Alan Wheatley, Global Economics Correspondent for Reuters has written a very interesting article, 'Analysis: China's currency foray augurs geopolitical strains’ where he emphasizes China’s desire to wean out the US dollar’s currency reserve status. China is actively taking steps to phase out the US dollar which will decrease volatility in oil and commodity prices and deride the ‘exorbitant privilege' the USA commands as the issuer of the reserve currency at the centre of a post-war international financial architecture which is now failing. In 1971, U.S. Treasury Secretary John Connally said, "It's our currency and your problem". China is frustrated with what it sees as the US government’s mismanagement of the dollar, and is now actively promoting the cross-border use of its own currency, the yuan, or also called the renminbi, in trade and investment. China’s goal is to decrease transactions costs for Chinese importers and exporters. Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar, euro and yuan and perhaps other currencies such as the yen and the Indian rupee. "The shortcomings of the current international monetary system pose a big threat to China's economy," he said. "With more alternatives, the margin for the U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."
It would seem the austerity-to-social-unrest 'correlation' is proving out as 250 furious shipyard workers stormed the Greek Defense Ministry in Athens demanding to be paid their wages (which they have not seen for six months)...
The market appears convinced that it now has nothing to worry about when it comes to the fiscal cliff. After all, if all fails, Bernanke can just step in and fix it again. Oh wait, this is fiscal policy, and the impact of QE3 according to some is 0.75% of GDP. So to offset the 4% drop in GDP as a result of the Fiscal Cliff Bernanke would have to do over 5 more QEs just to kick the can that much longer. Turns out the market has quite a bit to worry about as Goldman's Jan Hatzius explains (and as we showed most recently here). To wit: "our worry about the size of the fiscal cliff has grown, as neither Democrats nor Republicans look inclined to budge on the issue of the expiring upper-income Bush tax cuts. This has increased the risk of at least a short-term hit from a temporary expiration of all of the fiscal cliff provisions, as well as a permanent expiration of the upper-income tax cuts and/or the availability of emergency unemployment benefits." This does not even touch on the just as sensitive topic of the debt ceiling, where if history is any precedent, Boehner will be expected to fold once more, only this time this is very much unlikely to happen. In other words, we are once again on the August 2011 precipice, where everything is priced in, and where politicians will do nothing until the market wakes them from their stupor by doing the only thing it knows how to do when it has to show who is in charge: plunge.
It would appear the US consumer has become entirely bipolar. Bloomberg's US Consumer Comfort index has swung in +/- 3-sigma ranges for much of the last few months as hope turns to despair and once again rises phoenix-like to hope. The last four weeks have seen the biggest rise in 'comfort' in six years - mirroring quite closely the chaos that was occurring in the lead up to the financial crisis. What is a little perplexing - with all this exuberant optimism and confidence, that factory orders just plunged off a cliff - falling the most since Jan 2009 (though slightly better than expected). Or is it so bad that it can only get better as the imploding economy is imploding slightly slower than expected?
The ratio of negative-to-positive pre-announcements for the third quarter earnings season is running at 4.3-to-1. As Citi's Tobias Levkovivh notes, this is the highest since 4.7-to-1 in Q1 2009 and shows management's clear lack of confidence about even short-term economic performance (elections, fiscal cliff, China slowdown, Europe depression). He, like us, expected management to 'trim back' earnings expectations on their conference calls - especially as Q4 EPS growth estimates at 8% are simply 'too optimistic'. Of course, that doesn't stop the thundering herd of extrapolating analysts from imagining what the world could be like - as the following three charts of Q2 2012, Q3 2012, and Q4 2012 earnings growth estimates so clearly indicate. It would seem that with the Fed less able to 'surprise' given its QEternity bazooka has been fired, and China's PBOC stymied, it falls back to Draghi to drive us to this unreality - and after today's more disappointing call, that appears less forthcoming.
At least it is not the China bails out Europe one: thankfully that one is now finished. Instead it is something almost as stupid -i.e., something that was floated, then denied, then floated again, then redenied, from Reuters:
- EURO ZONE CONSIDERING FIRST LOSS INSURANCE FOR SPANISH BONDS UNDER ASISSTANCE PROGRAMME - EU SOURCES
- SCHEME COULD COST EU RESCUE FUND ABOUT 50 BLN EUROS FOR ONE YEAR, ENABLE SPAIN TO MEET FULL BORROWING NEEDS -SOURCES
- NO DECISION TAKEN YET ON BOND INSURANCE SCHEME, MAY BE SEVERAL WEEKS AWAY -SOURCES
Considering the source, Reuters, was pretty much 100% wrong on Monday when it said the Spanish bailout was imminent and Germany contingent, something Germany refuted shortly thereafter, we give this rumor about the same "likelihood" of being credible as every other one that Europe is fixed. But at least it managed to get the EURUSD higher by 20 pips.
