While we do not agree that anything will happen on Wednesday (or pre-Greek-election to be more precise) - aside from perhaps a small bump in BoE LSAP, Peter Tchir provides a useful update to our original 'full central bank menu' two weeks ago. Markets and economies are teetering across the globe. More and more people are coming to the conclusion that a Greek Exit would be catastrophic. Central banks won’t want to act as though they are panicking, but neither will they want to wait much longer to act. Tchir believes investors will be extremely disappointed if nothing happens and expects markets to decline rapidly. If central bankers do take some policy actions, it is key to figure out which ones are practical, which are merely symbolic, and which are just a dream and not an action. Who says what is just as important in some cases as what they say. When Merkel says something, we all need to listen. When anyone from the EU in Brussels says something, it will be the same thing they have said over and over and is completely self-serving and should be ignored. Anything Draghi and Bernanke might say is critical to listen to, because in this weird world, they have the most power to do something meaningful in a short period of time.
We all know that things are bad and getting worse. Goldman's Jan Hatzius take this opportunity to summarize all the various ways in which the global economy is floundering and once again floats the Goldman solution to everything: More QE, this time with a Bill Gross twist, pun and all, where the Fed again pulls a 2009 and goes for MBS: "Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown... Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion and possibly coupled with an extension of the forward guidance into 2015. This would be considerably more powerful than an extension of Operation Twist or other ways of changing the composition of the balance sheet, which are possible alternatives but are limited by the relatively modest amount ($200bn) of short-term paper that is still available for sale on the Fed's balance sheet." Well, if anything, global or Fed-based easing will most likely not come before the Greek June 17 elections - after all Greek confidence has to be crushed heading into the Euro referendum, and the only way to do this is by facilitating collapsing markets. So those hoping for a groundbreaking ECB announcement on June 6 will be disappointed. But June 20? That is fair game. We look forward to seeing PIMCO MBS holdings rise to a new all time high when the monthly TRF update is posted in a few days. Also look for something like this in the EURUSD if and when Bernanke surprises few at 2:15 pm on June 20.
The absence of the UK from today’s trade is particularly evident, with volumes remaining particularly light across all asset classes. Nonetheless, European equities are largely seen drifting higher with the exception of the DAX index, which is yet to move over into positive territory. News flow remains light with the highlight of the day so far being comments from the Troika, confirming that Portugal remains on track with its bailout program, and have confirmed that the country will receive the next EUR 4.1bln tranche in July. FX moves remain in a tight range, with EUR/USD looking relatively unchanged, with the USD index slightly weaker as the US comes to market. Looking ahead in the session, participants can look forward to US ISM New York and Factory Orders data as the next risk events of the session.
One word explains the overnight action: confusion. After opening down 10 points just shy of unchanged for the year following fearful Asian trade, futures have rebounded and are now almost unchanged courtesy of a UK-market which is offline for the next two days, letting Europe take advantage of another day of impotent rumor-mongering and wolf-crying, this time focusing on a 7pm press conference in which Merkel will say more of the same vis-a-vis Europe's non-existence Banking Union, but at least Europe will have closed at the highs. Not much on today's docket so expect more kneejerk reactions to rumors, which have a positive half-life measured in the minutes.
- Spain Seeks Joint Bank Effort as Pressure Rises on Merkel (Bloomberg)
- Banks Cut Cross-Border Lending Most Since Lehman: BIS (Bloomberg)
- Shirakawa Bows to Yen Bulls as Intervention Fails (Bloomberg)
- Merrill Losses Were Withheld Before Bank of America Deal (NYT)
- Investors Brace for Slowdown (WSJ)
- China's lenders ordered to check bad loans (China Daily)
- Obama Seeks Way Out of Jobs Gloom (WSJ)
- Noda Reshuffles Japan Cabinet in Bid for Support on Sales Tax (Bloomberg)
- China to open the market further (China Daily)
- Australian Industry Must Adapt to High Currency, Hockey Says (Bloomberg)
- Tax-funded projects to be more transparent (China Daily)
The past two weeks it was Spain, now it is back to Portugal, which overnight announced it is bailing out three banks to the tune of €6.65 billion. If at this point who is bailing out whom is becoming a confusing blur - fear not: that is the whole point. From AAP: "Portugal will inject more than 6.65 billion euros ($A8.49 billion) into private banks BCP and BPI, and the state-owned CGD to meet criteria established by the European Banking Authority. "In all, the state will inject more than 6.65 billion euros in these banks," though five billion euros is to come from an envelope worth 12 billion included in a financial rescue plan drawn up in May 2011, the finance ministry said. Portugal last year became the third eurozone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to 78 billion euros in return for a commitment to reform its economy and impose austerity measures." And surely that will be it, and Portugal will be fixed. Just like Spain was fixed, until someone actually did some math and found a hole up to €350 billion out of left field. Funny how those big undercapitalization holes just sublimate into existence, usually moments before client money is vaporized.
