Archive - Oct 2011 - Story

Out of the gate, credit and equity markets seemed happy that Trichet was offering CBPP2 and a Euro-TLGP II program in Oct/Dec but that quickly subsided (what no rate cut?) as rather surprisingly the market realized for itself - with little cajoling from us - that while short-term roll risk was reduced, capital still remains a 'problem' as the seemingly known (haircuts/exposures) unknowns and we assume unknown unknowns (contagion impact) remain tangible and this does nothing solve the underlying problem of insolvency. We were pleasantly taken aback by this reaction (and not in a Schadenfreude manner) but more simply that the market is 'getting it' - kicking the can by extending more and more credit (as Peter Tchir alluded to earlier) simply has its limits - and perhaps we are there.

Update: "a word out of line" - Trichet says not appropriate to leverage the EFSF... Not what the market wanted to hear.

On one hand, the ECB keeps Germany happy with no rate cut, on the other, he promises as much liquidity as possible (but probably not enough - see below) and paints a very bleak picture of the economy in the period ahead.  Bottom line: no recapitalization from the ECB, but the central bank will make rolling of existing debt as easy as possible, and allow insolvent European banks to pledge any assets they have for cool cash.

Europe is in the midst of doubling down again.  In May 2010, Europe was going to save Greece to prevent the "problems" from spreading into Ireland and Portugal.  In August 2010, Europe decided to save Ireland, Portugal, and provide more to Greece to stop the problem from spreading.  In early 2011, Europe starting buying Italian and Spanish bonds in addition to Portuguese, Irish, and Greek bonds to stop the spread of the "problem" into Italy and Spain.  In July, they increased the effort to save Italy, Spain, Portugal, Ireland, and Greece so the "problem" wouldn't spread to the banks.  Now, in October, they are going to save Dexia and the banks and Italy, Spain, Ireland, and Greece, to save the world. It is not too late for Europe to stop the madness.  Let Greece default.  Let Portugal and Ireland negotiate real haircuts on their debt.  Let some weak banks (even large weak banks) fail. Then provide support.  Support the best of the rest.  Provide infusions.  Create new institutions where necessary.  Stocks will be lower, but a floor can be provided.

Somehow the robotic knee jerk reaction to claims surging back to over 400k, which means the economy is not creating jobs, was enough to generate a jump higher in futures, confirming the market is now only and all about wild momentum swings and attempts to sucker other suckers in. And another way to spin at the data: this is the 26th consecutive week of claims of 395,000. In summary: In the week ending October 1, the advance figure for seasonally adjusted initial claims was 401,000, an increase of 6,000 from the previous week's revised figure of 395,000. The 4-week moving average was 414,000, a decrease of 4,000 from the previous week's revised average of 418,000. The advance seasonally adjusted insured unemployment rate was 2.9 percent for the week ending September 24, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 24 was 3,700,000, a decrease of 52,000 from the preceding week's revised level of 3,752,000. The 4-week moving average was 3,739,000, a decrease of 9,750 from the preceding week's revised average of 3,748,750. Americans on EUCs and extended claims tumble once again as more and more people formerly sponsored by the US government hit the 99 week cliff - 1.6 million people have now dropped from extended benefit rolls in one year - these are people who have virtually no hope of finding any remotely competitive job having been out of the work force for 2 years. But yes, take futures higher: nothing but good news here.

Update: Trichet announces two fixed rate LTRO tender operations, one 12 month in October, and one 13 month in December, very much as expected. In other words, the ECB will repo even more crap than it has already.

Update 2: Trichet announces CBPP2 - a new €40 billion Covered Bond Purchase Program, i.e. a new €40 billion QE program as the ECB will purhcase covered bonds in primary and secondary markets.

A historic press conference is about to unfold, in which the current ECB president, in a state of complete denial about the imminent implosion of his continent, will mumble for 45 minutes one last time and attempt to preserve his "legacy" after which he will hand over the "printer" briefcase and secret codes to none other than Goldman's Mario Draghi. And Goldman, as is well known to Zero Hedge readers, is certainly not nearly as shy as ole' Tricky to print when needed. Expect some vague promises of more liquidity, possibly the reopening of a 1 or 2 year repo line in which the ECB will accept even more used banana peels and sexual prophylactics in exchange for euros, and an overall deflationary bias. It doesn't matter. It is too late. More importantly, today's "shot rules" are a shot of Jager every time the words "price stabeeleetee" are uttered. Trichet's full prepared remarks transcript can be found here.