Draghi has said lots of things in today's conference, most of them regurgitated. So far the most notable item is what ha already been implied on several occasions, namely that the ECB will not restructure its holdings of Greek bonds (something restructuring professionals call debt for equity in other circumstances) for one reason:
- DRAGHI: RESCHEDULING GREEK BONDS WOULD BE MONETARY FINANCING
And there goes any hope that the Greek bonds currently in the market will soar due to an OSI restructuring. It also means that the ECB was merely, well, lying when it said that any future bond purchases under the OMT will be Pari Passu. The won't be, as this would imply, as Draghi said, a monetary financing should a PSI/OSI restructuring ever take place in Spain. Which it will.
The now-ubiquitous prior revision higher in jobless claims made the rise in jobless claims of 4,000 seem a lot less than otherwise as claims didn't even budge the market's needle. Coming in at 367k, slightly better than expected but within the 352k to 392k range that it has been in all year, the most interesting thing we can say about today's print is "it's off the lows". After last week's significant beat, no follow through is seen as we contonue to muddle through.
Just out from the WSJ:
- Turkey's parliament has approved a bill authorizing the military to conduct cross-border operations in Syria, a day after a deadly shelling from Syrian territory killed five civilians
So, just how is this different to war? And how does NATO, and specifically Article 5 feel about this? What about Russia and China?
The former Goldmanite head of the ECB, and CEO of DraghiFX LLC, whose only recommendation is still to not short the EUR and thus to make sure German exports suffer, is not expected to say anything too exciting or contradictory today, although he will surely be bombarded with questions about just how and when he plans on dethroning Spain's Rajoy who still refuses to play along with the program, and enact the Spanish bond buying program. Alternatively, if Draghi makes any indication the ECB is now backtracking from the OMT expansion and instead is forced to rely on first loss guarantees and other doomed ideas that failed a year ago, watch as everything goes risk off. Watch the full thing below.
Markets were in sleep mode for most of the session, ahead of the BoE monetary policy decision, as well as the ECB’s press conference where the President is unlikely to outline any new measures and instead reiterate that the ECB stands ready to do whatever is necessary. The BoE held both their rates and asset purchase target unchanged, however it is widely expected that the central bank will boost the facility by another GBP 50bln in November. Today’s supply from both Spain and France was easily absorbed by the market, both were supported by the recent decline in bond yields. Going forward, apart from digesting comments from Draghi, market participants will get to see the release of the latest weekly jobs report, durables revisions and the minutes from the FOMC.
First the BOE, now the ECB has left rates unchanged. Alas: you don't win pole position in the currency debasement closed loop in which nobody ever wins (well, except for Iran) by doing nothing. But for now, both banks did just as expected.
- Romney dominates presidential debate (FT)
- What Romney’s Debate Victory Means (Bloomberg)
- Obama Lead Shrinks in Two Battlegrounds (WSJ)
- "Everything will fall apart unless the Spanish conditions are extremely tough" German policy-maker (Telegraph)
- Draghi Stares at Spain as Brinkmanship Keeps ECB Waiting (Bloomberg)
- RBS facing loss after Spanish property firm collapse (Telegraph)
- Burdened by Old Mortgages, Banks Are Slow to Lend Now (WSJ)
- The Woman Who Took the Fall for JPMorgan Chase (NYT)
- European Banks Told to Hold On to $258 Billion of Fresh Capital (Bloomberg)
- Europe Weighs More Sanctions as Iran’s Currency Plummets (Bloomberg)
For the third day in a row, there is little to write home about from the overnight action. The EURUSD has been choppy following an MNI report about comments from EU officials that suggested Germany wants to delay the Troika decision on a €31.5 billion payment to Greece until after the November 12 Eurozone finmin meeting, no doubt predicated by the already discussed willingness by Europe to not rock the boat before Obama is reelected, still leaving the question hanging: just why is an entire insolvent continent so hung up on a US presidential decision. The main FX market focus is on the European Central Bank rate decision, due at 1145GMT. The ECB is widely expected to leave rates on hold just as the BOE did moments ago (it needs to hurry up if it wants to win the race to debase) although in the New Normal one can't be sure of anything. In other news Spain auctioned off a much needed €3.99 billion in various short-term bonds, the bulk of which fell under the LTRO maturity umbrella, but which was successful nonetheless if with modestly weaker short-end results, and an overall bitter aftertaste as seen by the resumption in Spanish 10 year widening, as the entire market, not to mention Draghi, is starting to get very impatient with Rajoy, who is now even getting urged by Catalonia's Arturo Mas to finally bite the bullet and demand a bailout (and resign shortly thereafter): "A bailout is inevitable; therefore the best thing to do is to make the decision without delay,” Mas said. “Spain has the potential to overcome the situation, but it will need assistance for some time." Recall that Spain's cash needs in October surge so every single successful euro raised is more than critical.