Archive - Jun 13, 2011 - Story

The blockbuster story first posted on Zero Hedge claiming that QE 2, and more specifically the $600 billion (to date, and $750 billion through maturity) in reserves generated as a result, was nothing more than another European bank bailout smokescreen is starting to pick up steam with the contrarian intelligentsia. Here is Sean Corrigan's take on a topic which we have a very distinct feeling will be the cause of substantial Q&A between the Chairman and the Monetary Policy Subcommittee shortly. From Corrigan: "Note that while Large domestically-chartered banks have cash assets of some $509 billion v non-cash ones of $6.840 billion (a ratio of around 8%), and small domestics hold $293 billion in cash against $3,595 billion in no-cash (a similar ratio of  approx 9%), foreign banks have the startling sum of $940 billion piled up against non-cash assets of $998 billion for a ratio of an incredible 94%. Put another way, despite the fact that all domestics’ combined non-cash assets amount to getting on for ten times those of foreign banks ($9,633 billion v $998 billion), they actually hold 15% LESS cash ($803 billion v $940). Once again, European banks have a lot for which to thank Mr. Bernanke, even if his fellow citizens have far fewer reasons to be grateful!"

Citi's Stephen Englander, who has been quite bearish over the past several months, continue his series of "negative outlook" pieces on risk currencies with this morning's note "Why this sell-off in FX risk is different", in which he warns traders  "we are concerned about risk correlated currencies because we see different forces at play now than over the past two years. The casual assumption that monetary policy remains expansionary, and can ramp up if needed, is questionable -- no one argues that there is a shortage of liquidity. Fiscal policy is, to say the least, not what it used to be. Investor positions and we suspect pricing largely continue to reflect optimism, but this time the assumed policy response may be much more limited than in the last two years, and probably less effective." Naturally, what one can warn about risk FX pairs applies just as well to risk assets in general. And both are things we have been saying for months.

Good morning Europe: do you know where you record wide PIIGS CDS are? From Reuters: "The cost of insuring Greek government debt against default rose to a record high of 1,600 basis points on Monday, hit by concerns that any second rescue of Greece will trigger a credit event or at least multi-notch rating downgrade of its debt. Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit.  The Markit iTraxx index of western European sovereign CDS was up 9 bps on the day at 220 bps, near a record high of 221 bps hit on January 10. Portuguese CDS were up 40 bps at 773 bps, while Irish CDS were 33 bps higher at 745 bps, both at record highs. Spanish CDS were up 13 bps at 289 bps." The slow motion European implosion is now accelerating as the reality that there is no spoon, nor rescue plan, is finally appreciated.

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