The odd timing of the Fed's QEternity (given macro data, risk, financials conditions, inflation expectations, and equity valuations) provided some impetus for the markets which had anticipated Bernanke's action. The supposed 'safety net' which we suspect has now been used up - by market front-running from a lower than implied Fed Put strike - does however look in question as the US fiscal cliff looms and global growth concerns grow. However, as Deutsche notes, there remain a large number of hurdles ahead for Europe - and while many 'believe' that progress has been made, it seems now that the rubber is meeting the road, that path forward looks a little less clear - and hence risk-wary investors are unwinding peripheral ST exposure and reverting back to the core (or US MBS/TSYs).
So Far So Good...
But The Going Gets Tough From Here...
- Spanish Government may want to stall OMT request until after regional election (October 21st)
- Structural reform plans in Spain are to be presented very shortly - which could form the basis for an MoU
- Italian Government currently delaying aid request to avoid losing momentum on reform implementation
- Pressure on Italy likely to mount after Spain requests aid
- Ultimately market pressure to dictate whether Italy requests aid before / after the election in early 2013
- Greek program significantly off-track
- TROIKA report delayed, don't expect decision until late Oct/Nov
- The most likely outcome is an extension of the Greek program via tacit agreement that covers the larger up-front needs, with finding shortfalls discussed further down the road (e.g. Official Sector Involvement)
- Euro zone PMIs surprised to the downside in September
- Composite PMI down to 45.9, 8th month of contraction
- Substantial drop in Services to 46.0 but moderate rise in Manufacturing to 45.5
- Today's news that Finland, Germany, and Holland are not chomping at the bit to provide their capital is a large set-back for bank re-caps
It seems the road ahead is just as prone to mines as the road traveled and as we have seen again and again - while Germany (and her 'AAA'nxious friends) are happy to toe-the-line with jawboning and showing support verbally, once the need for real hard money comes to bear - it appears the faith is gone...
We remain cognizant of the odd timing of Ben's deliverance and wonder just what he knew that we do not yet...