In early European trade risk appetite was again the dominant theme following the higher equity closes in Asia overnight. Particular focus came upon comments from EU’s Barroso who said the EU Commission is proposing coordinated action by member states to recapitalise banks. This comment was also followed the European Banking Authority who said that they were reviewing bank capital positions with no new round of stress tests scheduled. This spurred the equity markets across Europe with financial stocks gaining an immediate boost alongside the EUR currency which climbed against the USD sharply. Bunds have been weighed by the general risk-on sentiment, with additional pressure observed following successful bond auctions from both Spain and Italy with lower yields across all six taps today. The Spanish 10-year cash bond yield trading below the key 5.00% mark. In the forex markets the CHF weakened dramatically across the board following the release of the SNB forex reserves data which showed an increase on the previous month, before the fast money move quickly reversed. Elsewhere, all attention focused on the Bank of England key rate decision in which the benchmark rate was kept unchanged, however the Bank announced a further GBP 75bln of QE. This caused extravagant moves in UK related assets with Gilts spiking higher by 100 ticks and GBP/USD falling 150pips. Looking forward Trichet’s last press conference looms large following the ECB keeping its rate unchanged. In terms of economic data there will be the weekly unemployment claims data from the US with Operation Twist conducting its first selling of securities.

Just out from the ECB:

6 October 2011 - Monetary policy decisions

 

At today’s meeting, which was held in Berlin, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.50%, 2.25% and 0.75% respectively.

 

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

EURUSD, ironically, not too happy about lack of 50 bps cut. Now the market looks for JCT to say something at the press conference at 45 minutes although it may be quite disappointed.

• Steve Jobs "may never be equaled" (Reuters)
• Secret panel can put Americans on "kill list" (Reuters)
• Michael Lewis: California and Bust (Vanity Fair)
• Europe’s Rescue Fund is Only Last Resort (Bloomberg)
• EC To Propose Coordinated Action On Bank Recapitalization (MNI)
• SNB Foreign Currency Reserves Climb to Record (Bloomberg)
• Geithner Says Europe Debt Crisis Poses Risk to Global Growth (Bloomberg)
• Repatriation Tax Holiday to Be Proposed by Hagan, McCain (Bloomberg)
• China Tests US With Currency Move (FT)

Reuters summarizes the immediate responses from Wall Street on the BOE's surprising and substantial QE expansion.

As many expected, the Bank of England has followed in Bernanke's footsteps and proceeded with extra QE, 75 billion extra, or about 25 billion more than consensus - this is the first expansion in the British QE since November 5, 2009 when it did the latest  £25 billion expansion. Unfortunately, this is just the beginning: much more global QE is coming down the line as the "monetary authority" realizes it only has itself and its printers to rely on in a world rapidly reentering recession.

•    Outside chance of a rate cut
•    ECB may announce 1-year LTRO operation to support the banking system
•    ECB is expected to commit to further bond buying via the SMP

As predicted, the Dexia "bad bank" rumor lasted all of, oh, 24 hours. After exhausting all talking points, French and Belgian politicians took out the abacus and were horrified to learn, as we suggested, that any implicit backstop would cost them dearly, and in France's case, at least one A of those critical AAAs that continue to keep Europe afloat. So implicit moves to explicit and as Belgian De Tijd reports, "the Belgian government will nationalize Dexia Bank Belgium." From the article: "the federal government came together this morning to rule on the future of Dexia Bank Belgium. There were several scenarios on the table. One was the nationalization of Dexia Bank Belgium (DBB) . This means that the Belgian state will buy DBB to quickly resell in the future. The disadvantage of this scenario is that the shareholders suffer most because they are left with the unhealthy parts of the group (the bad bank)." It also means that Belgium can kiss its sterling credit rating goodbye, and its CDS will continue going up until it meets that of Dexia, which will now have the same implied risk as that of the government about to consume it. Two questions arise next: will the website of Dexia be down indefinitely as locals decide that keeping their money in an insolvent bank may not be the best option, and, secondly, who will nationalize a governmentless Belgium next?

Looking purely at the Vix one could say it is moving down as fear comes out of the market. Equities are moving higher, Vix moving lower, all is coming back to normal. But if you look behind the Vix it is signaling a completely different picture. What I see is something pulling back before a final assault and highly probable defeat of the 48.00 line in the sand. I see the Vix moving up to the 60 range in a matter of days. Perhaps that will lead to the final push lower in equities before some form of a tradable bottom is put in. Perhaps it is already in but judging by the divergence between volatility and the SPX I highly doubt it. There are three charts I want to share with you below, all of which have commentary on them so please click and read what is written. As a refresher below are the various terms used on the charts.

Our recent discussion on the four potential catalysts for a 'crash landing' in China seems to have been quite prescient as Markit Economics reports tonight that HSBC Hong Kong's PMI experience another month of deteriorating operating conditions as demand contracted further and the consensus outlook became increasingly downbeat. On the heals of JPMorgan's earlier downgrade of global growth to only 1.7% annualized for the next three quarters and HSBC's cutting of Asia Ex-Japan GDP growth expectations, citing Europe's financial stress as already taking a toll on growth and the US economy remaining 'decidely lackluster', things appear to be weakening rapidly as mainland China growth was insufficient to overcome domestic declines. Output fell at the fastest rate in just under two-and-a-half years.