Contrary to what some may have been expecting, there was no coordinated grand central-bank bailout announcement over the weekend (and likely won't be one for a while). Instead we got promises of plans for a master plan, even as Soros gave Europe 3 months (or 2 months and 29 days as of today). Still, that has not prevented European stocks from rising to intraday highs driven by the EUR, and fears of a major snap-back rally in the record oversold currency as explained here yesterday. It also means that, as warned repeatedly, even the faintest hint of German capitulation will trigger buy programs. Such as this one just hitting the tape:
- MERKEL, BARROSO TO MAKE STATEMENTS AT 7 P.M. IN BERLIN
- EU SAYS BANKING UNION ON AGENDA FOR BARROSO-MERKEL MEETING
No clarification, nothing of substance: the mere suspense now is enough to make traders ignore that nothing is getting better. But at least for the time being nothing is (much) worse.
If the U.S. Federal Reserve were a hedge fund, its phones would be ringing off the hook with prospective investors wanting fresh allocations and Ben Bernanke would be zipping around the French Riviera in a gold-plated helicopter. The Fed’s multibillion-dollar position in Treasuries is nicely in the money with the recent moves to record lows risk-free yields, after all. But it’s policy outcomes, not returns, that the Fed is after. By that measure, the current record low payouts in “Safe Haven” bonds (U.S., Germany, U.K, for example) are troublesome. There is, of course, the worry that they portend a global recession. This concern cannot be waved away with the notion that a worldwide flight to quality totally upends the bond market’s historical function as a weather-vane of economic expansion and contraction. Beyond this concern, however, Nic Colas of ConvergEx sees two further worries. The first is that the Fed has needlessly compromised its independence by pursuing bond purchases that, in hindsight, were unnecessary in the face of the current economic outlook and investment environment. The second is that interest rates have been demoted to a supporting role in kick starting any global economic recovery. As with unfriendly aliens unpacking their bags at a landing site, the move to record low rates around the world is a truly menacing development. Historically, low interest rates have generally sparked economic recovery. In the current environment, this gas-down-the-carb approach seems to have simply flooded the engine of growth. Other factors are at play, as I have outlined here. The real answer is simply more time.
In a perfectly succinct follow-up to Last Friday's Santelli-Kaminsky CNBC-aberration discussion of the now status quo financial repression (low interest rate / QE environment), this two-and-a-half minute clip asks and answers the seemingly simple question of whether low interest rates are good. Borrowing and saving are really about whether to consume more now or later (or more later and less now) and we agree with Professor Antony Davies that these decisions are best left to individuals - and not the nanny-state/Fed. Each person's judgment of what is best for them is replaced by the Federal reserve's judgment and the free market interest has become a thing of the past (for now). Lower rates don't mean more spending; they mean more spending now and less in the future.
While the Dow Jones Industrial Average crossed into negative territory for the year on Friday, E-Mini and the S&P are still "off the lows" of the year (low print was 1259.75 on January 5th). However, if the rapid sell off in the premarket session accelerates, it is possible that we will wipe out all of the 2012 gains in hours if not minutes: December 30, 2011 close was 1252.50. We are now 10 just points higher and closing fast.
Two weeks of utter confusion by most market participants out there, when the complete deja vu scenario is so very clear. To help out those banging their heads over what is happening, here, once again, is the full playbook as it was laid out here for eveyone to read and prepare, because it explained to the dot precisely what will happen, and has been happening since May 19. And yes, that 1000 bps on XO is still about 25% away... Do the math.