BOE

Markets were in sleep mode for most of the session, ahead of the BoE monetary policy decision, as well as the ECB’s press conference where the President is unlikely to outline any new measures and instead reiterate that the ECB stands ready to do whatever is necessary. The BoE held both their rates and asset purchase target unchanged, however it is widely expected that the central bank will boost the facility by another GBP 50bln in November. Today’s supply from both Spain and France was easily absorbed by the market, both were supported by the recent decline in bond yields. Going forward, apart from digesting comments from Draghi, market participants will get to see the release of the latest weekly jobs report, durables revisions and the minutes from the FOMC.

First the BOE, now the ECB has left rates unchanged. Alas: you don't win pole position in the currency debasement closed loop in which nobody ever wins (well, except for Iran) by doing nothing. But for now, both banks did just as expected.

For the third day in a row, there is little to write home about from the overnight action. The EURUSD has been choppy following an MNI report about comments from EU officials that suggested Germany wants to delay the Troika decision on a €31.5 billion payment to Greece until after the November 12 Eurozone finmin meeting, no doubt predicated by the already discussed willingness by Europe to not rock the boat before Obama is reelected, still leaving the question hanging: just why is an entire insolvent continent so hung up on a US presidential decision. The main FX market focus is on the European Central Bank rate decision, due at 1145GMT. The ECB is widely expected to leave rates on hold just as the BOE did moments ago (it needs to hurry up if it wants to win the race to debase) although in the New Normal one can't be sure of anything. In other news Spain auctioned off a much needed €3.99 billion in various short-term bonds, the bulk of which fell under the LTRO maturity umbrella, but which was successful nonetheless if with modestly weaker short-end results, and an overall bitter aftertaste as seen by the resumption in Spanish 10 year widening, as the entire market, not to mention Draghi, is starting to get very impatient with Rajoy, who is now even getting urged by Catalonia's Arturo Mas to finally bite the bullet and demand a bailout (and resign shortly thereafter): "A bailout is inevitable; therefore the best thing to do is to make the decision without delay,” Mas said. “Spain has the potential to overcome the situation, but it will need assistance for some time." Recall that Spain's cash needs in October surge so every single successful euro raised is more than critical.

Equity markets continued to edge higher today as market participants grew hopeful that a full scale bailout of Spain will take place in the very near future. So much so that even though reports that Spain is to seek bailout this weekend was denied, the risk on sentiment held strong. As a result, SP/GE and IT/GE bond yield spreads tightened further, with IT 10s now yielding close to 5%. The renewed sense of security saw EUR/USD squeeze higher towards the psychologically important 1.3000 level, while GBP/USD also benefited from a weaker USD and is trading in minor positive territory in spite of another round of disappointing macro data from the UK. Going forward, the second half of the session sees the release of the latest ISM New York index, as well as the regular weekly API report. Both the BoE and the Fed are due to conduct another round of asset purchases at 1445BST and 1600BST respectively.

In a world in which markets are simply policy instruments of central planners it is no surprise that the only thing that matters is how much money is injected by any given central bank at any given time. Last night, following the Fed and the BOJ, it was the turn of Australia, which in a "surprise" move cut policy rates by 25 bps. From SocGen: "Reacting to a weaker global economic outlook, which has moderated the outlook for growth in Australia, the Reserve Bank of Australia cut its policy rate today by 25bp to 3.25%, a move that was predicted by only a minority of forecasters (including us). Nevertheless, we believe that markets are too aggressively priced for further rate reductions: we expect a low of 3.00%, to be reached by year-end, but the swap market is currently discounting a low of 2.4% by mid-2013. The reasons the RBA stated for lowering rates centered mostly on the global economic outlook, which has softened over recent months, not least because of greater uncertainty about near-term prospects in China, and hence the outlook for Australia is seen as a “little weaker”. The RBA also stated that the resource investment peak may be lower than previously thought." Sure enough, the move sent Australian stocks to 5 month highs, and global equity futures spiking. Of course, in the open-ended global race to debase perhaps it is more surprising i) they did not do this sooner and ii) not more banks have "cut" yet. Ironically, while the ECB, BOE and SNB are still contemplating next steps to catch up with Bernanke, it is the BOJ which in the abysmal failure of its own QE 8 from three weeks ago, is now contemplating QE 9 - the foreign bond edition (because buying treasury and corporate bonds, ETFs and REITs is never enough). Naturally, all this additional liquidity and promises thereof, has sent futures to fresh highs as more and more latent inflation is loaded up in the global monetary system.

