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ECB: Expect Nothing And You Won't Be Disappointed
From Peter Tchir of TF Market Advisors
ECB: Expect Nothing And You Won't Be Disappointed
Auctions
This morning’s auctions appear to be nothing short of spectacular. Low rates, big size, follow through at the long end of the curves Italian 10 year yields are 40 better on the day and almost 60 better on 2 days as the yield is back to 6.56%. SOVX is 10 tighter (though it is hard to tell if anyone bothers trading that anymore). Main is 7 tighter, back to 170, and SNR Fins are once again outperforming as they are at 266 and 14 tighter on the day. Frankly, the reaction in stocks is muted, particularly in S&P futures which are up less than a ½% from their overnight lows, and barely up 0.25% from the close.
Stocks may continue to rise, and they may be nearing a “breakout” range, but the muted reaction is some evidence that “muddle through” and “decoupling” are fully priced in. It does seem that the number of bearish comments far exceeds the amount of bearish positioning. The equity markets may also be pricing in the fact that heavily manipulated auctions aren’t a valid signal of strength.
The auctions should be Euro positive, and given how crowded the short Euro trade is, that could spike nicely and with reduced correlation may not drag stocks up as much as it would have in the past. I like the Euro here relative to stocks.
Rate Decision
I think the ECB will leave rates unchanged. Germany issued bonds with negative yields. The LTRO program just started and there is little need to cut that already low rate by much, especially when so much of the money is still sitting at the ECB (I expect that some will finally have been used to play in these auctions). They may want to save some ammunition for later when the market is actually weak as opposed to a time when we are hitting new recent highs. So I don’t expect a rate cut.
I don’t think the market does either. A rate cut would be a surprise, so the market shouldn’t react much to an unchanged decision. It could be positive for the Euro though. Signs that they don’t feel the need to cut rates could take some selling pressure off the Euro, and again, the potential for short covering seems very high. A rate cut may create a brief rally, but I think that might actually fade quickly as investors wonder how much worse things are than they seem.
SMP or QE
Draghi will downplay the potential for QE. Not only will he not say they are going to increase the program, he will downplay the potential. They haven’t wanted to do QE (they don’t really believe it helps the real economy) and now they have the excuse. The auctions went well. LTRO is up and running and there is another tranche coming up in February. They will really go out of their way to demonstrate that QE or increased SMP is off the table.
I think this will disappoint the market, but only mildly. The strong auctions will be enough to reduce the impact from the ECB shooting down QE expectations, but I think the market will fade on that news, if only a little. I’m not sure how the Euro will react, in theory no QE should be positive for the currency, on the other hand, the mention of QE has been positive for the Euro enough times that the FX market reaction to this specific outcome is unclear.
I am biased to be long Euro, continue to be short the “decoupling” trade (ie, I like long Europe vs short US), and still have an overall short bias. Financials look like they could run further and I expect JPM to have good earnings. They were far more conservative on booking DVA profit last quarter and probably have a lot of wiggle room on reserve releases to produce a nice quarter, though they may want to save it for this year since last year’s bonus pool isn’t likely to get much of a bump from that.
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BOE unchanged rates, no change in qe
Tesco, Homebase, Argos, Thornton's, Halford's, Mothercare all disappoint. RBS sacks 3,500 staff.
And yet, the FTSE is up 0.37%.
nobody cares about the consumer today
However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the credit debit cards. Thanks.
Regards,
debt consolidation canada
I'm confused, where did the 490 odd billion LTRO money come from if it was'nt quasi-QE?
The money fairies, of course.
The ECB has been engaged in QE in all but name for months now. Amazingly, the shouting and arm-waving coming from the ECB and the German government about how they would never stoop to Anglo-Saxon levels of financial chicanery, especially money printing, seems to have distracted just about everyone.
Come on people, take a look at the ECB balance sheet, and tell me they're not pumping money into the Eurozone like it's going out of fashion.
Agreed...Could be 'money printing' or QE has become so much the norm that hardly anyone really cares or pays attention...Unless a really 'off the grid' program with 'formal announcements' occur, it's business as usual...
We have surely come a long way...Mostly psychological management at this point...
Ponzi bonds and LTRO - they have been printing
I think the stigma re QE has faded and we're creating a 'new economic model'.
Also, could be that the 'West' considers that if UK, EZ & USA all crank the handle at the same rate then we'll all end up in the same position competitively with a bit of inflation to erode the debt faster.
Now that the international spotlight is cooling on China, they will be left to deal with their own considerable pile of dirty washing.
Cold War II, here we come!!!!
That is exactly what Carroll Quigley stated in "Tragedy & Hope". The BIS controls the hydra.
No, thats my theory - I thought it up just now - using my own brain cells too!!
Oh no, they're merely increasing the capability of consumer credit. BIG difference (to Keynesians, anyway).
