Why the lack of follow through? Because, according to preliminary desk talk, just as we predicted yesterday now that the Fed has reengaged the QEasing machine, the ECB will too have to intervene and ease on its own once again to push the EURUSD lower (as otherwise the internal devaluation for most European countries will be simply unbearable). Which means one thing: the time to drag the Spanish insolvency out of cryogenic sleep is coming, and if Rajoy still refuses to request a bailout, he will get some much needed assistance from Frankfurt to make up his mind, allowing the ECB to inject hundreds of billions into the market and in doing so to keep up with the Fed or else risk dropping too far behind in the global race to debase (with a footnote that in Europe, a drop in the currency always raises redenomination risk now and going forward).
Today is probably the first day in a while in which minute-by-minute rumors on the Fiscal Cliff will not be on the frontburner (with yet another late day rumor yesterday of an imminent deal turning out to be a dud, when it was reported that Obama's latest grand compromise was to lower his initial tax hike demand from $1.6 to $1.4 trillion, or still $600 billion more than last summer's negotiated number), with Ben Bernanke and QE4 taking center stage instead. By now it is a foregone conclusion that Ben will proceed with extending Twist as first predicted here, into an unsterilized bond buying operation, in effect confirming that there has been zero improvement in the economy, as another $1 trillion is about to be injected until the end of 2013, and more trillions after that. The good thing is that all pretense that the Fed cares about anything but the market is now gone. The bad thing is that the Fed will continue to take over the capital markets until it and the other central banks are the only traders remaining. The only question is whether the market, now well into massively overbought territory, will fizzle and snap back after Bernanke's news announcement, and will QE4EVA (as we believe QE3+1, aka QEternity-er, should be called) have been fully priced in by the time it was announced?
Reuters has disclosed the outcome of the Greek debt buyback, citing a Eurozone official, which while completed at €32 billion, has missed it hard goal by €450 million, and as a result the completely unbelievable Greek 2020 debt/GDP target will be 126.6% instead of 124%. Reuters also reports that the average price on the buyback was 33.5 cents on the euro. As a result of the higher price paid for the buyback, the outcome is that Greek debt/GDP will be reduced by 9.5%, or less than the 11% targeted. Earlier, it was also reported that with virtually all Greek banks having sold out of their Greek bond exposure, all Greek private debt is now in foreign hands. It is unclear how holdouts will be dealt with, and what, if any, rights they will have following the transaction. Finally, as to the 2020 debt/GDP target, one can only hope that the Greek GDP, which is a rather critical component of the debt/GDP calculation, will now rise in a straight diagonal line up and to the right as the Troika expects it to do. Sadly, it won't.
In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.
A week ago, Mark Carney was announced as the BoE’s next Governor amid much fanfare. This week, Japan’s election could herald a new more aggressive approach from the BoJ. 2013 will then see speculation mount about Bernanke’s successor and also likely see the operation of the ECB landmark OMT program. It will also mark the 100 years of the Fed and probably much reflection on their impact on the US/Global financial system. So, as Deutsche's Jim Reid notes, central banks will remain in the spotlight for 2013. However whilst their actions to date have certainly minimized the tail-risk post-GFC, they have yet to lift real GDP above their 2007/2008 peak in most countries and virtually every developed economy is operating well below what is perceived to be trend growth. QE would have been seen as highly unorthodox four years ago - and unique for most central banks stretching back through their history. However fast forward to today, that old unorthodoxy has become the new orthodoxy. But what have the world’s central banks got left to offer a world that at some point might be hungry for more? as the world economy peers into the future and sees a growing threat of a recurring recessions and below target inflation, radical monetary policy may become increasingly appealing as elected politicians stuck in gridlock turn to (relatively) politically unconstrained central bankers to save them from their failings and get their economies racing again. For better or for worse.
Greece failed to persuade enough of its bondholders to complete the buyback that is so politically mandated by the Troika and so instead of admitting defeat, they have extended the deadline (til tomorrow at 12pm London). Current participation is around EUR26bn vs the EUR30bn target. The bottom line is that the buyback has created an upsurge in price for long- and short-dated GGBs as the 'Greater Fool' theory comes fully into play. Of course, with the Troika making the GGB (and its buyback) now the fulcrum security for Europe's 'break-up' risk, holding out for bigger and better offers seems the game for hedgies at least - there is always the Greatest Fool of EU leaders ready to step in. The paradox, of course, is that the more bonds are being bought the longer the buyback lingers on hopes Greece will keep on bending and keep rising the repurchase price; culminating with these being bought at par and replacing 30bn in old debt with 30bn in new debt. The buyback process has driven prices up dramatically - backfiring considerably on any real gains for the Greek people - but that's hardly the point eh?
In a perfect trifecta of disappointment, overnight we had reality reassert itself with a thud as first Japan reported weaker than expected GDP which contracted for a second consecutive quarter and which technically sent the country into yet another recession, merely the latest one in its 30+ year deflationary collapse. Which isn't about to get better: "Analysts expect another quarter of contraction in the final three months of this year due to sluggish exports to China, keeping the Bank of Japan under pressure to loosen monetary policy as early as this month." Of course, there is hope that the new, old PM, Abe will restore money trees and unicorns and get Japan to a 3% inflation target, without somehow destroying bank and insurance co balance sheets in the process, all of which are loaded to the gills with JGBs set to collapse should inflation truly return. Then after Japan, China reported miserable trade data, which flatly refuted all hopes of an economic pick up both in the mainland and across the world. Perhaps the reason China can not openly fudge its trade data, unlike its GDP, inflation, retail sales, industrial production and all those other indicators that none other than the incoming head of government Li Keqiang said are for "reference only" (a fact conveiently ignored when they are all going up, and duly noted when China is self-reportedly sliding) because other countries report the counterparty data and it is very easy to catch China lying in this particular case. And finally there was Europe...
