Archive - Feb 18, 2011 - Story

China continues to joust with windmills as its latest attempt to counter inflation, a 50 bps RRR hike, is now history, and will be just as successful as all of its previous RRR, and interest rate hikes at rebuffing gentle Ben's attempt at genociding a few hundred million additional serfs. Luckily for now the "silver for rice" trade continues, keeping a lid on rice prices. Indicatively, as we showed previously, neither interest rate hikes nor RRR have any impact on the Chinese market whatsoever, confirming that the only source of global liquidity that matters resides in the Marriner Eccles building.

The one thing that nobody is conveniently talking about that has suddenly become a big flash red light, the surge in borrowing on the ECB's Marginal Lending Facility which we noted yesterday, continues for the second day in a row, removing all speculation of this being a technical or calendar glitch, and confirming that some financial entity in Europe has entered its death rattle. Today, the ECB announced that after borrowing €15.8 billion in overnight liquidity, the highest since the program's inception in 2009, we got another increase in borrowing, this time at €16 billion in overnight liquidity needs. With expectations that this borrowing surge at a last resort rate of 1.25% would normalize disappearing, we are surprised the reaction in the EUR is not far greater: the EURUSD did contract modestly overnight, but if this is indeed the proverbial first domino we would be very concerned about the long term prospects of the European currency. What is most concerning is that after revelations of check kiting at Irish banks yesterday, which confirms that banks are using a legalized ponzi scheme to literally print each other money, that some bank - any bank - will need to resort to such a high rate source of overnight capital. As European collateral has no quality thresholds, and as the ECB will accept anything, it makes no sense for any bank to pay incremental interest just to transfer borrowing to an overnight facility with a punitive rate - simple as that. If this continues for a third day on Monday, it may well be time to follow Hugh Hendry's advice, and panic.

With no data on the docket, the focus will be on the G20 meeting in Paris…There is of course a POMO today: $5-7 billion of 08/31/2013 – 02/15/2015 bonds.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 18/02/11