While the 'Misery' Index in Iran reaches exceptional levels, and the US aggregate of inflation and unemployment peaked last October, Europe's misery has continued to rise in the face of an ever-easing ECB and political jawboning. As SocGen notes today, the UK's misery has turned back higher and the Euro-zone's Misery Index has never been higher. These misery indices clearly reflect deteriorating economic performances in the main G10 countries, with some unsurprisingly weaker performances in Spain and Greece, leading the eurozone index higher. Given recessionary situations expected in some eurozone countries next year, the misery index is unfortunately quite unlikely to edge south significantly.

After dropping to its 200 DMA, and threatening to breach its recent support level of 1.2800, the EURUSD has seen the usual powerlift over the past 4 hours, on two key events out of Europe: Eurozone unemployment, which came at a record 11.4%, up from 11.3% (which just happened to be revised to 11.4%) but because it was in line with expectations of the ongoing recession, all was forgiven. The other event was Eurozone manfucaturing PMI, which rose by the smallest amount possible from the 46.0 in August to 46.1, on expectations of an unchanged print. That 0.1% "beat" is what has so far set off a near 100 pip rush higher in the EURUSD, which has ignored the Chinese weakness overnight (the SHCOMP is closed for the Chinese Golden Week), as well as the UK PMI which did not share in the European "improvement" and tumbled from 49.5 to 48.4 on expectations of a 49.0 print (so much for that latest BOE easing), and instead is transfixed by headlines proclaiming the strongest PMI in 6 months. What also is being ignored is the components in the Eurozone PMI, with the leading New Order index falling to 43.5 from 43.7. But the data being ignored the hardest is the French PMI which tumbled to 42.7, the lowest print in 41 months, of which as MarkIt's chief economist Chris Williamson said "France is perhaps the new worry, with its PMI slumping to the lowest for three-and-a-half years." Coming at a 3+ year low when France desperately needs its new wealth redistribution budget to be credible, is not the best possible outcome. Bottom line: Europe is in a recession, but maybe not outright depression just yet, so the thinking is - buy the EUR, strengthen the currency, make German exports weaker, and make sure the recession becomes a full on depression. Or something like that.

Risk-averse sentiment dominated the first half of the session today, as market participants digested yet another disappointing macro economic data release from Europe (German IFO), which fell for a fifth consecutive month. In addition to that, EU’s Van Rompuy said that he sees tendency of losing the sense of urgency, likely pointing the finger at Spain which is yet to request monetary assistance to prevent another speculative attack. It remains unclear when the official request will be made, but there is a risk that the application will only take place after regional elections in late October or even after the Eurogroup meeting in November. Finally, German finance ministry spokesman said that leveraging the ESM to EUR 2trl, as reported by Der Spiegel over the weekend, is not realistic and called the report completely illusionary. As a result, peripheral bond yield spreads are wider, with Italian bonds underperforming as markets prepare for this week’s supply from the Treasury. Heading towards the North American cross over, EUR/USD is seen lower by around 75pips and is trading in close proximity to the 1.2900 level, with bids said to be placed below. Talk of dividend related buying in GBP/USD, as well as EU budget related selling in EUR/GBP by two different UK clearers helped support GBP/USD. Going forward, there are no major economic releases set for the second half of the session, but the BoE will conduct its latest APF and the Fed will buy between USD 1.5-2bln in its latest POMO.