Your comprehensive yet concise, one-stop summary of all the bullish and bearish events of the past week.
UBS and Nomura have suggested that gold could rise next week as the Federal Reserve may announce further easing at the FOMC meeting – on Tuesday (11/12/12) and Wednesday (12/12/12). Nomura said it is worth considering whether the FOMC will announce further easing to replace so called ‘Operation Twist’. The research house noted that gold remains at the same level as during the October meeting, which suggests gold has not yet priced in any move by the FOMC – creating an opportunity for gold bullion buyers. Regardless of whether the FOMC actually eases at this point – Nomura thinks there is a non-negligible probability – gold is likely to rise. Therefore, Nomura expects gold to rise and prices in this probability as the December meeting approaches, just as gold rose when the September meeting was approaching.
- Bundesbank cuts growth outlook as crisis bites (Reuters)
- Strong quake hits off Japan near Fukushima disaster zone (Reuters)
- Greece to Buy Debt It Already Owns to Reach Target (BBG)
- Draghi’s Go-to ECB Seen Risking Credibility Through Overload (BBG)
- Judge urges Apple and Samsung ‘peace’ (FT) ... Alas only the US government has a Magic Money Tree; others need profit
- Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion (BBG)... make that $5 trillion this time in 2014
- Level Global, SAC Fund Managers Ruled Co-Conspirators (BBG)
- Egypt demonstrators reject Mursi call for dialogue (Reuters)
- Japanese Dealerships in China Retrench in Wake of Dispute (BBG)
- Apparel factory fire reveals big brands' shadowy supply chainsa (Reuters)
- Republican Defectors Weigh Deal on Tax-Rate Increase (BBG)
In a day in which it was all supposed to be about today's far weaker (because there is a perfectly good alibi in the face of Hurricane Sandy) Nonfarm payroll report, expected to print at 85,000, due out in 2 hours, once again it is the the "rest of the world" that stole the scene, starting with a reality slam out of Germany whose Bundesbank came out with revised forecast for German economic growth, which collapsed projected 2013 growth from 1.6% to a tiny 0.4%, adding that there are "growth projections risks to the downside" in effect all but sealing Germany's recessionary fate in the coming year, and send the EURUSD to overnight lows. Sure enough, as if to confirm this forecast, moments ago German Industrial Production in October tumbled -2.6%, on expectations of an unchanged print. None of this should come as a surprise to our readers whom we have been warning for weeks and months that the European economic malaise is spreading closer to the core with each passing day. What this means is that as we have been saying for months, slowly but surely the narrative that the ongoing German bailout of Greece is crushing the AAA-rated economy will become louder and louder until it is the German people themselves who demand a severing of all ties with Greece.And speaking of Greece, there are simply no words to explain the stupidity of what may be happening there. Perhaps the following Bloomberg headline captures it best: Greece to Buy Debt It Already Owns to Reach Target. Er, LOLWUT?
A “new era”: 48% of the French consider themselves living in poverty or on the way to it.
While trading during US hours is all about the Cliff On/Cliff Off debate, the rest of the world is simple: the overnight session begins (and largely ends) with whether or not China has done another reverse repo (if yes, then PBOC will not lower rates, and inject unsterilized billions into the market) and whether the Shanghai Composite is up or down. Last night, after jumping by 3% the session before, it was down 0.13% to 2029. Was this it for the great Chinese "bottom?" Japan may or may not figure in the equations, although with the 10 Year future just hitting a record overnight, it is amusing to see how the bond complex is indicating record deflation just in time for the market to anticipate a surge in inflation. Ah, the joys of frontrunning central planning's monetization of government bonds. And then we move on to Europe, which is a whole new level of basket case-ness...
UPDATE: GBP at lows of day - moar QE?
UK's Chancellor of the Exchequer George Osborne delivered his Autumn 'Budget' Statement this morning and, as Citi notes, while he signaled that the struggling still-AAA nation is on course to achieve its cyclically-adjusted surplus on a rolling five-year horizon; the government now expects that net public debt/GDP ratio will start falling only in 2016/17 - a year later than originally planned. Mr Osborne attributed the softening in the debt/GDP target to growth underperformance in the UK and the Eurozone; leaving Moody's decision in early 2013 on the AAA rating still in jeopardy (the rating agency put the UK on negative watch and warned the coalition government to refrain from abandoning its ambitious fiscal austerity targets). GDP forecasts have been lowered, with a 0.1% contraction now seen this year (from a +0.8% forecast in the March budget). The 2013 and 2014 forecasts are also lowered to 1.2% and 2.0%, from 2.0% and 2.7% respectively. For now, cable (GBPUSD) has rallied back off knee-jerk reaction lows to around unchanged.
- LA port workers to return Wednesday (AP)
- Iran says extracts data from U.S. spy drone (Reuters)
- Obama to stress need to raise debt limit "without drama" (Reuters)
- Big Lots Chief Probed by SEC (WSJ)
- NATO missiles to be sent to Turkey, Syria clashes rage (Reuters)
- GOP Deficit Plan Irks Conservatives (WSJ)
- Japan Can End Deflation in Months, Shirakawa Professor Says (BBG) ... almost as good as Bernanke ending inflation in 15 minutes.
- Osborne Prepares to Breach Fiscal Rules Amid U.K. Growth Slump (BBG)
- Global Banking Under Siege as Regulators Guard National Interest (BBG)
- Freeport plans return to energy (FT)
- Serbian NATO envoy jumps to death at Brussels airport (Reuters)
- Tide Turns After a Flood of Chinese Listings (WSJ)
- Australian economy loses steam (FT)
- Euro Crisis Feeds Corruption as Greece Slides in Rankings (BBG)