Our reality has changed in the last twenty-four hours. The Bank of England and the European Central Bank have re-affirmed their old positions since the Fed has changed tacks. It may well be, as Europe is in much worse financial condition than the United States, that there is a policy reason for the European positions but it may well also be a calculated move to devalue the major European currencies. Whatever the actual reasons, the European statements have certainly sounded the trumpet that the “Currency Wars” have reignited. It is a dangerous game when the world’s central banks that have been working for the last five years in unison and now they head down different paths.
While the skeleton crew of market participants are still digesting yesterday's uber-dovish, "forward guidance" conversion by the BOE and ECB, driven in response to the Fed's increasingly tight (at least relatively) monetary policy, they now have month's biggest economic and market catalyst to look forward to. In a day which promises to be rife with illiquidity as the bulk of US market participants are within 100 feet of a sandy beach, we are about to get the number that will shape the market's mood for the next month: will the Fed's tapering planes be strengthened in response to strong NFP, or not. As Deutsche accurately points out, the curveball to throw in is that June-August numbers have tended to be seasonally weak over the whole period we have data (back 70+ years) and again over the last 10 years. Today's number is therefore going to be fascinating. A number between 150-200k is unlikely to change anyone’s opinion on the Fed whereas a number below might start to build a case for a taper delay. Above 200k and the September taper momentum will build. Such a high number (especially in a weak seasonal period) is unlikely to be great for markets but the ECB/BoE might have cushioned some of the hawkish blow for now. For the record the market is expecting 165k on payrolls and 7.5% (DB same) for unemployment. A full NFP preview post is coming shortly.
The all important ECB press conference is set to begin momentarily. Will Draghi answer questions regarding the readiness of the OMT's use in Portugal whose short end has exploded this morning, or will he be forced to wait for the German court's decision first? Or maybe Draghi will finally have some comments on either the ongoing Monte Paschi scandal or the recently revealed Italian derivative debacle which took place under Draghi's watch. We somehow doubt it...
*DRAGHI SAYS ECB RATES TO STAY LOW FOR EXTENDED PERIOD OF TIME
*DRAGHI: IMPROVEMENT IN FINANCIAL MARKETS SHOULD REACH ECONOMY
*DRAGHI SAYS INFLATION RATES MAY BE VOLATILE THROUGHOUT YEAR
*DRAGHI: RECENT TIGHTENING OF MARKET RATES MAY WEIGH ON GROWTH
Despite media rumors that the Portuguese foreign minister Portas, who resigned on Tuesday precipitating a complete collapse in Portugual bond prices and ushering in the latest European political crisis, has agreed to stay in the government as a Deputy PM and economy minister (nothing like some title inflation-pro-quo), things in Portugal are rapidly turning from bad to worse. To wit:
PORTUGUESE 10-YEAR BONDS DECLINE; YIELD RISES 14 BPS TO 7.60%
PORTUGUESE TWO-YEAR NOTE YIELD RISES 60 BPS TO 5.64%
PORTUGUESE 2-YEAR YIELD REACHES 5.66%, HIGHEST SINCE NOV. 20
The main reason for the collapse appears to be the near consensus developing this morning that no matter what the government does at this point, a second bailout of the small country is inevitable.
As largely expected, the ECB just announced that all three of its key rates remain unchanged.
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.Since the announcement itself is never that exciting, attention as usual shifts to the 8:30 EDT press conference by Mario Draghi in which he will indicate, once more, just how non-existent the OMT's legal term sheet is, and thus how the European deus ex machine, the OMT, continues to be merely a jawboning-inspired mirage (even though Portugal will need it quite soon).
Given the US holiday, markets are likely to be thin today but there are some big news stories floating around at the moment. If the fast and furious events from the past few days in a revolutionary Egypt bear a striking resemblance to what happened in the spring of 2011, it is because they are strikingly comparable. Only this time, following the ouster of yet another US-supported "leader" by the US-supported military, the country's CDS has normalized at a level that is roughly double where it was two years ago as the implicit backing of the US looks increasingly shaky, following what was yet another bungled foreign policy venture by the Obama administration. But for now, the people are celebrating, just as they did in 2011. One wonders what happens between now and the next coup, somewhere two years (or less) hence. For now focus merely on who controls the Suez - after all that is really all that matters for the US. The other major story of yesterday, Portugal, continues to be in limbo,
As southern Europe buckles under the weight of unserviceable debt and 60%+ youth unemployment rates, Germany is coasting along with an almost historically low unemployment rate; the disparity between Germany and its southern neighbors could not be more obvious. So it is ironic that Angela Merkel is leading the public pledge to ‘tackle’ the continent’s job crisis. Of course, European policy to deal with the jobs crisis is quite simple: print more money. Their latest initiative, a few billion more to fight the youth unemployment rate, was mercilessly eviscerated yesterday in the European Parliament by Nigel Farage... one of the few voices of reason left on the continent.
The Portuguese government is on the rocks. The junior coalition partner the People’s Party (CDS-PP) will hold a meeting this afternoon to determine whether to support the government, if it withdraws support in parliament, elections seem inevitable, although they could be delayed for some months. Such a move would seriously hamper Portugal’s economic reform program, which is already off track. Portugal has only met its deficit targets due to one-off measures while competitiveness adjustments have slowed and contingent liabilities remain a hidden risk. With the country on the cusp of an unsustainable debt burden any delays would likely be the final straw which pushes Portugal into needing some form of further assistance. Things must be getting serious in Portugal, they just announced a short-selling ban on select banking stocks - how long before capital controls?
Uncertainty over global oil supply chain amid a 'tanks on the street' and a coup in Egypt, no worries. Portugal increasingly prone to testing Draghi's OMT 'promise' as Cabinet collapses, don't sweat it. US growth implications terrible given trade balance and ISM services, all good. It appears to us like US equity market algos were not told that today is a half-day as they progressed with the BTFD ramp in the first half after some serious declines early on.
One has to laugh. Following overnight news of an ongoing collapse in the Portuguese government and an epic surge in Portuguese bond yields, not to mention the ongoing military coup in Egypt, the S&P just hit highs as trading volume disappears and the BTFD algos take over.
And those are just the major headline grabbing issues. Those banking on the market rallying even harder have got a lot of obstacles to overcome.
The algos could have a problem getting out of this one. From Mrs.Watanabe (JPY -170pips, NKY -500 points from highs) getting hammered (and the Hang Seng -5%) to European sovereign bond spreads exploding (Portugal +170bps - biggest spike in 2 years to 8 month highs) and financial stocks collapsing (-4%), safe-havens are heavily bid from gold and silver (+3% from lows) to US Treasuries (10Y dropped 8bps) and global equity markets are taking it on the chin. Not pretty...
- Portuguese bond yields soar amid political turmoil (FT)
- Portugal Resignation Rocks European Markets (WSJ)
- Portugal, Greece risk reawakening euro zone beast (Reuters)
- Egypt’s military chiefs hold crisis meeting as Mursi snubs ultimatum (Al Arabiya)
- Egypt Crisis Deepens as Mursi Refuses to Step Down (BBG)
- Hidden microphone found in London embassy: Ecuador (AFP)
- Health Law Penalties Delayed (WSJ)
- Rise in mortgage rates cut into homebuyer demand last week (Reuters)
- Bolivia angered by search of president's plane, no sign of Snowden (Reuters)
- Olympus ex-chairman gets suspended sentence (FT)
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.