Archive - Dec 9, 2011

So the ESM is going to be implemented ahead of schedule.  Or at least that is the current plan, although it seems that Finland is insisting that it retains unanimous voting and most (all?) countries still need to ratify it. The ECB will oversee the ESM and EFSF, which is good as they have more market experience than the EFSF head, but does mean they will be reluctant to print which is what the market really wants. The ESM will have an effective lending capacity of €500 billion.  That document states that the lending capacity of €500 billion includes any capacity being used by the EFSF.  The EU statement confirms that.  So between EFSF and ESM, the combined lending capacity is €500 billion.   “The ESM will use an appropriate funding strategy so as to ensure access to broad funding sources”.  So the ESM has paid in capital but it will continue to try and raise money based on guarantees and commitments.  I know this is a detail that people want to ignore in the rush to proclaim “paid in capital” but the reality is that the ESM is not so dissimilar from the EFSF... On a side note, Europeans seem to love night clubs much more than Americans.  Maybe that is why they make all these announcements at 5 am?  They are used to "table service" shutting down around that time and having to make a decision of what to do next.  I can count how many good decisions I've made at 4 am after an all-nighter on one hand.  Why will this be any different.  It feels to me like at the end they shrugged their shoulders and decided to settle because it wasn't going to get any better and they didn't feel like saying the night had been a waste.

Gold traded higher after the ECB interest rate cut yesterday, prior to sharp selling that came into the market at 1335 GMT. This led to gold falling 2% on the day and it is now down 1.3% on the week – again outperforming many equity indices. Market News International (MNI) reported that market sources said that the Bank for International Settlements, the Bank of England and the Federal Reserve have been “good sellers of gold” after it had popped to a fresh session high of $1,755.90/oz. The MNI report has not been explored and there have not been any official denials of official selling. From a trading perspective there is at least a ring of truth to the MNI report as the sharp fall in the gold price was counterintuitive given there was no negative gold news and indeed the news was bullish with significant risk ahead of the EU summit and continued ultra loose monetary policies and negative real interest rates. Given the scale of the coordinated intervention in markets by central banks recently one would have to be completely naïve to dismiss the report out of hand. There is of course the historical precedent of the London Gold Pool which ended in failure. However, before jumping to conclusions it would be good if the MNI report was looked at and some questions asked - in the finest traditions of journalism.

In a new experiment that began with "The Redline:  A Tale Of Collapse" , Alt-Market is trying something a little different; a short fiction series based on fact. Make no mistake; while the characters and events in this story are products of imagination, the issues presented and their probable consequences are anything but fantasy.

While futures are slowly getting reacquainted with gravity, following both the realization that the bailout was a failure, and seeing past the feeble attempt of the ECB to ramp up Spanish and Portuguese bonds (with Dupoint slashing 2012 outlook not helping) there is one indicator that has outright rejected this day's daily Hopium, and has tumbled to levels last seen at the beginning of the month, when the global Fed FX swap line rate cut was announced in a last ditch attempt to prevent Lehman 2.0. It is the all too critical primary FX liquidity mismatch indicator - the 3 month EUR-USD basis swap, which has fallen 9 bps to 126 bps, the biggest intraday drop since November 29, and the lowest since December 2, with the 1 month basis swap following. In other words, politicians can pretend and talk up the prospects of future bond issuance and crisis resolution, but the market has already spoken and once again demands the ECB (or the Fed) or else the prospect of another imminent liquidity lock up is fast approaching just like at the end of November, and with it rumors that a certain French and/or German bank will fail.

The deal seems a disappointment on almost every level and still needs approvals - UK out. Finland expressing concerns. The ECB has confirmed what they said yesterday. This agreement does not turn on the printing press (any more than it is already doing) Rating agencies likely to be underwhelmed. Countries will still be on watch and might still be downgraded. The budget rules seem unlikely to be met anytime soon. Unleveraged ESM is smaller than leveraged EFSF though ESM may actually be created. Central banks have found money to lend to the IMF so it can lend back to them - more form over substance and some debt burden shifting. Everyone seems in a rush to get ahead of the Christmas rally but that seems to require ignoring what actually happened in Europe this week.

