- The FOMC rate-decision remains the main focus today as market participants anticipate the Fed to take further easing steps
- According to BoE’s September minutes, the MPC voted 9-0 and 8-1 to keep its benchmark interest rate unchanged at 0.50% and its asset-purchase target unchanged at GBP 200bln respectively. Most MPC members thought it increasingly likely that more QE would be warranted at some point
- CAD received support across the board following higher than expected CPI data from Canada
- Shares in BNP Paribas came under pressure on the back of market talk of a credit rating downgrade by one of the major rating agencies as early as today
First it was US money markets; then it was various European industrial concerns (which somehow double down as banks); then it was China; now the bank runs shift to insurance institutions when, as Bloomberg reports, Lloyd's of London has decided to pull peripheral Euro bank deposits. What next: complete collapse of European interbank market as bank runs become a daily thing at both the retail and institutional level? Well, we already anticipated that. But it is something totally different to see it happen in practice.
- China Faces ‘Hot-Money’ Surge on Financial Market Turmoil (Bloomberg)
- China Lending Curbs Help Propel Commercial Paper Yields to Record (Bloomberg)
- Italy plans reforms to rebuild growth (FT)
- US accused of unfair antitrust tactic (FT)
- Trichet urges EU banks to strengthen balance sheets (Reuters)
- Brazil seeks to help Europe via IMF (Reuters)
- Labour and Tories battle over IMF report (FT)
- Greek reforms undermined by stereotypes: minister (Reuters)
Today's existing home sales data, which will simply confirm that there is no hope for the housing market, will be completely ignored as everyone focuses on what gizmo Bernanke pulls out today from his magic bag of tricks.
Our thesis that global coordinated monetary stimulus is returning is playing out, first slowly, then very rapidly, with the Fed expected to announce at least Op Twist and an IOER cut at 2:15pm today, following a currency peg by the SNB, more printing promises by the BOJ, and the ECB now assumed to return to cutting rates shortly even as it purchases sovereign bonds in the open market. Sure enough, the latest entrant in the global resumption of printing is the BOE, which in minutes presented earlier, makes it clear it won't lag behind the Fed. From Goldman: "BOTTOM LINE: (i) The September MPC minutes revealed an unchanged vote (8-1 on asset purchases; 9-0 on rates). More significantly, however, for "most members" the decision was "finely balanced" and the committee was unusually forthright in signalling the likelihood of QE2. October now looks like the most likely date for a commencement of QE2. (ii) In other important news today, the ONS announced that public borrowing has been revised down by £6bn (0.4% of GDP) in 2010/11 and by £5bn (0.3% of GDP) so far in 2011/12. This potentially opens the door to a more gradual pace of fiscal tightening, with increased capital expenditure (the so-called "Plan A+")." And with that global relative FX devaluation continues, very much as expected, as does absolute devaluation of all currencies against gold, also very much as expected.
The French bank trio is once again on the ropes, with BNP leading the decliners at -5%, following the latest weekly Fed swap line release update from the ECB according to which one bank had subscribed for $500 million of dollars at emergency funding, confirming that anything coming out of the Libor market (where the average rate increased once again from 0.355% to 0.356% for the nth day in a row) is pretty much irrelevant as no real dollar access is available at rates below the ECB's penalty rate which this week was 1.07%. The good news: this is not as bad as last week's two banks which needed $575 million. The bad news: we have reverted to the regime from a month ago when a bank, most likely the same bank, was forced to borrow from the ECB, and hence, from the Fed. Said otherwise, there has been no improvement in interbank liquidity conditions since August 17. Expect more weakness out of French banks especially if China steps up the war of rhetoric and announces that more (of its own massively levered) banks have cut liquidity connections with France.
Tonight's feel-good story of our time is a desperate stroll through the reality of the US housing market for millions of individuals (as opposed to the hope-driven must-say-something-positive spin the home-builder CEOs have been spewing recently). Notices-of-default jumped 33% in August, a nine-month high and largest month-over-month increase since August 2007 and it is becoming increasingly acceptable to walk away from contractual agreements as strategic default becomes the New American Dream.
We are sick and tired of speculating what Benny and the Inkjets will decide tomorrow. The truth is nobody knows, probably not even Benny (unlike that other guy who got a haircut at the Marriner Eccles building today and who speaks in tongues). So here is a quick and dirty cheat sheet from SocGen giving the probability to each of the six possible options that the FOMC can pick out of Bernanke's magic hat. With over four hours from open until the "Rien ne Vas Plus" is called, compulsive gamblers should be able to put some good money down on the trifecta.
Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward. Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast. Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!
