Archive - May 2, 2013 - Story

One possibility for the markets to reverse has always been some grand event but another is just the economic deterioration that wears away at the markets as current levels cannot be rationally supported. It is not just the Law of Diminishing Returns which is coming into play as the central banks create more money but the effects on the consumer of seriously declining available cash to be used to purchase goods and services.  We have been subject to a massive amount of monetary printing and an unconscionable manipulation of data but the affects of reality cannot be ignored forever because reality forces the consequences as the fantasy gives way over time.

Whoever said the New Normal would be boring, apparently never lived in a world in which one central bank crushing its key rate to a record low, would lead to the appreciation of its currency, and send the main competing currency, the USD, lower. And since we live in just such a world, we expect that when the ECB has to cut its deposit rate to negative next, people will line up around the block to pay the bank money so it can hold their deposits for them. In the meantime, the EURUSD squeeze continues, and the irony is that the move which is supposed to help Europe's export economies and push the currency lower is already resulting in further deterioration in Germany's growth dynamo industries.

While the ECB's refinancing rate cut of 25 bps was very much expected, and just took place pushing the main refi rate to a record low 0.50% (because more liquidity is just what Europe's collapsing economy needs), what was unanticipated was that the Marginal Lending Facility (which last time we checked was used by pretty much nobody) was also cut, from 1.5% to 1.0%. The deposit rate, at 0.00%, was obviously left unchanged.

• The number of bond funds that own stocks has surged to its highest point in at least 18 years (WSJ)
• Clubby London Trading Scene Fostered Libor Rate-Fixing Scandal (WSJ)
• Cheap money bankrolls Wall Street's bet on housing (Reuters)
• Bank of Japan reveals concerns over easing policy (FT)
• iPads and low-end rivals propel higher tablet shipments  (Reuters)
• China Cyberspies Outwit U.S. Stealing Military Secrets (BBG)
• Draghi Fuels Bets on Rate Cut With Risk of Limited Impact (BBG)
• China guides renminbi to fresh high against US dollar (FT)
• Japan is preparing to start up a massive nuclear-fuel reprocessing plant (WSJ)
• Apple’s Ive Seen Risking iOS 7 Delay on Software Overhaul (BBG)
• UBS faces calls for break-up at investor meeting (Reuters)

The Fed may or may not be able to afford schizophrenia regarding the future of its monetary decisions (for now), but the ECB, in charge of a continent mired deep in depression, does not have that luxury. While consensus overwhelmingly expects a 25 bps cut in the main refinancing rate, some have warned that should the ECB not engage in such a cut, the EUR will tumble as the short covering squeeze ends with a thud. What exactly are the individual banks expecting? The following bulletin from Bloomberg summarizes it all.

The overnight macroeconomic news started early with China where the second, HSBC Manufacturing PMI declined from 51.6 to 50.4, below estimates of 50.5, yet another signal of a slowdown in the country (where one can argue the collapse in copper prices is having a far greater impact), and where the Composite closed down 0.17% after its Mayday holiday. China wasn't the only one: India dropped to 51.0 from 52.0 in March, and Taiwan dipped to 50.7 from 51.2, offset however by the bounce in South Korean PMI from 52.0 to 52.6, the best in two years (a number set to tumble as Abenomics steal SK's export thunder). The focus then shifted to Europe, where virtually everyone was once again in contraction mode, as German Mfg PMI declined from 49.0 to 48.1, the lowest since December, if a slight beat to expectations (while VDMA industry body said March Machine orders dropped 15% Y/Y so little optimism on the horizon), France rose modestly to 44.4 from already depressed levels of 44.0, Spain PMI also rose from 44.2 to 44.7, Italy PMI at 45.5 from 44.5, Poland at 46.9 from 48.0, a 45-month low. At least Greece seems to be doing "better" with the Mfg PMI "rising" to 45.0 from 42.1. Across the reports, the biggest decline was in input prices following the recent clobbering in commodities, which in turn is translating into price deflation.