We have discussed the CRIC cycle a number of times - especially with regards Europe - but it seems the never-ending story of Crisis-Response-Improvement-Complacency has struck once again as Morgan Stanley notes when complacency becomes pervasive, it usually gives way to a renewed crisis. Complacent financial markets appear to be looking through the fact that the global economy remains stuck in a 'twilight zone' between expansion and recession. Dismissing weak PMIs in China and EU, markets have feasted in QEternity and OMT and this has, as expected, affected European policy-makers (e.g. ongoing disagreements over the details of the much-anticipated negative-feedback-loop-breaking banking union; and Spain/Italy's 'belief' they can avoid an ESM 'austerity' program). This feels eerily like the March/April period when post-LTRO improvements induced euphoria in traders and governments/ECB to relax prematurely and as Brevan Howard explains below - every major developed economy is facing significant downside risks - no matter how enthusiastic markets appear to be.

• Obama, Romney tiptoe around housing morass as they woo voters (Reuters) ... just as ZH expected
• Poll Finds Obama in Better Shape Than Any Nominee Since Clinton (Bloomberg)
• Romney on Offense, Says Obama Can’t Help Middle Class (Bloomberg)
• Fed’s Fisher Says U.S. Inflation Expectations Rising (Bloomberg)
• Citigroup Warns Irish Investors to Plan for Losses (Bloomberg)
• Central Banks Flex Muscles (WSJ)
• China says U.S. auto trade complaint driven by election race (Reuters)
• Brussels sidesteps China trade dispute (FT)
• How misstep over trading fractions wounded ICAP's EBS (Reuters)
• Ex-CME programmer pleads guilty to trade secret theft (Reuters)
• Income squeeze will persist, says BoE (FT)
• South African miners return to work, unrest rumbles on (Reuters)

• 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.

News may come, and news may go, but the fiscal policy implementation vehicle known as the market, and now controlled by the Political Reserve don't care. For those who do, here is what has happened in the past few hours and what is on deck for the remainder of the week.

You could be forgiven for believing that the ECB's talk/plans have indeed solved the European problems. The market's reaction appears to confirm all anchoring bias and thanks to overly bearish positioning (and thin summer markets) has sent all but the long-term-est bears scurrying for their rabbit-holes - as once again 'tail-risk has been removed' - just like LTRO, the SGP, and The Grand Plan before it. However, as BofAML notes in this must read note, we do not believe the ECB move will necessarily lead to a permanent stable equilibrium for the euro area for two reasons: 1) a stable equilibrium would require certainty about the ability of countries to restore debt sustainability, i.e. that they will respect an agenda of economic policy reforms and/or; 2) certainty about the ECB course of action, i.e. that the ECB will purchase bonds in such a way that we will not observe renewed financial market stress as we did this summer. Such certainty would require both Spain and Italy to put their faith in the Troika’s hands and the ECB to pre-commit in return, which seems to us very unlikey at this time. The ECB’s conditional backstop is some way from the “bazooka” that many were expecting

There is only one event on pundits and traders minds today: the ECB's press conference, during which Draghi will announce nothing material, as the substance of the bank's message has been leaked, telegraphed and distributed extensively over the past three weeks before just to gauge and test the market's response as every part of this latest "plan", which is nothing but SMP-meets-Operation "Tsiwt" was being made up on the fly. And not even a weaker than expected Spanish short-term auction in which €3.5 billion in 2014-2016 bonds were sold at plunging Bids to Cover, sending yields paradoxically spiking just ahead of what the ECB should otherwise announce will be the buying sweet spot, can dent the market's hope that Draghi will pull some final detail out of his hat. Or any detail for that matter, because while the leaks have been rich in broad strokes, there has been no information on the Spanish bailout conditions, on how one can use "unlimited" and "sterilized" in the same sentence, and how the ECB can strip its seniority with impairing its current holdings of tens of billions in Greek bonds without suddenly finding itself with negative capital. Elsewhere, the Swedish central bank cut rates by 25 bps unexpectedly: after all nobody wants to be last in the global currency devaluation race. Ironically, just before this happened, the BOJ's Shirakawa said that he won't buy bonds to finance sovereign debt: but why? Everyone is doing it. Finally, in news that really matters, and not in the "how to extend a ponzi by simply diluting the purchasing power of money" category, Greek unemployment soared to 24.4% on expectations of a rise to "just" 23.5%. This means there was an increase of 1.3% in Greek unemployment in one month.