Archive - Aug 2, 2012 - Story

Sigh...

As he began to speak the EUR rallied, EGBs rallied and ES rallied - last minute hopiness wrung out of the system, but as soon as he explained that his plan to promise a plan which plans to promise a solution was nothing but another promise and not an actual plan, so everything reversed. S&P futures are  -17pts from pre-Draghi, Gold back under $1600, and the USD is ripping higher, Treasury yields are down 8bps from pre-Draghi, EURUSD is down 50pip sfpom, pre-Draghi after trading up over 1.24 as he began, and has retraced over 75% of the post-Draghi 'believe' speech. Spain and Italy have given back the immediate euphoria with Italy now 50bps wider from pre-Draghi and Spain +25bps (having retraced over 60% of the post-'believe' rally).

Summary of what has been said so far: Nothing, just as we said last week. Draghi basically repeated the June 29 summit bottom line that the EFSF should buy PIIGS bonds, the ECB "May" act, which means Germany is still not on board, and that after talking markets up by 5%, he has delivered nothing but a delay. This is a huge blow to his and the ECB's credibility.

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With speculation ripe out of everyone from Reuters to the FT about what Draghi may or may not say, with or without Germany's blessing, the best at this point is just to hand over the microphone to the former Goldmanite. Here is the live webcast of Draghi's press conference. Pay attention as a word out of place will send the EURUSD plunging by 200 pips. Or soaring.

While JPMorgan thought it was $170mm, we said last night the number was notably higher - and sure enough, via Bloomberg:

• *KNIGHT SAYS TRADING OUT OF POSITION YIELDED $440M PRETAX LOSS
• *KNIGHT SEEKS OPTIONS TO BOOST 'SEVERELY' HURT CAPITAL POSITION
• *KNIGHT CAPITAL PURSUING STRATEGIC, FINANCING ALTERNATIVES

KCG is down another 50% this morning to $3.45! And here is what we explicitly warned yesterday: "In  other words, with  Knight losing about $300 million in market cap today,  investors are  speculating that the net loss to the firm will be just  that as it has  to foot the bill. Considering the volume and breadth of  the impaired  universe, this will likely be very big underestimation of  just what the  final bill will be to Knight." Sure enough...

Both the ECB and the BoE have held their benchmark borrowing rates unchanged at 0.75% and 0.5% respectively at their rate announcements. The ECB decision provided instant support for EUR/USD, in firm positive territory at the North American crossover. In the fast money move, European equity futures sold off, but half the move has been rapidly pared. In fixed income, Bund futures declined, and are now seen marginally higher on the day. Despite this decision being largely expected, markets have priced in action from the ECB today, and some analysts pointed to a potential rate cut today. This reaction was seen on initial disappointment and the retracement move made as the ECB could still announce measures at the press conference scheduled to begin at 1330BST/0730CDT. Risk appetite has boosted European equities are in positive territory at the North American crossover as speculation that the ECB will announce further stimulus at the press conference later today rises. Financials are the best performing sector led by BNP Paribas whose earnings beat analyst expectations despite a decline of 13% year-over-year for its net.

Today there will be no discussion of the weather. Today platitudes, arcane phrases, vague promises couched in banalities will no longer do. Mr. Draghi has laid down the gauntlet of actually providing a solution for Europe by having the ECB act as Superman, Batman and the Avengers and show up and make the last minute rescue and I fear that anything short of this will now send the markets into a tailspin. Expectations run high, Mr. Draghi may well have over-promised and any sort of under delivery will not be taken well. Today may be the most critical meeting, ever, of the European Central Bank and it is Mr. Draghi’s reputation, the ECB’s reputation that has been put on the line by Mr. Draghi’s bold comments.

The rate announcement is not the surprise: virtually nobody expected a cut which would have taken the deposit facility to a negative rate and the monetary Twilight Zone. Where the surprise will come is what Draghi announces at the press conference in 45 minutes time which we will livestream when it starts.

Investors now look to the European Central Bank’s rate decision at 1145 GMT.  If “Super” Mario Draghi doesn’t come out with a loaded arsenal (bold intervention), then the markets will be disappointed.  Mario Draghi will be confronting his colleague and nemesis in the ECB Jens Weidmann. Weidmann is the Head of THE Bundesbank, a former Merkel economics advisor, and an ECB governing council member who has just 1 vote out of the 23 today at the ECB MEETING in Frankfurt. However Weidmann sees his role differently.  "I certainly would not say that we are just one of 17 central banks [in the Eurozone]," he said in an interview published on Wednesday. "We are the largest and most important central bank and we have a greater say than many other central banks in the Eurosystem. This means we have a different role." The disagreement here lies with the fact that the Germans are against the ECB becoming like a US Federal Reserve in Europe. Weidmann feels it would be wrong to give the ESM a banking license allowing it to tap large quantities of funds from the ECB. Can “Super” Mario make the jump happen? Time will tell.

• What's wrong with this headline: Obama authorizes secret support for Syrian rebels (Reuters)
• Hilsenrath promptly dusts off ashes of sheer propaganda failure, tries again: Fed Gives Stronger Signals of Action (WSJ)
• Fed Hints at Fresh Action on Economy (FT)
• Fed Poised to Step Up Stimulus Unless Economy Strengthens (Bloomberg)
• IMF Chief Lagarde Praises Greece, Spain for Efforts (Bloomberg) - efforts to beg as loud as possible?
• US sanctions against bank 'target' China (China Daily)
• Trimming China's Financial Hedges (WSJ)
• ganda central bank cuts key lending rate to 17 pct (Reuters)
• Greece Agrees €11.5bn Spending Cuts (FT) - Agrees? Or does what a good debt slave is told to do
• Germany Retains Stable AAA Outlook at S&P After Moody’s Cut (Bloomberg)
• Spain’s Bond Auction Beats Target as Borrowing Costs Rise (Bloomberg)

With everyone confused over why Draghi has put himself in a position from which he can't deliver and satisfy the market one hour ahead of the ECB announcement, and everyone placing their last bets on the EUR and the SPGBs before the ECB press release hits without really having any clue what the Italian has in store that will make both the EuroStoxx and the Bundesbank happy, here are some additional last minute "insights"  from Deutsche Bank that promise not to clarify the situation all that much. Because while "We'll be honest and say we've been totally confused about what to expect from the ECB ever since Draghi's speech last Thursday" DB does say: "In short it doesn’t look like we will get any explicit action today." Clear as mud.