Okay, a new month arrives. Where November went out like a lamb, December roared like a lion. The equity markets across the globe put on a stellar performance as the ECB was rumored to have reversed course and began buying the BONDS of the peripheral European nations. The amount purchased was unknown but whatever the total it was enough turn around the damage done on Monday and Tuesday. German BUNDS were sold and Italian, Irish, Portuguese and Spanish were bought, but the Greeks barely moved. Spanish bonds were 18 basis points lower; Italy, 15; Ireland, 29; and Portugal, 30bp lower. The newfound support for PIIGS’ debt was enough to lift the gloom that has weighed upon EQUITY … at least for a day.
Thursday the ECB reports its rate decision followed by a Trichet press conference. It is doubtful that the Europeans will move rates but it will be more important to hear if the ECB is going to embark on a quantitative ease program similar to the FED. The chances of a program in magnitude similar to the FED are doubtful. It will be interesting to hear if Trichet and his cronies have heard the markets and attempt to be proactive. It is important to recall the Duisenberg dictum that has ruled the ECB since its inception: “WE HEAR BUT WE DO NOT LISTEN.”
Later in the morning the markets will hear from Axel Weber, president of the Bundesbank and ECB executive board member. Lately, Weber has softened his stance on the European Financial Stability Facility as he seems to have accepted the fact that it is better for the EFSF to continue buying sovereign debt rather than face the possible demise of the EURO and all of misery that may cause to Europe as a whole. Germany has been the intransigent one on any type of real European QE program so his speech takes on a new dimension. (The speech is at 9 a.m. CST.)
Tonight there is word that the EFSF has decided to issue its first EUROPEAN BONDS in a move to raise capital for emergency funding as the BONDS are to be guaranteed by 16 European nations and will be priced to yield 50 to 90 basis points over German BUNDS. It is rumored that Asian buyers are lining up for these European notes as they are a good credit with an extra kicker over BUNDS. Klaus Regling, head of the EFSF, was in Singapore on a trip to secure buyers. The BUNDS may have been sold off as these new BONDS will replace some BUNDS in global bond portfolios. Also, in the U.S. bailout news, the FED revealed that European banks were major recipients of the FED‘s special funding programs. The FED cannot turn its back on Europe as the world’s financial system is so very interconnected and today’s news was more proof of that symbiotic relationship.
Now that we’ve had European debt problems to digest, the markets will have a look at the jobless claims as a prelude to Friday’s unemployment report. Last week there was a significant drop in claims and the consensus is for a small upward move to 425,000. I am going out on a limb and suggesting that the claims number is going to be under 400,000 and that will light up the news boards. A drop under that number will be equity-positive and lead to anticipation of a robust number on Friday. If the jobs situation improves and U.S. BOND rates move higher, it will be important to see how the FED reacts. Will Bernanke and company be complacent to allow long rates to move up as equities rise as it would be the confirmation of the Jackson Hole Portfolio Balance Channel?