While our assessment that the latest and certainly not greatest European summit due this Friday will be yet another dud (confirmed by today's Merkozy non-statement which took both Eurobonds and the ECB off the table), we are surprised to learn that none other than Deutsche Bank has once again joined our call that the market continues to get ahead of itself, in the process making life for the ECB that much harder. As BBG reports, Deutsche Bank's Dominic Konstam has advised clients to re-establish risk-off trades ahead of the December 9 summit. In his note he adds: "We think the current track of European policy is not credible in that austerity ultimately undermines the banks, increasing the need for recapitalization and asset liquidation, and threatening a vicious circle." And therein, as noted over the weekend, lies the rub: European banks are desperate for a longer-term solution (not the Fed's FX swap band aid), which can only come if and only if the ECB relents and starts printing. This however, will not come as long as the stock market keeps diverging from broad risk indicators, and rises purely on hope and a career risks Santa rally. In fact, as DB today confirms, it makes the case for the ECB (or Fed for that matter) to print that much harder, which considering there is no additional fiscal stimulus coming either in the US (thank you congressional gridlock) or Europe (thank you Germany-imposed austerity), means only additional monetary easing can do anything to push markets higher out of the recent trading range. Alas, we doubt any of the momentum chasing algos caught once again reacting to the market, will care much about this, and instead once the inevitable Risk Off day once again comes - which it will: it's mathematically certain - will simply accentuate the downside move as one side of the boat moves to the other at the same time.
Here is how Deutsche Bank continues to beg for the market to finally sell off and for the ECB to do the only thing that can buy some time in a slightly longer time-frame than just day to day.
From Dominic Constam:
- We think it is too early to return to “risk on” trades.
- In the short run, European “fiscal integration” means “fiscal austerity”.
- We think the current track of European policy is not credible in that austerity ultimately undermines the banks, increasing the need for recapitalization and asset liquidation, and threatening a vicious circle.
- We view 2012 as a year of two distinct halves; the first of which is “risk off”, the second of which is “risk on”.
- The transition from the first to the second will be marked by central bank (read: ECB), catch up.
- We continue to expect 10y Treasuries to trade to 1.75% early in 2012, with the curve flattening, spreads widening, and LIBOR pressured higher.