" they get as soon as the market realized that the intervention half life has passed), the more the European banks will push to make things appear and be as bad as possible, as the last thing any bank in Europe can afford now is for the ECB to lose sight of the target which is that it has to print. Which explains today's release of "How bad might it get", posted a day after the Fed's latest bail out: because instead of attempting to beguile the general public into a false sense of complacency, UBS found it key to take the threat warnings to the next level. Which in itself speaks volumes. What also speaks volumes is his conclusion: "Finally it is worth underscoring again that a Euro break-up scenario would generate much more macroeconomic pain for Europe and the world. It is a scenario that cannot be readily modelled. But it is now a tail risk that should be afforded a non-negligible probability. Steps toward fiscal union and a more proactive ECB, after all, will still not address the fundamental imbalances and competitiveness issues that bedevil the Euro zone. Nor will they tackle the inadequacy of structural growth drivers and the deep-seated demographic challenges that the region faces in the period ahead. Monetary initiatives designed to shore up confidence can give politicians more time to enact the necessary policies. But absent those policies and sooner or later intense instability will resume." So what exactly does UBS predict will happen in a scenario where the European contagion finally spills out from the continent and touches on US shores?