Eurozone

Pivotfarm's picture

The EU may have many worries and woes that are slapping it around its face right now (and it could be said for a number of years), but there is one thing that is worrying economists more than the sovereign-debt crisis and that’s the fact that prices are not increasing enough.

Overnight Equity Levitation Interrupted On Strong Dollar, Weak Treasurys

Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.

Next From The ECB: Here Comes QE, According To BNP

The latest myth of a European recovery came crashing down two weeks ago when Eurostat reported an inflation print of 0.7% (putting Europe's official inflation below that of Japan's 1.1%), followed promptly by a surprise rate cut by Mario Draghi which achieves nothing but sends a message that the ECB is, impotently, watching the collapse in European inflation and loan creation coupled by an ongoing rise in unemployment to record levels (not to mention the record prints in the amount of peripheral bad debt).  Needless to say, all of this is largely aggravated by the EURUSD which until a week ago was trading at a two year high against the dollar, and while helpful for Germany, makes the so-needed external rebelancing of the peripheral Eurozone countries next to impossible. Which means that like it or not, and certainly as long as hawkish Germany says "nein", Draghi is stuck in a corner when it comes to truly decisive inflation-boosting actions. But what is Draghi to do? Well, according to BNP's Paul-Mortimer Lee, it should join the "no holds barred" monetary "policy" of the Fed and the BOJ, and promptly resume a €50 billion per month QE.

El-Erian Fears The "Over-Empowerment" Of Central Bankers

History is full of people and institutions that rose to positions of supremacy only to come crashing down. In most cases, hubris – a sense of invincibility fed by uncontested power – was their undoing. In other cases, however, both the rise and the fall stemmed more from the unwarranted expectations of those around them. The more responsibilities central banks have acquired, the greater the expectations for what they can achieve, especially with regard to the much-sought-after trifecta of greater financial stability, faster economic growth, and more buoyant job creation. And governments that once resented central banks’ power are now happy to have them compensate for their own economic-governance shortfalls – so much so that some legislatures seem to feel empowered to lapse repeatedly into irresponsible behavior. The trouble is that few outsiders seem to be listening, much less preparing to confront the eventual limits of central-bank effectiveness. As a result, they risk aggravating the potential challenges.

Mystery Behind Spanish Banks' Extend-And-Pretend "Bad Debt Miracle" Revealed

One of the mysteries surrounding the insolvent, and already once bailed out Spanish banking sector, has been the question why reported bad loans - sharply rising as they may be - are still as relatively low as they are currently, considering the nation's near highest in the Eurozone unemployment rate, and in comparison to such even more insolvent European nations as Greece, Cyprus and Slovenia. Courtesy of the just completed bank earnings season, and a WSJ report, we now know why: it turns out that for the past several years, instead of accurately designating non-performing loans, banks would constantly "refinance" bad loans making them appear viable even though banks have known full well there would be zero recoveries on those loans. In fact, as the story below describes, banks would even go so far as making additional loans whose proceeds would be just to pay interest on the existing NPLs - a morbid debt pyramid scheme, which when it collapses, no amount of EFSF, ESM or any other acronym-based bailout, will be able to make the country's irreparably damaged banks appear even remotely viable.

Key Events And Issues In The Coming Week

With better US labor market data, the key event in the upcoming week could well be the Yellen nomination hearing in the Senate Banking Committee. Yellen will likely deliver brief prepared remarks followed by questions from members of the committee. Yellen is expected to be relatively circumspect in discussing potential future Federal Reserve policy decisions in the hearings. Nonetheless, the testimony may help clarify her views on monetary policy and the current state of the economy. Yellen has not spoken publicly on either of these topics since the spring of this year. In addition to the nomination hearing, there will be a series of Fed speeches again, including one by Chairman Bernanke.

No Open Bond Market, No Problem: Futures Rise On Another Yen-Carry Levitation To Start The Week

Bond markets may be closed today for Veterans' Day, but equities and far more importantly, FX, are certainly open and thanks to yet another overnight ramp in the ES leading EURJPY, we have seen one more levitation session to start off the week, and an implied stock market open which will be another record high. There was little overnight developed market data to digest, with just Italian Industrial Production coming in line with expectations at 0.2%, while the bulk of the attention fell on China which over the weekend reported stronger Industrial Production and retail sales, while CPI was just below expectations and additionally China new loans of CNY 506 billion (below est. of CNY 580bn) even as M2 in line, should give the Chinese government the all clear to reform absolutely nothing. That all this goldilocks and goalseeked data is taking place just as the Third Plenum picks up pace was not lost on anyone.

The Biggest Difference Between QE3 And QE2

... And why does the Fed, with $1.3 trillion in cash parked at foreign commercial banks or more than half of the reserves created under QE1, 2 and 3, continue to bail out non-American banks?

Big Institutions Bet "All In" On Small Caps

To many institutional investors, buying the Russell 2000 is merely the highly levered bet with which the bulk of institutions (recall that almost all hedge funds, and a majority of mutual funds, are underperforming the S&P for a 5th consecutive year) seek to make up for losses in their portfolios by chasing high (and even higher with leverage) beta.  Which is why as the next chart below shows, in a furious scramble to catch up by year end, the institutional Russell net futures (i.e. levered) positioning just hit a record high: the biggest investors are now all-in the smallest names.  So is the massively overbought small cap sector due for a correction? With these manipulated, centrally-planned markets, nobody has any idea. However, for those who have once again bet all in, which just happens to be most plain vanilla dumb money, it may be time to reevaluate.

Citi Expects "A Significant Fall In EURUSD" As Currency Wars Escalate

European monetary policy/monetary conditions are too tight and, Citi's FX Technical group explains, the EURO is too strong thereby exacerbating the effects of the internal devaluation in Europe (as we noted here). Looser monetary policy and a weaker currency are becoming increasingly necessary conditions for the Eurozone to recover/survive. The present period in the Eurozone, Citi adds, where the financial architecture is coming apart at the seams is not remotely unprecedented and in fact offers a very compelling historical perspective for significant devaluation of the EUR in the years ahead.

Frontrunning: November 8

  • Fed Anxiety Rises as QE Raises Risk of Loss With Political Cost (BBG)
  • Iran Nuclear Deal Expected as Early as Friday (WSJ)
  • Israel rejects mooted interim Iran nuclear deal, Kerry heads to talks (Reuters)
  • JPMorgan Banker Backed $200 Million Madoff Loan in 2008 (BBG)
  • Unleashing the food nazis - FDA Says Trans Fats Aren't Safe in Food (WSJ)
  • Draghi Aggression Shows Pledges Backed by Rate Surprise (BBG)
  • S&P Cuts France's Credit Rating by One Notch to Double-A (WSJ)
  • S&P criticises France’s high tax rates for stifling growth (FT)
  • Payroll Gains in U.S. Probably Cooled Amid Government Shutdown (BBG)

"Sources" Confirm No ECB Rate Cut Tomorrow, Euro Soars Pushing Dow Jones To New Record High.

Even though a meager 3 of 70 economists actually expected Mario Draghi to announce some sort of rate cut at tomorrow's ECB press conference, moments ago MarketNews reported that according to "sources" a rate change tomorrow is unlikely even amid a dip in Europe's inflation.

ECB SOURCES: RATE CHANGE THURSDAY UNLIKELY EVEN AMID INFLATION DIP - MNI

The flashing red headline, as this non-news was picked up by the algos, was enough to send the EUR, and naturally the all important EURJPY spiking by another 40 pips, and taking the correlated US equity markets, right along with it.