Update: "a word out of line" - Trichet says not appropriate to leverage the EFSF... Not what the market wanted to hear.
On one hand, the ECB keeps Germany happy with no rate cut, on the other, he promises as much liquidity as possible (but probably not enough - see below) and paints a very bleak picture of the economy in the period ahead. Bottom line: no recapitalization from the ECB, but the central bank will make rolling of existing debt as easy as possible, and allow insolvent European banks to pledge any assets they have for cool cash.
Update: Trichet announces two fixed rate LTRO tender operations, one 12 month in October, and one 13 month in December, very much as expected. In other words, the ECB will repo even more crap than it has already.
Update 2: Trichet announces CBPP2 - a new €40 billion Covered Bond Purchase Program, i.e. a new €40 billion QE program as the ECB will purhcase covered bonds in primary and secondary markets.
A historic press conference is about to unfold, in which the current ECB president, in a state of complete denial about the imminent implosion of his continent, will mumble for 45 minutes one last time and attempt to preserve his "legacy" after which he will hand over the "printer" briefcase and secret codes to none other than Goldman's Mario Draghi. And Goldman, as is well known to Zero Hedge readers, is certainly not nearly as shy as ole' Tricky to print when needed. Expect some vague promises of more liquidity, possibly the reopening of a 1 or 2 year repo line in which the ECB will accept even more used banana peels and sexual prophylactics in exchange for euros, and an overall deflationary bias. It doesn't matter. It is too late. More importantly, today's "shot rules" are a shot of Jager every time the words "price stabeeleetee" are uttered. Trichet's full prepared remarks transcript can be found here.
• Outside chance of a rate cut
• ECB may announce 1-year LTRO operation to support the banking system
• ECB is expected to commit to further bond buying via the SMP
Risk aversion has again dominated the European session in what is becoming a familiar theme. The postponement of the decision on the next Greek aid tranche weighed heavily on sentiment which was compounded by several other factors. Goldman Sachs cut their forecasts for global growth saying they expected the Euro-area to experience a “mild recession” and this was later echoed by S&P who also noted they see a 40% chance that Western Europe would experience a recession. Developments in the financial sector have been in focus with Dexia shares at one point falling 30% after reports that its exposure to troubled Eurozone sovereign debt amounts to more than its entire equity base, with the French finance minister having to say that France and Belgium will guarantee the banks creditors. Furthermore, Deutsche Bank cut their 2011 forecast for their core business area saying that Q3 results for this year will be significantly lower than forecast; the banks shares fell 8% before bouncing with the DAX index lagging its European peers. Elsewhere, there were solid government debt auctions from Austria and Belgium while the Italian government bond yield spread over Bunds tightened due to renewed market talk that the SMP was again buying in the Italian curve. Moving into the North American session the key data will be the Durable Goods and Factory Orders, while comments will be anticipated from both ECB’s Trichet and Fed’s Bernanke. Later into the session there will second round of Operation Twist purchases from the Fed while the Belgian cabinet will hold an emergency meeting to discuss the Dexia situation.
Goldman Raises US Recession Odds To 40%; Sees More Fed Easing, Expects Recession In Germany And FranceSubmitted by Tyler Durden on 10/03/2011 19:37 -0400
We won't comment on the supreme imbecility of being able to predict something as amorphous as a recession in decile increments, but for what it's worth, here it is. Just out from the crack Goldman tag team of Hatzius and Dominic Wilson, who usually don't work together unless they have to make some big statement: "We now see the risk of a renewed US recession as around 40%." (this was 30% before - expect every other Wall Street idiot to follow suit with an identical prediction). Also, those wondering if Goldman is content with getting shut out on its IOER cut demand, we have the answer: no. To wit: "We expect additional easing of monetary policy beyond the ‘operation twist’ announced recently, although this may not come until sometime in the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target - is likely to intensify." Lastly, as relates to the saving grace in Europe, little surprise there - Goldman, whose plant Mario Draghi is about to take over the ECB, expects the very same ECB to open the spigots: "The increase in financial risk is likely to lead the European Central Bank to ease its liquidity policies further this month, and the economic weakness will probably result in a cut in the repo rate by 50bp to 1% by December." As for European economic prospects, well, sacrifices will be made: "we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery." And with a former Goldmanite about to take over the European money issuance authority, we have a bad feeling about what will transpire in Europe after October 31, when Trichet finally exits stage left.
- German conservative MP says "Greece is bankrupt" (Reuters)
- Eurogroup to discuss EFSF leveraging, Greek reforms (Reuters)
- Europe Aims to Dodge ‘Scapegoat’ Label (BBG)
- UK Treasury Fears Effects of a Euro Break-up (FT)
- Dollar Beating All Assets in September Undermines S&P Downgrade (BBG)
- Japan Tankan Sentiment Below Pre-Quake Level on Global Slump (BBG)
- Osborne Reaches for Middle Ground (FT)
- Hong Kong Banks Face Higher Credit Risks in Midterm, KPMG Says (BBG)
- Greece to Miss Deficit Targets Despite Austerity (Reuters)
- US Congress Presses China on Currency (FT)
On the policy front, a series of critical EFSF votes went through last week without any hiccup, including the German, Finnish, and Slovenian decisions. Though the clearing of these hurdles provided some support to markets in the earlier part of the week, renewed Greek headlines pushed risky assets lower. In FX, a similar pattern persisted as in other asset classes, with most Dollar crosses matching the round trip during the week, including in EM. Only a few currencies marked notable new lows last week, in particular the Canadian Dollar. Positioning has continued to move in favour of defensive currencies, in particular the USD. The latest IMM report hints at very stretched short positioning in currencies like the EUR, AUD, and CAD. The upcoming week will provide more detail on both key subjects. Firstly, we will get the latest round of PMIs, though regional US surveys and preliminary readings in Europe suggest that macro data will continue to stabilise at relatively low levels, as mentioned earlier. The second important issue is the upcoming ECB meeting.
