Trichet

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."

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.

Sean Corrigan, of Diapason Commodities Management, outdoes himself this week. At one fell swoop, and in his usual eloquent manner, he dismantles Krugman's Keynesian war-mongering, Bernanke's bafflement at a lack of recovery, Trichet's stable instability, and Hildebrand's god-like control of markets. Along the way he destroys every six-year old girl's (and sell-side/academic economist's) dreams - quite a read for a Sunday afternoon.

As the Eurozone prepares for the Ecofin meeting in Poland, where the consensus among Unicredit, Barclays, and BNP analysts and pretty much everyone else is that there would be a discussion for the EFSF to be leveraged under a TARP-like solution, the three Eurostooges, Juncker, Rehn and Trichet have hit the tape with various soundbites. Here is the European partyline which luckily never changes.

And so the ECB's balance sheet, once upon a time clean of any monetization interventions, continues to deteriorate, and has now grown to a record €143 billion, after the bank disclosed €13.96 billion in PIIGS debt purchases in the prior week. This is an additional €70 billion since the SMP was expanded to purchase Italian and Spanish debt in early August (predicated by Italy complying with an Austerity prgoram that it has since made a complete mockery of). So for those complaining about the ECB pursuing Quantitative Easing, we wonder what one would call nearly $100 billion in bond repurchases in the open market in the past month: this is about as much as the Fed would purchase in its most active monetization month during either QE1 or QE2!

All you need to read.

After a brief push back above Friday's lows, ES is back down to the early overnight lows (-17) just in time for the opening of Europe. Early runs on ITRX Main show +10bps at 198/200bps, XOver breaking 800bps (+35bps), and SovX +23bps to 333bps - not pretty (and worse than simply catch up to late Friday's demise). Financials continue to bear the brunt but non-financials are getting dragged out now more and more.

It is a messy situation Trichet will be handing over to Draghi on October 31st. After the unnecessary rate hike in spring, what do you do: i) Cut rates in one of the remaining 3 meetings (see table), presenting Draghi with (almost) no room left to cut? ii) Leave rates unchanged and risk being seen as a lame duck as the Euro debt crisis escalates? iii) Agree to be removed early so Draghi can announce “his” first interest rate cut?

Even as the eyes of the world are currently frozen in a spot in time from ten years ago, and Wikileaks is making doubly sure of this by releasing the entire record of Metrocall pager (remember those?) intercepts starting at 9:55 am on 9/11/01, the world itself continues onward, and especially those who determine its global policy of "Prevention of Harm to The Status Quo^TM" are busier than ever this weekend. Chief among these is and always has been the one financial firm which has infiltrated "sovereign" decision-making more than anyone in history: Goldman Sachs, whose alumnus, incidentally, is about to replace Jean Claude Trichet at the helm of the world's largest and most undercapitalized central bank (yes, a central bank can be undercapitalized - read on). Which is why the following note just released by Goldman's Dirk Schumacher is of particular attention. Mere hours after Goldman economist Sven Jari Stehn said that FOMC "easing at the September meeting is very likely—around 75% according to our model", Goldman is now taking on European monetary policy, and specifically the question of further quantitative easing, across the pond, where printing money has always been a far more touchy subject than in the US, courtesy of the German experience with hyperinflation. As a result, the key line in the Schumacher note is the following: "How Far Can The ECB Go In Using Its Balance Sheet.  The Short Answer Is: A Lot Further." To be sure, this is not surprising: after all Zero Hedge first predicted that following the latest market trouncing on Friday, in the aftermath of the ECB's admission of failure on Thursday (who can forget Ze Price Stabeeleetee), see "ECBCTRL+P: The Next Steps In The European Implosion", but we are nothing but a simple blog, which predicts what will happen but certainly does not set policy for a corrupt and failed regime. That's Goldman's job. And what is stunning is the brazenness with which it does it now. To sum up: to Goldman both the Fed and the ECB have to engage asap in yet another episode of bonus-preserving currency debasement, middle class be damned. And, we have very little doubt, they will.

Your one stop, comprehensive summary of the past week's key positive and negative events.

For those struggling under the deluge of relentless newsflow out of Europe, here are the key events to look for over the next month, courtesy of CitiFX Wire. Readers can take advantage of the weekend which will be calm until late Sunday morning after which it won't be calm, to familiarize themselves with the hurricane that is headed straight to global capital markets.