Archive - Jun 30, 2010 - Story

Today at 9:00 am the FCIC will have yet another great diversion session, in which the man responsible for losing half a trillion on behalf of AIG shareholders (and forcing US taxpayers in the biggest involuntary bailout in history), Joe Cassano, will be chided for a few hours, then promptly released back on his way. Goldman will be there too for some reason. Here are some observations in advance of this hearing.

• API reported a decline of 3.4M barrels in US' oil stockpiles.
• Asian markets stay in the red but pare early losses.
• Australia reportedly close to mining-tax compromise.
• Consumer Confidence grows in Euro zone, ebbs in UK.
• IMF chief: No double-dip for global economy; defends G20 focus on deficit reduction.
• Japanese stocks fall to seven-month low as US consumer confidence drops.

Today's 3 Month Long-Term Refinancing Operation saw a surprisingly low €132 billion in bid interest on behalf of 171 banks. The transaction which is the key bridge to the rolling-off of the 1 Year €442 billion LTRO which matures tomorrow, was expected to see demand for between €150 and 200 billion, yet missed even the low end as the bulk of excess cash had been used for arbitrage opportunities which would be eliminated with the new, shortened maturity. On the other hand, the 171 banks that did participate in the transaction will likely be stigmatized as it means they are likely locked out of the traditional interbank lending market, which has a comparable 3 month rate of 0.76%. On the other hand the LTRO has a fixed 1% rate: the banks are hardly paying the additional 24 basis points because they like JC Trichet so much. Alternatively, we are convinced that none of the 171 banks will fail the most recent scam that is taking Europe by storm, namely the Tim Geithner-inspired "Stress Test", which just like in the US, have already seen their first mandatory leaks of information. Furthermore, the €310 billion in liquidity that is leaving the system is precisely the amount Barclays' analyst Joseph Abate predicted would depart: "Market attention is focused on how much of the €442bn stays at the ECB and how much leaves the program: currently there is about €300bn “surplus” liquidity in the euro area market, and so a full rollover is not theoretically needed." In fact, the lower the roll, simply means that a greater the number of government securities have been pledged elsewhere: "Obviously, the more government securities pledged, the more likely it is the 3m replacement LTRO will be considerably smaller than the €442bn rolling off." In other words, the ECB's recent willingness to accept any garbage as collateral has skewed the usefulness of this liquidity transition operation as indicative of absolutely anything.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 30/06/10