Archive - Dec 8, 2011 - Story

The leaders pretty much have to cobble together some form of agreement. If they don’t reach an “agreement” the market will likely sell off 5% or more pretty quickly. We were at 1150 2 weeks ago when Europe was back to no plan, so that would be a pretty obvious target if they can’t reach an agreement this week. If they reach an agreement, the market is likely to move up a bit (1-2%), the bulls will be dancing in the street shouting out that Europe is fixed and gets it. The bears will point out that the agreement is a long way from being implemented and is unlikely to ever actually be followed. In either case, it doesn’t make a difference. The moment a treaty agreement is announced (assuming it is) the market will turn its attention to the ECB, IMF, and Fed. The market will be desperately hoping that the ECB immediately follows up the “successful” treaty summit with a new and fresh commitment to become lender of last resort for sovereigns. Expect disappointment. Draghi may be a dove, but he seems focused on banks (which is his primary mandate) and is unlikely to implement a new, and in Europe, revolutionary policy. The markets will test their resolve. Italian and Spanish bonds aren’t trading so well because anything has been fixed or because the market cares about treaties. The bonds rallied hard because the ECB was in the market and no one wanted to take a chance that a treaty agreement would be the excuse the ECB needed to ramp up its purchases. Without aggressive ECB action, Italian and Spanish bonds will decline in price, and renewed fears will hit all risk assets.

Citi's Steven Englander shares his outlook on what the key things to look out for, in the 8:30 am press conference, are. One variable in his forecast has already been presented: the cut was 25 bps not 50 bps. As he says: "By contrast, if they did 50bps and indicated that more aggressive measures might be forthcoming, the pendulum could swing to positive." In other words, the kneejerk jump in EURUSD following the ECB has been largely misguided for now, especially with forward EONIA rates jumping across the curve confirming that European liquidity is about to get far tigher all over again.

Probably far more anticipated than the monetary announcements out of BOE (which just announced it is keeping rates at a record low of 0.5%, but no more QE), or even the ECB, and certainly far more than the latest and not greatest European summit which begins today, is the 9am testimony out of the House Agriculture Committee by one "Honorable" Jon S. Corzine, as well as the Q&A that will follow. Naturally the Q&A will be the focus, but as for the prepared remarks, they have just been released and are presented below. The choice selection: "Obviously on the forefront of everyone’s mind – including mine – are the varying reports that customer accounts have not been reconciled. I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account for many hundreds of millions of dollars of client money. I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others. As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of  the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business. Again, I want to emphasize that, since my resignation from MF Global on November 3, 2011, I have not had access to the information that I would need to understand what happened. It is extremely difficult for me to reconstruct the events that occurred during the chaotic days and the last hours leading up to the bankruptcy filing....I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules. Moreover, there were an extraordinary number of transactions during MF Global’s last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks  and counterparties have held onto funds that should rightfully have been returned to MF Global." Translation - he pleads da FIF.

The ECB has cut the various relevant interest rates by 25 bps, in line with expectations, but not the 50 bps most likely needed to stem the crisis. Mario Draghi's second press conference begins in 45 minutes.

• Reports suggested that the G20 is considering USD 600bln lending programme for the IMF to help the Eurozone, however the news was later denied by the IMF and Japanese officials
• According to sources, the EU is discussing EUR 200bln loan to the IMF with EUR 150bln from the Eurozone, and the  Eurozone is negotiating lifting EUR 500bln cap on the EFSF and ESM lending
• Le Monde wrote, French banks need EUR 7bln of additional capital, however recapitalisation can be done without any state aid. Later, French ACP financial regulator declined to comment on the report
• The Bank of England kept its key benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 275bln respectively

• Germany insists on new treaty for Europe (FT)
• Banks Prep for Life After Euro (WSJ)
• Bank Values in Europe Fail to Lure Buyers (Bloomberg)
• Banks' Ratings Reliance Nears End (WSJ)
• BOE’s King Waits to See Europe Crisis Response (Bloomberg)
• Accelerating U.S. Economy Eases Pressure for Further Fed Asset Purchases (Bloomberg)
• Government acts on payday loan worries (FT)
• Hong Kong May Loosen Property Curbs: Tsang (Bloomberg)

Given pressure on the central bank continues to build, today the ECB is widely expected to cut the benchmark borrowing rate by another 25bps, with an outside chance that members will push for a 50bps cut. Apart from cutting the interest rate, press reports indicated that some members of the ECB governing council have been debating on providing bank loans lasting up to two or three years. An alternative solution would be to broaden the range of assets banks can use as collateral to obtain funds from the central bank. Highlighting deteriorating condition in money markets in Europe is the last data from the Bank of Italy, which showed that funding from the ECB to Italian banks rose sharply to EUR 153.2bln in November from EUR 111.3bln in October. In addition to that, the head of UniCredit has urged the ECB to increase access to ECB borrowing for Italian banks, while the Bank of Italy launched twice-daily overnight liquidity auctions to boost access to capital. Still, despite the persistent widening in the 3-month Euribor-OIS spread and the TED spread, the 3-month EUR/USD cross-currency basis swap has edge back towards -100bps mark, that’s after trading -152bps only few weeks ago (Note: post Lehman Brothers collapse in October 2008 saw 3-month EUR/USD cross-currency basis swap trade at -215bps).