Today was the day the world’s major central banks decided to “shock” the markets and provide a coordinated intervention to help ease the pressure in the Global bank lending markets. LED BY THE U.S. FEDERAL RESERVE, the OVERNIGHT INDEXED SWAP +100 WAS LOWERED BY THE FED AND OTHERS TO +50 POINTS, AS WELL AS THE MARGIN REQUIRED FOR ECB LENDING TO BANKS WAS DROPPED TO 12% FROM 20%. This is a technical move by the world’s banks to try to ease the pressure in the interbank lending market. I believe this is the first act in a concerted attempt to shift market psychology.
This is really the beginning of an attempt to create an INTERNATIONAL PORTFOLIO BALANCE CHANNEL. The Bernanke-led FED is a firm believer in the wealth effect and its necessity to promote a sense of support in an uncertain world. By today’s measure, the initial effort by the global authorities was a RESOUNDING SUCCESS. However, as Peggy Lee would say: “IS THAT ALL THERE IS?” If the world’s bankers don’t have more tools to use, the market will punish their initial foray. Geithner and Bernanke had better convince the Europeans and others that the time to act is when the market is caught off guard and you can build on some positive momentum.
The European strategy has been ATTEMPTING TO SKIRMISH WITH THE MARKETS AND DECLARE VICTORY WHEN THE GLOBAL INVESTORS RETREATED SO AS TO RELOAD. IF YOU ARE GOING TO WAR WITH THE MARKETS–never a good idea–IT IS BEST TO BRING EVERYTHING YOU HAVE TO THE FRONT. IF I AM CORRECT IN MY THINKING, THIS SHOULD BE A FOUR-PRONGED ATTACK BY GLOBAL ECONOMIC POLICY MAKERS. TODAY IT WAS THE DOLLAR SWAPS. WHAT WILL THE COMING DAYS BRING?
1. THE ECB CUTS INTEREST RATES TO 50 BASIS POINTS
2. THE IMF TO FIND SOME WAY TO LEVERAGE ITS LENDING CAPACITY AND LAGARDE WILL CERTAINLY BE COMPLIANT
3. THE CHINESE DID A MINIMAL AMOUNT BY CUTTING THE BANK RESERVE RATE THIS MORNING BUT LOOK FOR JAPAN AND OTHER ASIANS TO BE AGGRESSIVE LIQUIDITY PROVIDERS
I have to applaud today’s action as it came in the middle of the EUROPEAN TRADING DAY, thus generating a great deal of influence. Also, the impact was even greater because of month-end and, of course, because of holiday thinned markets. The FED and ECB have to be concerned that if the EUROPEAN DEBT MARKETS COME UNDER INCREASED STRAIN DURING A THIN LIQUIDITY HOLIDAY MARKET the seizing up all of markets could be possible.
Yes, today’s action is an attempt to throw liquidity at a solvency problem, but failing to stem the rise in OIS RATES COULD HAVE CREATED A MELTDOWN. If the slide in all assets continues, the cost of intervention would rise exponentially. The FINANCIAL AUTHORITIES cannot afford for the speculative forces to get the traction of momentum at this time on the calendar.
Sarkozy saw the arrival of an early “SANITY CLAUSE”
visit, he must hope there are more Christmas packages to be delivered. It is important to remember that the FED
moved to help Europe in January of 2008 when Jerome Kerviel brought SOCGEN
to its knees by “unauthorized” trading. It was Martin Luther King’s birthday and U.S. banks were closed but the FED
still answered the French SOS
by cutting U.S. interest rates. Sleigh bells ring, are you listening?
***Aiding today’s equity rally was aided by better-than-expected U.S. ADP
, Chicago PMI and pending home sales. If Friday’s unemployment number surprises to the upside and the EUROPEANS
actually move to support today’s concerted CENTRAL BANK
actions, the EQUITIES
can stage a very strong year-end rally. Most hedge funds have performed poorly for the year as the S&Ps
are basically unchanged for the year. The shorts have been severely punished this week so the longs can have an easy run if the IMF
choose to aid the battered EURO DEBT MARKETS
. It should be a very volatile and chaotic month. No rest for the weary.
***This late afternoon, the Brazilian Central Bank did its part for the G-20 by cutting the selic rate
for the third time in its last three meetings. The lending rate was lowered by 50 basis points to 11%. Watch the Brazilian real tomorrow to see if the market sells off the currency or if the cut was anticipated and the REAL
will rally as we enter a late year risk-on rally. It has been a goal of the Brazilian president to weaken the REAL
so as to improve the trade position of Brazilian industry.
The REAL is down 11% for the year so it will be important to see if the currency weakens further even as global equities rally. If Brazil fails to rally with the commodities it will be a signal that the HOT MONEY CROWD is SEEKING OTHER PLACES TO INVEST. Will the emerging markets lose their allure to developed markets? This may be one of the stories for 2012.
Tags: Bernanke, Brazilian real, debt markets, ECB, Equities, Europeans, Fed, IMF, international portfolio balance channel, jobs, margin requirement, OIS +100bps, Sarkozy, U.S. ADP