Archive - Aug 2012

The European Equities are in positive territory at the North American cross over. The CAC-40 was the initial outperformer following SocGen’s earnings. Despite reporting a drop of more than 40% in Q2 net profits year over year, the co. beat analyst expectations on Q2 CIB net and announced the completion of its cost cutting measures and traded up to highs of EUR18.57, though shares have since pulled back into negative territory. The FTSE-100 now leads the way despite a sharp decline in July’s UK Manufacturing PMI, which came in at 45.5, the lowest reading since May 2009. This saw GBP/USD also tumble to intra-day lows of 1.5619, though the pair has since stabilised around 1.5650. Elsewhere, comments from ECB’s Weidmann that “governments overestimate ECB possibilities”, going against general consensus and speculation that the ECB will announce further stimulus measures at tomorrow’s meeting, provoked a sharp drop in the riskier assets and the Bund to gain 8 ticks, though as it came to light that these comments were taken from an article published on June 29th, the move was pared.

America is now exactly 5 months away from the day the US Fiscal cliff will crater the economy unless a Congress which has never been as partisan as it is currently agrees to collaborate and delay the day of reckoning. This is very unlikely to happen before the presidential elections for obvious reasons, and it is even more unlikely to happen after the elections when politicians demonstrate just why the term "graceful loser" has never existed when describing what happens in D.C. So what would happen to the US economy if and when January 1, 2013 rolls in and nothing has changed, and how does this differ from the consensus? The chart below from BofA answers that particular question, and brings up a new one: even if the Fed goes ahead with more NEW QE today or in September, if the "cliff" consensus really is as wrong as it very well may be, will the Fed have no choice but to follow up its easing at this FOMC meeting or the next with another one immediately following? And is this precisely the one consideration for Ben Bernanke, who realizes very well that if financial conditions, read the Russell 2000, are relaxed just in time for the crucial decision on Bush Tax Cut extension, then absolutely nothing will happen, forcing the Fed to continue being the sole source of "stimulus" in America. Of course, in that case expect nothing from the Fed not only in in August and September, but well into 2013.

A Fed decision to launch QE3 would increase the yellow metal’s appeal as an inflation hedge and bolster prices.  US house prices increased for their 4th month in a row suggesting that the US housing market recovery may be underway which dampened further hopes of any immediate easing in the US Fed’s monetary policy. The markets are playing a waiting game and investors are cautious.  Thursday’s ECB policy meeting will determine if President Mario Draghi will have the backing he needs to embark on significant policy changes to rescue the region’s financial woes.  Yesterday, German Finance Minister Schauble said in an email response to a newspaper, “The rules of the European Stability Mechanism don’t foresee a banking license to allow refinancing at the European Central Bank”.  Schauble’s comments fell like a penny in a wishing well that rippled to curb the market’s enthusiasm. Since Draghi’s initial comments to “do anything it takes” gold has increased by nearly $50/oz.

• Bundesbank’s Weidmann Says ECB Shouldn’t Overstep Mandate (Bloomberg)
• Hollande and Monti Vow to Protect Euro (FT) - be begging Germany to death
• Monti Calls French, Finns to Action as Italy Yields Rises (Bloomberg)
• not working though: Banking license for bailout fund is wrong: German Economy Minister (Reuters)
• Switzerland is ‘New China’ in Currencies (FT)
• Regulator Says no to Obama Mortgage Write-Down Plan (Reuters) - tough: there will be socialism
• Gauging the Triggers to Fed Action (WSJ)
• When domestic monetization is not enough: Azumi Spurns Calls for Bank of Japan to Buy Foreign Bonds to Curb Yen (NYT)
• Indonesia’s July Inflation Accelerates on Higher Food Prices (Bloomberg) - remember: the Deep Fried black swan
• China Manufacturing Teeters Close to Contraction (Bloomberg)
• Spain Introduces Regional Debt Ceilings to Achieve Budget Goals (Bloomberg) - yes, they said "budget goals"

Anyone who paired a corn/wheat long in July while shorting the "natural" hedges Spain and China (a painfully obvious trade in retrospect, maybe) can now take the rest of the year off. Everyone else will have to continue trying to frontrun Ben Bernanke for a few more months.

TAG ought to be allowed to expire at the end of 2012, but people like Barney Frank and Tim Johnson will be working to preserve this corporate subsidy for their clients among the large banks regardless of the deleterious effect on the US economy.