Archive - Sep 6, 2011

With bankers and politicians arguing over their mandates and who should move first fiscally or monetarily, we thought a look at the success of 'price stability' as the 'backbone' of European central bankers day-to-day work would be useful.

I think it is worth repeating that we have entered a new phase of risk aversion. Banks that had been complacent are now hedging so they can show no exposure to PIIGS, or to European Banks, etc. The implications are that we see credit curves flatten, or invert. We will get fewer short squeezes, at least until October, and there will be more rumors of banks having difficulty securing short term funding. Yesterday's write-up talks about it more. Europe was wider again early this morning, had a nice relief rally, and has since sold off again. Main went to 188, back to 178 and is back to 187. Needless to say liquidity is virtually non existent.

Just a headline for now but Reuters is citing sources that EU officials are set to discuss how to recapitalize weak banks today. Just a week after fuming over Christine Lagarde's brutal honesty, it seems once again that the market has pushed the ignorant into action.

Yes, equity markets in Europa and the US are getting the Axe treatment, but the event that is most forboding is still being overlooked by the media. At the end of the day, this will be the cause of continuation of the 2009 global market collapse... CONTAGION!!!

• The SNB set the minimum exchange rate target for EUR/CHF at 1.2000, and said that it will take further measures if risks to the economic outlook or that of deflation emerge
• According to an article in the FT, global bank regulators are preparing to ease new rules that would require banks to hold more liquid assets to withstand a funding crunch in a crisis
• Early market talk of a planned merger between Societe Generale and BNP Paribas provided support to equities
• The Italian/German and Spanish/German 10-year government bond yield spreads narrowed partly on the back of market talk that the ECB is buying the Italian and Spanish government bonds

Holy Red Screen, Batman! If you haven’t seen the news, the Swiss National Bank has just announced that it is putting a ceiling on the franc’s appreciation against the euro… effectively abandoning its economic sovereignty and putting its future in the hands of woefully corrupt and incompetent bureaucrats. On the news, the franc fell off a cliff, dropping almost 10% INSTANTLY. Gold priced in Swiss francs jumped from 1497 to 1620 per troy ounce, all in about 45 seconds. Precious metals are now all alone as the only forms of sound money that are truly safe havens.  Since then gold has soared roughly 20%, and as of this morning, the SNB has imposed capital controls to thwart the rise of its currency. This is just the beginning. The Swiss government has basically told the world that they will print as much money as it takes, and buy up as much crap sovereign debt as they can, to competitively devalue the currency. This essentially puts Switzerland in the same sinking boat as Italy, Greece, and Portugal… with one key difference: Switzerland has 0% interest rates. In other words, you can now borrow in francs at 0% and buy government-backed euro garbage yielding 5%, 10%, 30%…. with absolutely no downside currency risk.

Currency markets have seen massive volatility this morning after the Swiss National Bank decision to fix the Swiss franc to the euro. Just prior to the announcement, spot gold for immediate delivery had risen to a new record nominal high of $1,921.15/oz in early morning trading in Europe. Then just before 0900 hours GMT came the news that the Swiss National Bank has decided to fix the country's exchange rate at 1.20 Swiss francs per euro. The SNB indicated it would buy an unlimited amount of euros regardless of the risk to maintain that value. In a matter of minutes, gold fell 3% from the high of $1,921.15 to an inter day low of $1,862.72. It then recovered as quickly and surged back to over $1,912/oz. Gold’s London AM fix this morning was USD 1,891.00, EUR 1,330.75, GBP 1,172.86 per ounce. Gold fixed lower in all currencies (USD 1,896.50, EUR 1,341.13, GBP 1,174.67 per ounce). The SNB announced the currency fix because of what it called "the current massive overvaluation of the Swiss franc." It said it will "no longer tolerate" an exchange rate below the minimum rate of 1.20 francs, which it said is still high.

Currency War coming up?

All you need to read.