In one of the best Marx Brothers scenes is from A Night at the Opera, where Groucho and Chico are ripping up a contract and they finally come to the SANITY CLAUSE, in which Chico proclaims there is no SANITY CLAUSE. In tomorrow’s Financial Times, there is a story about France pushing for a Christmas gift from the ECB. The gift that the French are hoping for is a backstop for the European banks that are under severe stress because of the huge amount of EURO sovereign bonds on the banks’ balance sheets. In order for the ECB to act, there would have to be a SANITY CLAUSE invoked and the EUROCRATS would have to attain a measure of sanity. The day-to-day machinations of EUROPEAN politics has left the markets FATIGUED and in a very defensive mindset.
The blowout from the MF GLOBAL collapse and the fears of more financial firms failing because of investments in European DEBT leaves investors in anything but a festive mood. European leaders are heading to Washington where meetings are scheduled all week between Herman Von Rompuy and others from Brussels. Secretary Geithner will read the EUROCRATS the riot act over their inability to get ahead of the EUROPEAN DEBT PROBLEM and re-emphasize that a EURO collapse will cause global and economic problems.
As the European leaders receive lectures from the Americans, they will be hat and hand asking for U.S. aid to help relieve the crisis. Interestingly, the biggest rumor this weekend is that ITALY will receive a 600 BILLION EURO support package from the IMF at a 4-5% rate to make Prime Minister Mario Monti’s austerity budget palatable to the Italian populace. Again, this is just a rumor but with the EURO trading higher in early Asia there may be something to the rumor.
If the IMF were to backstop Spain and Italy, it would be easier for the ECB to enter the fray and agree to increased purchases of SOVEREIGN BONDS. The IMF rumor has further credibility because the Financial Times has an article about Germany, Finland and the Netherlands being the proponents of a greater IMF role. The rationale is for the IMF to build a firewall for the Eurozone.
The “FIREWALL” language is significant because that is the term that Secretary Geithner has continuously called on Europe to create. Remember that the Obama administration is very concerned about the impact of European bank failures on U.S. credit markets as election season commences. The U.S., the largest force in the IMF, will be more than willing to allow the international body use its assets to alleviate Europe’s stress. Let the money flow now and the bill come due post November 2012.
***The results from “Black Friday” are in and the U.S. consumer appears to have exceeded expectations as sales increased 6.6%. Final weekend sales were much larger than anticipated. If Europe was not a continue drag the S&Ps and other EQUITIES would rally out of a sense of relief that the consumer has not rolled over. If the news out of Europe were to be somewhat positive the rally in stocks tomorrow could be very large. After all, how many BONDS can investors keep stuffing into their stockings. Watch for technical support on the S&Ps and especially the S&Ps in relationship to the BONDS. If German BONDS can suffer buyer fatigue, how about U.S. DEBT?
***An indicator that must be watched is the 2/10 Italian CURVE. Bloomberg’s last quote on Friday showed the Italian curve to be inverted by 40 basis points. A few weeks ago this 2/10 curve was more than 100 basis points positively sloped. The inversion is a concern only because it sets into motion the concept of the feedback loop resulting from an austerity budget. Just as in Greece Portugal and Ireland, inverted yield curves indicated an economic slowdown that was the result of the negative impact of severe austerity budgets. The greater the austerity, the impact on a country’s finances is increased to a greater degree.
When a government limits its spending without the ability to depreciate its currency,the immediate economic impact is negative for growth. The ECB needs to cut rates to ZERO to limit the immediate impact of all the austerity measures being placed upon the proverbial PIIGS. Italy, it is your turn on the RACK of German-inspired austerity.