Peter Tchir writes in: "After a recent trip to Disneyland the kids decided we should move there. The vote amongst the children was unanimous. So, are we moving to Disneyland? No! There votes don't count. They are not the decision makers. What does this have to do with anything going on in the markets? I think everything. I think it may provide the best lens with which to watch the noise out of Europe....I think the European leaders should go to some management bonding exercise and spend a weekend with a psychologist who tries to talk them out of their fear of default. Their fear of default is bordering on irrational, and maybe they need to be reminded of it. Maybe they should also be reminded that they represent their people and have some shred of responsibility to do what their citizens want.Anyways, back to the headlines, but I think if you filter out who to listen to, the outcome becomes more clear. In the meantime, it seems like 3% daily moves with big intraday volatility will be the norm."
FT Report That Greek Bailout Package On The Verge Of Collapse After Surge In Greek Funding Needs Sends Stocks, Euro Plunging From HighsSubmitted by Tyler Durden on 09/27/2011 15:27 -0400
Wondering what just caused the market to slump? Take a wild guess. That's right - Greece. Minutes after Greece passed a vote in which it promised to promise to promise to consider collecting 1998-1999 taxes (even as all of its tax collectors are about to go on permanent strike), the FT was breaking news that while the Troika was "bailing out" Greece in the past years, the country was spending itself into an even greater oblivion. As a result, the terms of the July 21 Second Greek Bailout will most certainly need to be renegotiated, with banks having to take even greater write downs on the bond exchange, and with far more capital having to be injected into the country. The result is the France and the ECB are panicking because as we all know, any additional write downs will expose just how undercapitalized French banks already are (no need to even mention the world's most toxic hedge fund: Trichet et Cie). Should this story pick up traction, look for Europe to open limit down again tomorrow.
At the end of a dramatic week such as this, when clearly the hope of a civilized world of buy-the-dip monetary policy-to-the-rescue 'investors' was somewhat dashed, we take a look at the decimation. Friday appeared a day of rest for everyone but margin clerks as 'safety' was sold but nothing appeared to be bought. Financials managed to hold their heads above water as hope remained that someone would do something this weekend but as we scan the asset classes - we note that investment grade credit was the best performer of the day - hardly a signal of strength - as volumes in equity markets dropped significantly.
UPDATE 1: The fact that the CME hiked margins after-hours seems to be as much a driver of the weakness in gold, silver, and copper and we note that after the equity close, we are seeing both silver and gold up around 1%. They also hiked 30Y which helps explain the coordinated sell-off we discussed earlier.
UPDATE 2: Here they come - Trichet: We Stand Ready to Supply Unlimited Liquidity
- China Faces ‘Hot-Money’ Surge on Financial Market Turmoil (Bloomberg)
- China Lending Curbs Help Propel Commercial Paper Yields to Record (Bloomberg)
- Italy plans reforms to rebuild growth (FT)
- US accused of unfair antitrust tactic (FT)
- Trichet urges EU banks to strengthen balance sheets (Reuters)
- Brazil seeks to help Europe via IMF (Reuters)
- Labour and Tories battle over IMF report (FT)
- Greek reforms undermined by stereotypes: minister (Reuters)
The ECB just announced its bond purchases in the prior week, which came at €9.793 billion, a notable drop to the €13-14 billion purchased in the past two weeks. And while the cumulative total has now hit €154 billion (and we wish the ECB all the best as it seeks to sterilize an ever greater amount of bond purchases without a major operational failure), it appears that the ECB may be losing its appetite for transactions of this kind, which as is now known was the reason for Stark's departure from the ECB, and an indication of the growing chasm between Trichet and Merkel.The EURUSD, which just took out session lows, and is down 200 pips since the Friday close as it prepares to break 1.36 sure seems to think so.
The Eurozone crisis will remain on top of the agenda with a Monday conference call scheduled between the Greek Finance minister and the Troika to assess if the conditions have been met for the disbursement of the next tranche. Also on Monday, Chancellor Merkel will face the press after weak regional election results in Berlin. Likely, the Eurozone crisis will be on the agenda. The developments in Greece will remain important throughout the week, with speeches by German Finance Minister Schaeuble and the ECB's Mr. Stark potentially important at the end of the week, during the IMF/Worldbank/G20 meetings, which start at the end of the week. At the Washington gathering we expect plenty of public comments on the Eurozone crisis by global policymakers, giving the currency market an opportunity to move on every headline. The other main event this week is the FOMC meeting, where Goldman expects “Operation Twist”. Some investors have started to wonder if there will be a QE3 surprise with additional asset purchases.