Of course they are - the question is one of degree.
The EUR can't just "do nothing" if the USD expands, same as the CHF can't "do nothing" if the EUR expands... there is an economy chugging along and keeping us all fed and clothed, working like a good old diesel engine, with or without the super-power-booster-hyper-charged-turbo that is our dear financial system with fiat-whistles and all... there is trade... there is a physical anchor to all the graphs and forecasts
I believe at this point it would be customary to cry an ingratiating "got phys, bitchez?"
The EUR could appreciate and give the people of Germany some real wage increase this way. The first since the introduction of this espranto currency.
Yes, but whenever you suggest "let the currency appreciate", all the politicians hear is "job losses".
yeah, instead the keep their manufacturing jobs in the country and have the lowest rate of joblessness since ages
economy is a though bitch, she sayz you can't have all and for free, too...
Don't you know that giving banks free money to buy bonds is not *exactly* the same as buying bonds yourself, so it is not *called* QE.
And increasing a "reserve" account is DEFINITELY not the same as printing money.
Because printing money happens on physical pieces of paper.
/Technically, it's actually worse, as physical pieces of paper take more engineering to leverage.
You're confused? Man, that is who I am! Seems like the EU has been easing for 10 years or better. Still, there they are, looking pretty much the same as yesterday to the untrained eye.
Seems the headlines at ZH are moderating towards the benign a tad. Less the end is near and more the end is coming but not quite yet. Almost, the end should be near but for various reasons, it just ain't gettin' here.
A sign that things are getting better? A sign that things can't get any worse? Sucks to be confused.
"Seems the headlines at ZH are moderating towards the benign a tad."
This is Peter Tschir of Market Advisors. Yeah, sometimes I wish TD's comments would have a differen colour, one per TD. I have a serious bone to gnaw with the "purple" TD...
It is January... hope springs eternal, etc
"Never you mind, sheeple. We will save our wealth, even if we kill the rest."
rational meloncholy.
The ECB has to backstop Spain and Italy's debt. There's no other way around it. If Spain or Italy default than the entire banking system goes, including the US banking system. Don't get me wrong, to stop keeping the beast alive through the printing press would be a great thing, but the bankers and politicians aren't yet ready to give up control of their beloved printing press.
TheSilverJournal.com
Look at the auctions today - there is no need for a backstop at this point.
No new additional backstops
looks like a cusip swap-----US trash paper for Italian /Spainish trash paper--didnt we just issue a 10yr and 3 yr hmmm ?
I think that the psotion of the ECB was put well in this quote from a song from the blog post linked too below.
Auction success gives cover for S&P rating action on FrAAAnce this weekend?
No, don't say 'nothing'. Eddie.
Nothing from nothing leaves nothing
But who's bought those Spanish bonds? With almost all the LTRO money now sitting at the ECB, who still has an appetite for Spanish bonds? Or maybe as Peter Tchir suggested in the past, TPTB can't manipulate the secondary market since it's too big, then they manipulate the primary market?
Maybe it's the printing presses or utter luck, but I've bought a flat in Venice (Italy) in August. Today I received an offer 30 % higher than the purchase price. Quite surprising because the forecast was gloom and doom in the real estate and I was already regretting of having bought. I would not discard the hypothesis we're going to see a global spike in inflation.
location, location, location - Venice is my love, a city without cars
let me guess: with view on the Giudecca? This is what I would choose.
Near rialto, on a campiello. But I don't sell it. I want to live there as soon as I can. Indeed Venice is a place where you fall in love with the city. You risk the Stendhal Syndrome
good choice, I'm thinking about it, too
Your Flat in venice is ALREADY under water.......lol...man I love that joke...
Unicredit keeps getting halted today... guess which way!
Lovely rally really.
Scary. There is no liquidity - either way
"The auctions should be Euro positive, and given how crowded the short Euro trade is..."
..and strike #56 for Shorting Yanks. That pitcher is a machine! Maybe euro shorting attempt #57 will be the one?
Lets see..you give the banks 600 billion in printed money at 1%....then they can buy bonds at 5-7%....and then you can give them more moeny at 1%..and they can buy bonds at 5-7%......see the game here....but hey its not QE....but hey...yes it is...its all printed money...and now the countries know that...so who REALLY has to cut anything from anyone.....why lose a vote when you can print it all away...got gold
Peter - you and a couple others on here are the only ones I've seen that are near the mark when it comes to the ECB and this LTRO. Being a relatively recent econ graduate at a top UK university (NOT a douchebag alert, illustrating that I worked regularly with people who currently advise the BOE and ECB), I think the key that most people miss to understanding central bank action today is they all want the same thing: to avoid 'deflation,' and everything that comes with it.
