Charting Europe's Broken Transmission Channels

Tyler Durden's picture


The catalyst for the major turnaround in markets last week was comments from ECB President Draghi that he was prepared to do whatever it takes to preserve the Euro and ensure monetary policy transmission. While this is nothing more than stating his mandate (and that water is wet), the focus on 'transmission' caught the attention of many and Barclays provides a succinct flowchart of just where those transmission channels are broken. However, with SMP empirically a losing proposition for sovereign spreads, LTROs having had no impact on loans to non-financial corporates, and rate cuts not reaching the peripheral economies (and in fact signaling further divergence); it seems that short of full-scale LSAP (which JPM thinks will need to be a minimum EUR600bn to be in any way effective), whatever Draghi says will be a disappointment and perhaps that explains the weakness in European sovereigns this week as exuberance fades (or is the game to implicitly weaken the EUR to regain competitiveness).

The transmission policy channels of central bank largesse are failing...


as giving free money to banks is not reaching the economy...


and cutting rates didn't reach the areas it needed...


and the SMP may have an initial reaction but does nothing short-term to reduce sovereign spreads which are now even more interlinked with banking systems...


so maybe, just maybe (as JPMorgan notes) the game is to weaken the Euro to aid in competitiveness broadly - but be careful what you wish for...

So if currency weakness is an implicit ECB policy objective, the quickest path toward that end is to foster persistent sovereign stress by delaying approval of banking union, reviving the EMU exit debate, or pressuring the ECB to avoid further LTROs or direct asset purchases. Such delays and constraints could easily push EUR/USD to 1.15 or below. Of course such malign neglect would mark a pyrrhic victory since overall financial conditions will tighten through wider credit spreads and lower equity prices. Conversely, the policies that are most helpful to sovereigns, such as the SMP and LTRO, risk arresting the euro’s decline unless the Fed is on hold (possible) or tightening (impossible). So as obvious as the normative argument seems, it isn’t so helpful in thinking through the range of factors in play as the ECB moves into uncharted territory.


Source: Barclays, JPMorgan

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Tue, 07/31/2012 - 13:42 | 2665635 Cognitive Dissonance
Cognitive Dissonance's picture

"Charting Europe's Broken Transmission Channels"

This isn't another GM channel stuffing it? :>)

Tue, 07/31/2012 - 14:21 | 2665765 NotApplicable
NotApplicable's picture

One man's broken transmission channel is another's choke-point.

Tue, 07/31/2012 - 17:33 | 2666519 RiverRoad
RiverRoad's picture

Maybe "doing whatever it takes to preserve the Euro" includes letting Greece go, if it comes to that.

Tue, 07/31/2012 - 13:43 | 2665640 LawsofPhysics
LawsofPhysics's picture

Irrelevant.  We are well on our way to real trade wars, fuck these paper games.  Start paying attention when supply lines are cut because manufacturers or commodity producers decide to "renegotiate" contracts or cancel contracts at the last minute.  Then and only then do things get interesting.

Tue, 07/31/2012 - 13:48 | 2665653 Jlmadyson
Jlmadyson's picture

So any guesses on the Euro tomorrow if Benny Boy Bernake doesn't QE?

Shall be fun!

Tue, 07/31/2012 - 14:05 | 2665709 sabra1
sabra1's picture

the market ramp in the last few days, were the last shot for the insiders to cash out, and, or go  massively short!

Tue, 07/31/2012 - 14:09 | 2665721 FRBNYrCROOKS
FRBNYrCROOKS's picture

Soooooo!!!!.......Has the memo gone out to every banker except the one they are going to shank? ...Which bank will it be this time?

Tue, 07/31/2012 - 15:40 | 2666136 SAT 800
SAT 800's picture

I'm short right here; 1.23 zip; it's the top of the trading channel and it's up against overhead resistance. It was just a short covering rally to begin with.

Tue, 07/31/2012 - 14:13 | 2665739 timbo_em
timbo_em's picture

That banking union everyone is hoping for is dead before arrival. For northern Europe a banking union means a common supervision of major banks in the eurozone while Latin Europe sees it as a mechanism where the eurozone members implicitly or exlicitly give a guarantee for the banks. Can anyone imagine that Finland for example guarantees for the Spanish banking system that has been dead on the water since 2008?

While I don't know what Draghi is going to propose to safe the Euro, it won't be a long-term fix...believe me!

Tue, 07/31/2012 - 14:19 | 2665755 slaughterer
slaughterer's picture

Forecast for tomorrow: Massive high-speed spike, massive high-speed plunge--one following the other, not necessarily in that order. Commodities will fly every which way, as if traded by a scattering, panicked collective of hypertense bats. 

Tue, 07/31/2012 - 15:37 | 2666119 SAT 800
SAT 800's picture

He's going to suggest that all of Europe reconvert to Roman Catholicism, hold a candlelight vigil, and pray together. Or at least, that's what he may as well do.

Tue, 07/31/2012 - 14:22 | 2665767 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

And now for something completely different !

EURUSD is trading inversely to the SPX intraday!


Tue, 07/31/2012 - 15:02 | 2665917 magpie
magpie's picture

Risk prop deluxe

Tue, 07/31/2012 - 19:14 | 2666769 spine001
spine001's picture

Reason for the inverse trade:

Now EUR/USD down means massive EUR-QE or EUR dilution without USD real value appreciation

Before EUR/USD down meant flight to USD for safety but still trust value of EUR was going to be preserved (for Germans, Finish, Belgium, Dutch, etc.)

Again, this trade is hinging on the market believing that Draghi was speaking with consensus. If he mispoke, then it'll be fun Thursday

Until next time,


Tue, 07/31/2012 - 14:56 | 2665896 orangegeek
orangegeek's picture

Today:  US markets down, US dollar down, Gold down, Oil down, Euro up.  SNAFU.

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