Eurozone

All you need to read.

On the policy front, a series of critical EFSF votes went through last week without any hiccup, including the German, Finnish, and Slovenian decisions. Though the clearing of these hurdles provided some support to markets in the earlier part of the week, renewed Greek headlines pushed risky assets lower. In FX, a similar pattern persisted as in other asset classes, with most Dollar crosses matching the round trip during the week, including in EM. Only a few currencies marked notable new lows last week, in particular the Canadian Dollar. Positioning has continued to move in favour of defensive currencies, in particular the USD. The latest IMM report hints at very stretched short positioning in currencies like the EUR, AUD, and CAD. The upcoming week will provide more detail on both key subjects. Firstly, we will get the latest round of PMIs, though regional US surveys and preliminary readings in Europe suggest that macro data will continue to stabilise at relatively low levels, as mentioned earlier. The second important issue is the upcoming ECB meeting.

All you need to read.

It's over. There is no coming back from this.

With the weekend full of on-again-off-again comments from various European, Asian, and US politicians and central bankers with regard the chances of various incarnations of the EFSF solving all of our ills (or not), Nomura's Fixed Income Research team has what we feel is one of the most definitive analyses of the various options. We have discussed the self-exciting strange attractor nature of the endgame that will be a leveraged EFSF many times recently. The Nomura team, however, does a great job of breaking down various scenarios, such as Structural Weaknesses of EFSF 2.0, Proposals for an EFSF 3.0 (and their variants), Leverage-based options, and EFSF 2.0 as TARP and how these will result in one of three final outcomes: fiscal union, monetization, or major restructurings risking the end of the euro, as everyone searches for a steady state solution to the 'problem' of the eurozone.

While the most elegant solutions have no official sanction, we think the necessary political resolve is yet to be forthcoming, and the technical issues are challenging if not insurmountable for many of the legal workarounds, resulting in the need for yet another round of parliamentary approvals. Consequently, we see a significant risk that the market, looking for large headlines and enhanced flexibility, will be disappointed at least in the short run.

We are going to hear several carefully fashioned talking points concerning the economic collapse over the course of the final quarter of 2011, especially in light of the dismal end of the stimulus driven bull market that sustained public optimism since the derivatives implosion in 2008. Let’s not forget, three years ago mainstream economists and the Obama administration were calling for a near full recovery by 2011. Obviously this never materialized, and so, the game has to shift to a new dynamic to keep us all guessing. The deflationary boogieman will be resurrected to frighten taxpayers into taking on even more debt in order to feed the fiat machine, but this is going to meet extraordinary resistance. If you think the protests on Wall Street today are gaining momentum, just wait until Helicopter Ben announces QE3! The next logical step in the progression of banker planning is the call for “Globally Coordinated Action”; global initiatives tying numerous countries together in a unified effort to whitewash the crisis and solidify their real purpose of economic centralization.

Your one stop, comprehensive summary of the past week's key positive and negative events.

All you need to read. (a little late today)

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.

Monday afternoon the markets shot straight up after taking a dose of CNBCialis. CNBC was the first to break the story about letting EFSF use leverage or turning the EIB into a vehicle to increase the potency of the EFSF funds.  That was followed up by more leaks to other news sources. Stocks went higher quite happily but failed to drag the credit markets with it to a large degree.  Any analysis of the various plans all lead to the same conclusion - no matter how complex or convoluted the plan, the only way it works is for Germany and France to risk their credit ratings to support everyone else, or to print money.  No miracle solution was at work.  Plans may yet be put in place, but it is clear all they do if shuffle the deck chairs and obfuscate who is picking up the tab, but solve nothing.  It is clear that if it gets implemented, any further problems would become far worse as there would be no Eurozone country strong enough to support the rest.  What wasn't clear, is whether the downgrades would occur even before the plans were launched. As I wrote earlier, I will change my view of the market when something real comes out to make me change it.  I also really believe that in the near term, after a Greek default, SPX is likely to move in a range of 1000-1150, and the next big move will be if the global economies can resurrect growth.

As demands to bail out Greece wash over Europe, Greek society digs in its heels, and Greek ministries just pulled the rug out from under their prime minister.

The German "TARP equivalent" EFSF expansion vote has passed with a resdounding majority of 523 votes For and 85 Against. Obviously this was largely priced in judging by the rapid sell off in the EURUSd on the news. And now, back to focusing on the structural failure of the Eurozone which no vote can fix.

All you need to read.

Today at 9:00 GMT, Germany is expected to vote on the EFSF in a much anticipated vote. Needless to say, while futures are slowly drifting higher on expectations of a favorable outcome, a negative vote will see the EUR plunge to parity with the USD and kill markets in minutes as it would mean that German politicians pick their careers over rescuing a failed monetary experiment and bailing out pathological big spenders and liars. As the BBC reports, "If more than 19 members of Mrs Merkel's coalition rebel against her, she will have to rely on the support of the centre-left opposition to pass the bill on new powers for the European Financial Stability Facility (EFSF)." And if she does that, we will have a rerun of Angela's ashes.

Morgan Stanley has released "A panorama of the European Debt system" - easily the most comprehensive summary analysis (in 83 pages) of the Eurozone. To wit from the authors: "In this primer, we have compiled the key background information and statistics relevant to the context in which the European debt markets operate, encompassing Europe’s Institutional Framework, the ECB and the banking system, as well as sovereign, corporate and household debt, both in aggregate and by country. The compilation reflects the most frequently asked questions our economics and strategy teams receive from clients globally." Anyone who has ever had questions or been generaly curious about the uber-dysfuctional European debt system, and that would be everyone, especially the ECB, must read this document, if nothing else for the plethora of pretty charts.