Selective Interpretation Of European Newsflow Demonstrates Ongoing QE3 Promise-Driven Risk On Confirmation Bias

Tyler Durden's picture

In yet another confirmation that absent some dramatic headlines which likely will not transpire due to all of Europe being on vacation, we will likely see another day of low volume levitation, is the over night split in action between stock futures and FX, which in turn demonstrates the selective interpretation of macro stories to validate any given cognitive bias. After dropping to overnight lows just above 1200, the futures are now preparing to print largely in the green following an overnight meltup driven, purportedly, by one single theme, namely that there is increasing German support of the EFSF after it was announced that that Germany's opposition Greens will approve new powers for the euro zone's bailout fund in a vote later in September, the party's parliamentary floor leader Juergen Trittin said on Wednesday. Per Reuters, Trittin was speaking after Chancellor Angela Merkel informed parliamentary floor leaders of the changes to the fund, which also supposedly would have bank recapitalization abilities, refuting all the rumors to the contrary from before. In other words, Europe has once again resorted to the old playbook where it floats one rumor then immediately turns around and refutes it to gauge market impact, as it did all though June and early July during the foreplay for the Second Greek Bailout. Yet ironically, while futures benefited from this, the EUR, which should be the biggest beneficiary of European stiblility actually fell substantially against Europe's safe haven currency, the CHF, on a 180 degree read of the just the same news flow. As Bloomberg explains, the CHF outperformed overnight in otherwise muted price action on concern regarding Germany’s willingness to expand EFSF commitment- bunds fall further after German cabinet backed measures to expand EFSF, allaying fears of further deterioration in Greece and Europe’s sovereign debt crisis and implying increased debt burden on Germany. On the other hand, Finnish reluctance to budge on the collateral issue then weighed down on the euro, negating all core risk transfer benefits.

In other words, the same set of news is interpreted as both bullish and bearish based on preexisting biases. And yet the underlying theme once again reinforcing the equity cognitive bias is nothing but expectations of more, in fact "much more" QE3. As said two days in a row, the market will continue to price this theme in as the fall of 2010 fast forwards by 265 days.