If it was as easy as coordinated 300T QE, they would do it. But it's all about managing long-term inflation expectations. The LTRO IS the bazooka, a bazooka that satisfies their 'minimum loss function,' so to speak, and if it doesn't achieve what they want it to, they WILL come out with something else.
When you see the 12 Fed presidents out there debating whether more asset purchases are a good idea now, or ECB members going back and forth about inflation yada yada yada, just remember that there's one thing they all agree on: we have a global aggregate demand problem. Output gap. They're all Keynsians, and will do whatever it takes (which will eventually fail, but endzone dancers in this forum are about to be very wrong), trying their 'first best' solutions which they think minimize l-t inflation risks, but will inevitably just say fuck it and go all out.
Hope that's lucid enough to understand, been up all night positioning for today. Happy trading everyone.
You are right they will print.....so even though their bonds get bought...no cuts needed to the unions pensions or salaries...everyone on the dole can stay on the dole....BUT...and this is a big BUT....food costs will go up...oil and gas will go up...fees, taxes, licenses are all going up...but the govts will hide the inflation....so people ..the average Joe...will lose and lose big...
ECB is not Kensian. They will do whatever it takes to save the banks and lower short-term interest rates, but they are clearly support budget consolidation ("austerity") in parallel.
Europe has chosen the path of austerity and that path will eventually lead to defaults, regardless of any QE or LTRO. Italy, Spain and Portugal are headed towards deep recessions which would increase deficits a total debt load. If so few are willing to give Italy money at 121% debt/gdp, how many will be giving them money at 130$ debt/gdp?
It's very much a case of say one thing, do the other when it comes to the ECB.
And it's not the path of austerity which will lead to default, it's excessive profligacy. Increasing public sector spending in economies with 100% public sector debt to GDP will not magically lead to a lowering of debt/GDP, regardless of what everyone's favourite socialist writer has to say on the topic. At least, not without a major unleashing of inflation.
Wild that austerity doesn't apply to purchasing new jets
Or military weapons, in the case of Greece...
Seems they're making it up as they go...One question boils down to whether they know what they're doing or not? To me the whole ECB/Eurozone enchilada resembles a child caught in a lie that even the parents refuse to believe but have to...
The other question boils down to how long they can keep the lie rolling without it spinning out of control...Straight into Bizzaro-land
That's perfect. Little Johnny lies and his parents know it deep down but really want to believe the lie because the truth is too painful
That's pretty much the flip side of the same coin. When much of your GDP depends on public spending, austerity will lead to a declining GDP, lower tax receipts, higher debt/gdp and higher rates and then back to austerity. That's why they call it the debt spiral. I really can't understand why people think that Italy is immune to the process that we saw in Greece.
... and (1) higher deficit spending leads to further increases in debt repayments, (2) higher likelyhood of increases in risk demands and thereby an (3) increasing interest rate requirement, and thereby an even faster appreciating public sector debt load. This can be temporarily "fixed" through (4) getting the central bank to artificially depress the interest rates, but this usually leads to (5) an increase in inflation down the road.
Since we have taken the path of (1), (2), (3); "fixed" it with (4), we're now down to lying about it so we don't get to (5).
The Austrians repeatedly warned against this exact path. And were repeatedly ignored. There are no easy ways out.
The 'debt spiral' is akin to 'chinese finger-cuffs'...
the sad truth is that any central bank has to react to what the government does
you can starve a CB's balance sheet just by balancing the budget or - heaven forbid! - having a surplus
Keynesianism starts with budget deficits
Euro starting to breakout now. ECB decision coming up in 20 minutes. I have a feeling they could drop rates by 0.25% and have the markets shoot even higher. Draghi has be accommodative.
This morning I read a lot about people being knocked out, stoplosses, etc. in the market discussion channels i regulary visit. Most of them were not prepared for a green market. Nothing has changed over night. Manipulation seems to be the only reasonable explanation (bond auctions, frontrunners, ... whatever). Still many are sitting on their shorts at -50%. I wouldnt be surprised either if they drop rates. Its a very good chance to collect some more dumb money and raise the profits of those who a _really_ in need.
Apparently no rate cut. The better than expected auctions were virtually guaranteed and shouldn’t surprise anyone. What is surprising to me is that the Euro simply can't move. After a breakout attempt, it's back at $1.275.
With all the great auction news, you'd think the Euro would move, but there's simply too much pressure on it. A complete disconnect between equities and FX at this point.
Also, I wonder if Draghi will say that they will be winding down bond purchases in light of the successful auctions. Clearly there is no justification now for continued bond purchases by the ECB.
Greek 1 Year yield now 403%.
All is well.
that's why the hedgies are buying?
Tyler thinks the ECB is not monetizing? No QE? that's crazy. why else would Italian and spanish rates go DOWN? because they are saying they're not but they are. the oldest trick in the books. sheesh.