Archive - May 18, 2010 - Story

One attempt at explaining this morning's spike in the EURUSD from CS:

• This morning, the ECB opened its first 84 day swap line with the fed at which banks can borrow USD @ OIS+100bps in exchange for worthy collateral (20% posted collateral for total USD amount borrowed). 
• Low demand = positive for market (means they can find funding elsewhere).  If confident with funding liquidity, banks should continue to tap the 7-day swap rather than lock up the same rate for a longer period (less margin is also needed for the 7 day loan, 12%). 

• The only relevant piece from today's economic barrage: building permits down to 606k vs 680k exp., previous 685k
• Stephen Roach Op-Ed: New battle plan needed for a crisis-prone world (FT)
• Now this is funny:  Goldman Sachs, facing a fraud lawsuit from U.S. regulators who accuse the company of misleading investors, is trying to convince more Americans to trust the firm with their retirement funds (Bloomberg)
• How the 'Flash Crash' Echoed Black Monday (WSJ)
• The day the Dow dived (NY Observer)
• Debt woes spur "Lehman II" concern for Europe's banks (Bloomberg)

• Asia may need capital controls to curb fx rise - ADB.
• China sees inflation quickening this Month to 3% 'trigger' point for rates: State agency.
• China's holdings of US Treasury securities totalled $895.2B in March, up 2% from Feb levels.
• EU finance ministers seek deficit cuts to ward off debt crisis threat.
• Euro weakens to near four-year low on economy; Most Asian stocks decline.
• FDIC has inherited CDOs with a face value of more than $400M from failed lending institutions.
• German governing parties call for financial transaction tax in Europe.

• Q1 revenue $99.85Bn versus Exp. of $98.44Bn
• Sees Q2 EPS $0.93-0.98 versus Exp. of $0.98
• Ended Q1 with negative free cash flow of approximately $1.6Bn
• US Comp store sales for Q1 declined 1.4%
• Total same store sales for Q1 declined 1.1% ex fuel
• Sees Q2 WMT US comp store sales without fuel to be -2.0% to -1.0%
• Confirming initial capital spending guidance of $13-15Bn this year
• Q1 Sam's Club posted comparable sales increase, ex-fuel 0.7%

Yesterday we highlighted the passage of the Cornyn Amendment to FinReg which essentially makes US participation in IMF loans to countries which have greater debt than GDP very difficult if not impossible. The amendment has received little if any press, until this morning, when Telegraph's Evans-Pritchard savages what it means for a now partially defunct Europe. "This is obviously aimed at Greece, which will have a debt of 130 per cent by the end of this year. The debt will rise to 150 per cent by the end of its the rescue/death package, leaving Greece in a worse position than before. The IMF share of the Greek bail-out is 30 times quota, more than double any other rescue in the history of the Fund. There is a very strong suspicion in Washington that the IMF is being misused by French chief Dominique Strauss-Kahn – French presidential candidate in waiting – to support ideological purposes regardless of economic logic or sanity. This can (and in my view most likely will) destroy the credibility of the Fund itself unless the US and Asians can wrench the institution back from the Europeans." As more people realize the ramifications of this Amendment, we expect the IMF to increasingly lose credibility as a backstop to any upcoming European risk flareouts.

The ECB's sterilizing Fixed-Term Deposit facility closed earlier today, with the result being €162.7 billion in bids for a €16.5 billion in total allotted. The interest rate on the facility came out at 0.28%, on a whopping 223 bidders. Well, out of a 1,000 or so banks, we know that at least a quarter are flushed with liquidity, or at least happy to put aside 7 days of cash.

Yesterday we announced the ECB's plan of €16.5 billion in liquidity withdrawal via term-deposits. What we missed is that this is one of the biggest circuitous monetization schemes imaginable as these very term-deposits are eligible as collateral against the ECB's repo facility. In other words, this is very much like pulling oneself out of the toxic asset swamp by one's bootstraps. It gives the impression of a liquidity tightening event when in reality it could easily become leveraged loosening. And here we were thinking that the ECB could go ahead and do something sensible for once. Expect reprisals from Germany once it is understood that toxic bond monetization by JCT is now implicitly permitted.

The euro sits in no mans land. No longer looking as though its about to disappear lower as seemed the case in early Asian trading yesterday , but also not back above last years low of 1.2457 which would suggest a return to some stability and the opportunity to reverse some of the years losses. The euro has come a long way on the year and is clearly much less (if at all) over valued. The last portion of the move was clearly sentiment and fear driven and its quite likely that the fear had become excessive; yesterdays Sunday Times headline speculating on an imminent move to parity perhaps testament to the extreme bearishness. We have squared up our shorts and will revert to opportunistic range trading and I'm starting to think the euro might be a buy on dips rather than a sell on rallies barring any fresh pitfalls. - Goldman Sachs

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 18/05/10