• Tensions Rise at EU Summit (WSJ)
• Cameron faces showdown with Sarkozy (FT)
• Euro Leaders’ Fiscal Union Pact Leaves Next Step to ECB (Bloomberg)
• IMF China Chief Says Worsening Crisis May Force Hong Kong to Back Banks (Bloomberg) - same China expected to bail out Europe again
• Putin blames Moscow protests on US (FT)
• Boehner: Payroll Tax Cut Can Pass U.S. House (Bloomberg)
• EU Leaders Drop Demands for Investor Write-Offs (Bloomberg)
• Japan Imposes New Iran Sanctions (WSJ)

Who thought violent reprisals by "the people" are only contained to Greece. Following news earlier this week of an attempt to take the life of the Deutsche Bank CEO using an explosive package, Il Sole 24 Ore now reports that a parcel bomb has exploded in front of Equitalia - the country's revenue collection agency - in Rome. Google translated: "A parcel bomb exploded in front of Equital in Rome Ardeatina area. The police arrived on site and is investigating the Digos. The parcel was delivered by mail and during the explosion injured the hand of the director of the office." So is the European "Unabomber" the advent of the populist response against the encroaching take over of sovereignty by a small group of bureaucrats and bankers, and how long until someone dies and the class warfare moves from the drawing board to Europe's main street?

Hours after the details of the Euro Summit were released when it became clear it will be yet another failure, following a drop in the Euro Basis Swap by 10 bps to 127 bps, to week earlier levels, and not following a rise in the all important EURUSD, it was time to recycle old rumors all over again, knowing full well some positive market reaction had to be engendered or else the entire rally of the past two weeks would be undone, here comes the latest regurgitation of the tried and (very much un)true "China to Rescue the World"^TM rumor, this time from Reuters. The media company which has become the latest conduit of favorable market rumors says that "China's central bank plans to create a new vehicle to manage investment funds worth a total of $300 billion to improve returns on the world's largest stockpile of foreign exchange reserves, a source with knowledge of the matter told Reuters. The vehicle would operate two funds, one targeting investments in the United States and the other focused on Europe, said the source, who asked not to be named because of the sensitivity of the matter. The vehicle's goal is to make more aggressive overseas investments for higher returns, said the source along with a second, independent source, who also declined to be named." So far so good. And the bad news: "Details of the venture are still under discussion but key personnel for managing the venture have been agreed upon, the sources said." Oh, and the funds have names, but that's all. So to summarize: details are unknown, China growth is collapsing, home prices and inflation are supposedly plunging, and it is now conventional wisdom that the PBoC will have to bail out China all over again from a hard landing, but... the key personnel for a fund that may or may not exist and which will have no impact whatsoever on the $2 trillion in rolling European debt over the next two years, have been selected? And futures are up on this?

The overnight agreement by 17 European countries to tighten euro-area budget controls and expand bailout funds fails to address key aspects of the crisis and may fall at the first hurdle, analysts and investors say. The summary of various Wall Street expert opinions is compiled and presented below from Bloomberg. It is not pretty.

Nothing really new here or unexpected or earth shattering or even approved.  The bilateral loan thing is new (subject to confirmation) but something about that seems too bizarre to get excited about.  If they have the EUR 200 billion lying around to lend, why use the IMF. In the end I don’t see much here.  I cannot imagine we are going to get any new support from the ECB on the back of this.  I don’t think this is enough to get the rating agencies to take the countries off of watch.  Nothing has been really agreed to.  I’m not even sure that if everything is implemented it is enough to avoid some countries getting downgraded. Since I started reading this, markets have improved a bit, but once again, as people read more and get past the headlines and the lipstick, this is very disappointing.  The UK has taken a further step away from the EU and may have opened the door for more countries to take that step over time since everything that was “agreed to” still needs to be ratified and implemented and defined.