Risk averse trade was observed in early European trade following the news over the weekend that Greece were to miss budget deficit targets set by the Troika with the Asian markets closing sharply lower into the beginning of the European session and consequently fixed income markets being heavily supported. Focus remained on the banking sector following reports that consultations are underway regarding the nationalisation of Belgian bank Dexia with further comments from ECB’s Noyer on the dependence of French banks on USD funding. At the Equity open Dexia opened down 12% with the French banks underperforming heavily, however as the session progressed risk sentiment did begin to creep back into the markets with the Euro-area manufacturing PMI’s generally being higher than expected. This was allied with the ECB’s Securities Market Programmed rumoured to be buying in the Spanish and Italian curves with significant tightening observed in both countries 10-year government bond yield spread over Bunds. Looking forward in the North American session focus will be on the Eurogroup meeting due to start at 1600BST where discussions on EFSF leveraging will be on the agenda. In terms of data there will be the ISM manufacturing report for September and the start of Operation Twist, alongside the latest Outright Treasury Coupon Purchases.
Inflection points on four key markets that would serve as definitive indicators that the world is in a double-dip recession.
Today’s session has been a quiet one so far as markets digest yesterdays German EFSF vote and trading has seen light volumes heading into the month and quarter end. Weakening in the Euro currency was observed after higher than expected Eurozone CPI, which led to market participants further questioning whether the ECB will now be cutting interest rates in their monthly Governing Council meeting next week. As European bank fragility has remained in focus in recent times, news came from the EU Commission that they have temporarily approved state aid worth EUR 4.75bln to recapitalize three Spanish savings banks, although little reaction was seen in the markets. The largest moves have been seen in crude futures today with WTI and Brent trade down around USD 1, extending their quarter losses which remain on track for their biggest drop in 15 months. We’ve also seen the German upper house now approve EFSF expansion, and are awaiting final approval from Austria at today, although no time has been given. Looking ahead to the US cash open, focus will be on the US Chicago PMI data which is expected to show a slightly lower than previous reading at 55.0, plus the final University of Michigan Confidence number 10 minutes later. Hope will be that these readings add to yesterday’s indication of some recovery in the US economy.
- The German lower house passed the EFSF amendment bill with a leading conservative lawmaker noting that the coalition did not need to rely on opposition votes.
- Fed’s Bernanke said the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
- German BDB confirms that the 90% target rate for private sector involvement in the second Greek bailout has been met adding that the ECB is well prepared to assist EU banks.
- Greek PM will travel to Paris on Friday to discuss debt crisis with French president Sarkozy according to a source.
- Banks and other private sector bondholders are resisting the idea of taking larger haircuts on Greek debt by lobbying countries such as Germany and the Netherlands.
When one compiles the annals of the great deflationists of the early 21st century, they will be hard pressed to decide who is deserving of the title most ferocious deflationist in a runoff between David Rosenberg and Gary Schilling. And while David did not have much notable to say today, despite his daily release of interesting and insightful commentary from his perch atop Gluskin Sheff, Gary Schilling took advantage of the media vacuum to appear on Bloomberg TV and preach, what else, deflation. Among the topics touched upon were the #1 issue du jour - the Chinese hard landing, presented earlier here, and the resulting collapse in copper, on bond market volatility, on investing and speculation, and lastly on the S&P, which just like Rosenberg, he see as deserving of a 10x multiple applied to a soon to be revised S&P 500 EPS of 80 (do the math). All in all sensible stuff except for one thing: his statement "Inflating away is an excess supply world is almost impossible, even for the Fed" leaves a little to be desired. While he may be spot on, it does not mean the Fed will not try. And try it will: we expect rumblings for full blown LSAP to commence in a few days, and QE4 in which the Fed will pull a BOJ and buy ETFs, REITs (in addition to MBS and Agency bonds) early in 2012, after which it will be time to quietly depart from these continental US, or else load up on lead, spam and precious metals.
The risk faced by those who are analyzing macro trends is sounding like a broken record. For those younger readers who have no idea what that means, imagine an MP3 song that will stick on and endlessly repeat a random segment of the song you are listening to until you give your device a sharp knock on the side. That's what a broken record sounded like. The world economy is on the ropes and it won't ever recover. At least not to anything resembling its recent past. Neither the gleeful housing bubble nor the free-flowing credit that enabled that side bubble to emerge will return. The resources simply do not exist to repeat that final orgy of consumption. A new reality is upon us and - while fortunately more and more people are choosing to face our predicament rather than pretend the current risks and challenges do not really exist - the absolute numbers are still small and for the most part don't inlcude any of our political leaders.
- Euro Crisis Makes Fed Lender of Only Resort as Funding Dries Up (Bloomberg)
- Germany Slams 'Stupid' US Plans to Boost EU Rescue Fund (Telegraph)
- US Inflation Expectations Lowest for a Year (FT)
- Chinese Banks Raise Cash to Cushion Against Bad Debts (WSJ)
- Banks Wary of Financing Big Projects (FT)
- German Ruling Coalition Faces Tricky Bailout Vote (WSJ)
- Health Insurance Costs Deal Blow to Obama (FT)
- China Warns Asia Not to Hide Behind U.S. Military (Bloomberg)
- Japan Ruling Party Proposes $120B Tax Increase (Bloomberg)
- A European official said a detailed plan is being worked on leveraging EFSF money with the plan using some EFSF money to shore up bank capital.
- The Austrian finance minister said Euro-zone officials are to discuss the EFSF leveraging plan on Monday
- German Chancellor Merkel says we are not prepared to implement further stimulus programmes.
- Confirmation of the EFSF leveraging talks sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday.
U.S. Diesel could see significant price spikes before year-end while gasoline demand is at 10-year low.
- ECB said to debate new 12-month loans at the October 6th policy meeting where they may discuss a rate cut
- EU may speed up ESM enactment to stem the crisis with Euro aides discussing setting up the fund in 2012 a year early.
- German IFO data higher than expected on all three readings
- CME raises margin requirements for longest dated T-Bond futures by 20%
- Finance ministers and central bank governors of the G20 countries pledged for a strong and coordinated international response to boost global economic recovery
- ECB’s Coene said that the central bank may take action as soon as next month if the economic data continues to disappoint. However, he also said that giving EFSF bank license would not be a good idea. Meanwhile, ECB’s Knot said that a Greek default cannot be excluded
- Kathimerini wrote that several Greek MP’s are resisting a new round of austerity
- The Head of Finnish Parliament said that the use of new EFSF powers should always require parliament approval
- Handelsblatt quoted a German economic professor saying that Germany has EUR 5trl of hidden debt, while Deutsche Bank said co.’s write downs on Greek bonds could be higher than the 21% level foreseen in a July agreement