Volkswagen

There were moments yesterday when it felt we stood at the edge of the abyss preparing to take a giant leap forwards. Apparently Draghi did a great job meeting German legislators yesterday; Greece is being touted as a crisis averted - if you believe all the guff; and more of the same from Spain. However, it does feel the crisis is developing in some new directions. Until recently it’s been about sovereigns and banks – but now we’re seeing corporates struggle. There is a general consensus France had no choice but the bailout Peugeot’s finance arm PSA. So why are the problems of the French car industry so important for the Euro? If French industrial policy is founded on preserving the country’s manufacturing base is that really something German/Finish/Dutch taxpayers could have been bailing out through a single European banking union. Perhaps not! These are national choices that illustrate sovereign self interest not European hegemony. We simply ask the question how is Europe supposed to move towards closer Union when national interest remains paramount?

Once again confusion is rife overnight, following yesterday's main European event, Spain's first "mixed" regional election, which saw Rajoy's PP party in his home state of Galicia eeking a majority by a few seats, offset by wins for nationalist parties in the Basque Country. The immediate read here is that the Galician win is an endorsement of Rajoy's "austerity poilicies" and thus EUR positive (which have yet to be actually implemented as Spanish spending continues to rise, as tax revenues continue to drop), yet it makes the likelihood that Spain requests a bailout before the Spanish regional election on November 25, which is about secession, virtually nil, and thus SPGB negative. Furthermore as Bank of America points out "some euro-area govts may remain reluctant to support Spain’s request as long as yields continue to be low, banks haven’t been recapitalized; probably reinforced by Catalonia elections" but that is a reality tale for another day - the "market" can only handle so much.

Yet again Germany was forced to compromise and agree on what can only be viewed as a partial agreement on EU banking supervision. Under the agreed timetable, a legal framework for the new ECB-based supervisor would be finalised by the end of this year and then it would take six to 12 months to get the supervisor up and running. Still, German Chancellor Merkel insisted that direct recapitalisation of banks by the ESM will only be available once fully fledged supervision is in place and ruled out retroactive bank recapitalisation. This, together with the fact that Spain is yet to ask for monetary assistance prompted market participants to book profits. In particular, selling pressure was most evident across the financial sector, where Italian and Spanish banks underperforming for much of the session. As a result, EUR/USD traded lower, with large option expiries today and on Monday between 1.3000 and 1.3050 preventing the pair from posting large losses. Going forward, the second half of the session sees the release of the latest Existing Home Sales from the US and Canadian CPI.

• Italy rejects need for EU control (FT)
• ‘Worst US quarterly earnings since 2009’ (FT)
• Chinese firm helps Iran spy on citizens (Reuters)
• World Bank cuts East Asia GDP outlook, flags China risks (Reuters)
• Foxconn factory rolls on in spite of strike (China Daily)
• Economic recovery ‘on the ropes’ (FT)
• Japan Tries Cars That Make the Mini Look Maxi (Businessweek)
• Euro Finance Chiefs to Give Positive Greece Statement, Rehn Says (Bloomberg)
• Romney attacks drones policy (FT)
• Euro zone mulls 20 billion euro separate budget (Reuters)
• Hong Kong’s Leung Seeks Turnaround With Economy Focus (Bloomberg)
• RBA Keeps Some Documents Private in Securency Bribe Probe (Bloomberg)
• India Inflation to Remain at 7.5%-8% Till Early 2013 (WSJ)

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.

And Monday, it became official.

Where is the bacon, Mrs. Clinton?

There is still some compression margin, but where to put the credit spread, real or “perceived”, from a (real) default possibility point of view or even from the shunned convertibility point of view?

• Merkel Adviser: Unlimited ECB Bond Purchases Would Violate Mandate (Dow Jones)
• Illinois' credit rating downgraded after pension reform failure (Chicago Tribune)
• Correspondence and collusion between the New York Times and the CIA (Guardian)
• ECB action prospects underpin Italian bond auction (Reuters)
• Ryan puts down calculator, picks up bullhorn (Reuters)
• Barclays Names New CEO (WSJ)
• Barclays’s New CEO: Analysts React (WSJ)
• September Offers 15 Days to Cement Crisis Solutions (Bloomberg)
• Iran's Nuclear-Arms Guru Resurfaces (WSJ)
• Rocket blasts off to put NASA radiation belt probes into orbit (Reuters)
• Citi to Settle Suit for $590 Million (WSJ)
• Swiss-Style Latvian Banking Hub Thrives on Ex-Soviet Cash (Boomberg)

Mark Grant stated yesterday on CNBC that Europe will have a “Lehman Moment” and likely a number of them. The construct is a failing enterprise as the available European capital cannot support the combined debts and as real money investors pull their capital and stop lending because of the continuing deceit. You may be able to “fool some of the people some of the time” as Abraham Lincoln so succinctly put it but you cannot fool all of the people all of the time as he humbly nod to his sage wisdom.

The ear-piercing screech of the German export machinery as it down-shifts....

European markets started off on a quiet note with thin volumes as equities drifted lower and fixed income gradually made gains, however newsflow rapidly picked up as commentary from the ECB President Draghi picked up wide attention. The ECB President was very upbeat on the Eurozone’s future, commenting that the bank will do whatever is needed to preserve the Euro, fuelling the asset classes with risk appetite across the board. European equities as well as the single currency erased all losses and the Bund moved solidly into negative territory. As such, EUR/USD is seen comfortably back above 1.2200, with both the core and peripheral bourses making progress. In the wake of the moves, attention is particularly being paid to Draghi’s comment that if monetary policy transmission is affected by government borrowing, it would come within the bank’s policy mandate. As such, much of the focus now lies firmly on next week’s policy decision from the ECB.

• Finland (which with Holland account for 50% of the Eurozone's AAA rated countries), just says "Ei" to stripping ESM subordination (Bloomberg)
• Libor Rate Scandal Set to Spread (WSJ)
• #ByeBarclays flashmob descends on bank (FinExtra)
• What is financial reform in China? (Pettis)
• Cities Consider Seizing Mortgages (WSJ)
• China Beige Book Shows Pickup Unseen in Official Data (BBG)
• China’s New Rules May Curb Credit Growth, CBRC Official Says (BBG)
• India Said to Pay in Euros for Iranian Oil Due to Rupee Hurdles (BBG)
• Wealthy Hit Hardest as France Raises Taxes (FT)
• Euro Bank Supervisor Faces Hurdles (WSJ)

The absence of the UK from today’s trade is particularly evident, with volumes remaining particularly light across all asset classes. Nonetheless, European equities are largely seen drifting higher with the exception of the DAX index, which is yet to move over into positive territory. News flow remains light with the highlight of the day so far being comments from the Troika, confirming that Portugal remains on track with its bailout program, and have confirmed that the country will receive the next EUR 4.1bln tranche in July. FX moves remain in a tight range, with EUR/USD looking relatively unchanged, with the USD index slightly weaker as the US comes to market. Looking ahead in the session, participants can look forward to US ISM New York and Factory Orders data as the next risk events of the session.

Everyone knows that Europe is divided into the Periphery (aka the PIIGS), and the Core (aka the countries that are supposed to be safe). What everyone also knows, is that the core, naively represented by Germany and France, supposedly has homogeneous distribution of economic growth and prospects. That all changed last year, when France moved from being a AAA-rated country, to a fallen superduper angel following the Moody's downgrade to AA+. Yet nowhere is the glaring divergence between these two formerly comparable economies than in the two articles cited below, both from the same publication, and both from today.