Following up his earlier note laying out expectations (translated as: "you better or else") for the outcome of the FOMC meeting tomorrow, Goldman's chief economist Jan Hatzius produces another 'concerning' research note tonight providing just enough evidence for a growing downside risk to the firm's 2% GDP growth estimate for 2012. We assume the failure of the market to hold onto dramatic losses (easier to justify more easing) or dramatic gains (can't disappoint a Pavlovian public waiting for the FOMC bell to ring) in the last few days prompted the 'nudge' from the policy-makers-elect. It appears weak stocks, a strengthening dollar, and the European crisis were not what the doctor ordered.
Nine months after the very same quartet of republicans, headed by John Boehner, sent a letter to Bernanke protesting the launch of QE2, this time the GOP has waited until a mere 24 hours before the actual announcement with an identical, if preemptive, message, namely: don't print, or stated differently, "we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people." And while the political undertone of the letter is all too obvious: i.e. prevent any additional Obama-benefiting stimulus in the economy through the only conduit Obama has left, courtesy of Fiscal stimulus being snarled for good due to the republican majority in the House, Boehner et al bring up a valid point, which is that the Fed policy now accentuates market uncertainty and promotes trade wars: precisely the topics discussed in an earlier article today. As stated by Boehner: "Our long-term growth depends on restoring confidence and certainty in our fiscal, regulatory, and trade policies -- and not on government’s willingness to engage in additional stimulative measures. When asset prices increase due to anticipated Federal Reserve policy rather than economic fundamentals, it increases the potential for speculative action and erodes confidence in the economic outlook, making it more difficult to generate sustainable growth." Regardless of its actual merit, one thing is without doubt: QE3, and the Fed, just become once again critically politicized, and as such, even more market uncertainty is imminent. All that said, the theatrical optics of this action are quite glaring.
One of the recurring themes on Zero Hedge in the past several months has been the continued mockery of the seemingly global conventional idiocy that China can bail out the world, when it itself is on the verge of a huge credit bubble popping and requiring the rescue of China itself by the rest of the global pyramid scheme (which however will be far too busy monetizing its own debt by then). Why, we vividly recall this quote from July 4, "So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3..." Well, Dagong did since downgrade the US (as did S&P), although not to junk just yet, and somehow the world still continues to labor under the illusion that China (whose shadow banking system we also covered most recently here), is somehow healthy because it is far better than Europe (and the US) in hiding the true severity of its problems. Naturally, as long as that persists, the global ponzi will always have the benefit of pulling out a "white knight" whenever needed, regardless of just how ludicrous such an presumption has become. Today, famous China bear Jim Chanos appeared on Bloomberg TV and recapped his thesis which summarizes the bulk of these points, further extrapolating based on the Andy Lees analysis posted yesterday which estimates what a true economic growth rate is when one factors for bad debt and loss severities. His conclusion: "If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero." And this stagnant, overlevered behemoth is somehow supposed to be... the world's white knight?
Greece Promises To Front-Load Austerity Even As Troika Has Not Yet Agreed To Provide Next Dose Of Monetary HeroinSubmitted by Tyler Durden on 09/20/2011 - 17:34
After Greece realized that it is not America, which can pretend it will do an infinite does of austerity... just not today... and not tomorrow...and really everything will be back-end loaded to some point 9 year from now (when it is some "other administration's problem") and the IMF made it clear that cuts have to happen immediately if not sooner, the country has released a statement that in exchange for getting the latest round of Troika funding (which it needs desperately: recall that it has another €2 billion debt paydown this Friday), it will front-load some of those mythical austerity measures that otherwise would have never really occurred. Which means that strikes (most notably by the tax collectors), riots and all around fun is about to become the prime time TV highlight from Syntagma square all over again, as tens of thousands of more government workers are fired or furloughed, or just generally lose their pension benefits, courtesy of living in an insolvent country. In the meantime, the European banks can pretend the contagion from a Greek fall out will be contained and the Fed's infinite swap lines will mask any and all completely unexpected black swans. Best of luck with that.
Another day, another roller-coaster ride in US equities as every other asset class was relatively well-behaved. We lurched from headline to headline all day long - up on some hope of a 'deal', down on news that nothing was achieved, up on 'progress', down on a revisit in October - but the lurches were much more evident in US equities than in FX, credit, TSYs, PMs, and commodities. These other markets were not dull by any means but did not exhibit the absolute schizophrenic paranoia that equities did and this was critical in getting a handle on trading today as with 30 minutes to go, equities tore back down from Friday's highs to reconnect with several fair-value models across broad risk assets and the credit markets (highlighted in our earlier European close snapshot).