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.
Given how many unconventional means have been deployed over the last weeks, I wouldn’t exclude some form of stimulus postpartum depression… With nothing in immediate sight, it’d better hold. Why does my heart feel so bad?
After almost forty years on Wall Street we understand both the joke and the punchline and you cannot pay off old debt with vastly greater amounts of new debt without consequences and, we assure you, there will be consequences. This paradigm does not work for a corporation or a sovereign nation and the borrower is eventually brought to his knees by the sheer weight of the debt that he has laden upon his back. The interest rate paid is only part of the equation with the rest being the absolute size of what is undertaken. The Euro and the equity markets rally upon misperception. It is not “unlimited” or “no cap” that are really the operative words for the scheme but the “condition” of use that is the most important part of the recent “Save the World” speech of Mario Draghi. Spain is an admitted user of “dynamic provisioning” which is a long and academic argument for shifting reserves but in the end it means but one thing and one thing only and that is they are admittedly fiddling with their books. Spain is scared to death of the “Obermeisters of the Troika,” the refrains of the three brothers Reich, that will show up in Madrid and demand explanation and sacrifice.
While this and that may have happened overnight, the only thing that matters today is what the FOMC presents to a market which has now priced in well over 100% of a new easing round. Except little movement until Bernanke speaks, and with that removes any doubt that i) the Fed, like the ECB, are both political creations comprised of unelected academics, and ii) the entire modern capitalist world is nothing but a Pavlovian creation that responds only to promises of liquidity injections. Luckily, if nothing else, this will once and for all shut up anyone who claims that the market reflects the economy, it doesn't; that a "virtuous economic cycle" is possible under the new centrally planned normal, it isn't, and that the US economy is recovering 4 years after Lehman collapsed. It never did, and without $14 trillion in central bank liquidity injections over the same period, the world, as represented by the S&P, would be in a mindblowing depression, which it will still get back to once the surge in hard asset inflation offsets any incremental liquidity provided by the central planning academics as Citi warned yesterday.
Whatever... Final sign off by Germany and an ESM start-up session for 08 Oct.
Yes, Sir, I Can Boogie.
Spanish aid “not urgent, given actual market levels”…
Looks like a loop bad US news, good EUR; good EUR must be good news.
Love boat, everywhere. Final Risk On, or so. And up 1%
Ah, hmm, yes, Greece… Not much else to chew on.
Risk is lofty and near the point where all stimulus measures that were already priced have been delivered.
So, what's next?
Even in the face of worsening odds of re-election (no sitting government has been returned to power in EU elections since the start of the crisis) one would expect national governments to do what is necessary to maintain current stability. The ultimate arbiter of burden sharing capacity, or whether the Euro will continue on the steady incremental path to integration, is whether regular voters vote for it. Hence the importance of elections, like the Dutch election this week. The anti-austerity Socialist Party (SP) has gained significant ground on the incumbent VVD party - focusing the market's attention on the willingness of the Dutch to meet the 3% of GDP deficit targets in 2013. The two 'extreme' parties look set to gain considerably more seats, and either a very broad coalition would be required, including a tail of small parties, or all four mainstream parties will have to participate in the new government: either way, government stability might be questionable. The scenario troubling markets is the potential for a long government formation process coinciding with the euro area’s need to fight the crisis and progress communal policies - though in the last week or two, support for the SP has declined. With the 2013 budget an immediate test, a 'new' Dutch government faces decisions over Greece, Cyprus, EFSF bond buying, and a common-bank supervisory body - none of which have anything like majority support across the coalitions.
Stocks in Europe traded lower throughout the session, as market participants reacted to another round of weak data from Asia. In particular, China’s imports fell 2.6% on the year in August vs. Exp. 3.5%, underpinning the need for policy easing measures from the People's Bank Of China. Some of the weakness in equity space was also attributed to profit taking following last week’s gains. Spanish bonds continued to benefit from the ongoing speculation that the government will seek a full scale bailout. As a result, SP/GE 10y bond yield spread is tighter even though there is an outside chance that the constitutional court vote in Germany will delay this. On the other hand, IT/GE and NE/GE bond yield spreads are wider, reflective the upcoming issuance, as well as elections. EUR/USD and GBP/USD, both seen lower on the back of touted profit taking, as well as pre-positioning into near-term risk events mentioned above. Commodity linked currencies are also weaker, weighed on by the weaker data from China, which also showed that imports of crude oil hit a 22-month low. In terms of notable stocks news, Glencore said it will not improve its offer for Xstrata after the company raised offer for Xstrata to 3.05 from 2.8.
Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.
Central Banks United have the upper hand these days. So don’t mess with them…
At least not this week…
What Draghi did is buy some time. About three months worth of time. But at what cost?
Not Cypriot money flowing into Russia, but Russian money flowing back.
The monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination. As Powell notes: Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that - as economies remain hugely divergent.