Archive - Sep 19, 2012 - Story

The BoJ obediently submitted to pressure from stimulus addicted markets and announced yet another expansion to its JGB buying program. The program now stands at JPY 80trl, the expansion impacts only JGBs and T-Bills, both of which will be monetized by a further JPY 5trl. As a result, risk assets rallied overnight in Asia and in turn supported European equity markets in early trade. However, the half life of the latest policy easing action from the BoJ proved to be very short-lived and as the session progressed, the risk on sentiment quickly subsided. As such, as we enter the North American cross over, equity markets in Europe are seen lower, led by tech and financial stocks.  Elsewhere, Bunds topped yesterday’s high and look set to make a test on the 140.00 level should the sentiment deteriorate further. Nevertheless, peripheral bond yield spreads are actually tighter today, with the Spanish 10y bond yield spread tighter by 9bps and the shorter dated 2y bond tighter by 24bps vs. German equivalent. EUR/USD and GBP/USD edged lower throughout the session, currently trading in close proximity to intraday option expiry levels at 1.3000 and 1.6200 respectively. Going forward, the second half of the session will see the release of the latest housing data, as well as the weekly DOE report.

• Deposit Flight From Europe Banks Eroding Common Currency (Bloomberg)
• BOJ eases monetary policy as global slowdown bites (Reuters)
• Stalled Rally Puts Pressure on Spain (WSJ)
• Missed Chances Stoke Skepticism Over EU’s Crisis Fight (Bloomberg)
• Germany's big worry: China, not Greece (Reuters)
• Goldman names new CFO, heralding end of an era (Reuters)
• Russia Demands U.S. Agency Halt Work (WSJ)
• Fed’s Dudley Says Easing Vital to Spur Too-Slow Growth (Bloomberg)
• Romney under fire from all sides (FT)
• Poland cuts red tape to spur growth (FT)
• IMF to Put Argentina on Path to Censure Over Inflation Data (Bloomberg)

Those who expected a major response following the surprising, and "preemptive" easing by the Bank of Japan which has now joined the freely CTRL-Ping club of central banks, and went to bed looking for a major pop in risk this morning will be disappointed. The reason is that with every passing day that Spain does not request a bailout, all those who bought Spanish bonds on the assumption that Spain will request a bailout look dumber and dumber (a dynamic we explained nearly two months ago). As a result, the EURUSD has been dragging ever lower, and is now playing with 1.30 support. Providing no additional clarity was Spanish deputy PM Soraya Saenz de Santamaria who said Spain will decide if and when to trigger an ECB bailout once all details have been analyzed. Well the details have been more than analyzed, and Spain has been more than happy to receive the benefits of its bailout, it has yet to trigger the cause. Ironically in a Barclays study,over 78% of investors see Spain requesting a bailout by year end (even though as we explained over the weekend Spain really has to do this ahead of its major cash drawing bond redemption schedule in October when it may well run out of cash). And so, just like the US Fiscal Ceiling, the global markets are expecting some Catchy 22 deus ex machina, where traders can get their cake and politicians can eat it too. Alas, there never is such a thing as a free lunch. And what is making the much needed outcome even less probable is that Spanish bonds this morning are actually trading tighter once again making a bailout less than likely. The Spanish zombie has left its grave and is now romping through the neighborhood unsupervised.