The power of the ECB’s 3-yr LTRO program was in full force today as the Spanish 3-month BILL AUCTION provided the spark to ignite the kindling of the massive amount of liquidity provided to the banks via the LONG-TERM REFINANCING OPERATION. This has not been a secret as we have repeatedly discussed how the 2/10 YIELD CURVES HAVE RECENTLY GONE FROM INVERTED TO POSITIVELY SLOPED. The move has been so dramatic that the Italian and Spanish curves are almost the same as the German. Bloomberg had the closes on the Italian at +164, the Spanish at +172 and the German at +174. This movement is quite dramatic and the Spanish auction today merely confirmed the power of the recent ECB action.
Violent moves in the curve pushed the global equity markets substantially higher and the DOLLAR was sold off as the RISK-ON paradigm was back in vogue. The only problem with the paradigm is that the EURO CURRENCY put on a very lackluster rally relative to the EQUITY MARKETS. When the S&Ps has rallied 3% as it did today, the EURO would have generally kept pace, especially as the newswires have been reporting how so many investors/traders are SHORT EUROS. The fact that the EURO failed to stage a more significant rally may be an indicator that the ECB action is actually aiding the desire to weaken the EURO and the risk-on matrix may be losing one of its main indicators.
An AGGRESSIVE LTRO PROGRAM SHOULD WEAKEN THE EURO FROM A PURE FUNDAMENTAL PERSPECTIVE BUT IN AN ALGORITHMIC PARADIGM-INDUCED WORLD CHANGE TAKES TIME. As TRADERS/INVESTORS, IT IS IMPORTANT TO KNOW IF THE CHANGE IS GENUINE OR JUST THE EFFECT OF A HOLIDAY THINNED MARKET? ARE THE PROBLEMS OF EUROPEAN DEBT RESOLVED?
The answer is of course no as the 10-year notes of ITALY AND SPAIN are still close to the recent highs in yield. Also, the FRENCH/GERMAN 10-year differential is still out more than 100 basis points, indicating that there is still a great amount of unease in buying longer term French paper. Again, pay close attention to the EURO in relationship to the RISK-ON PARADIGM. As George Harrison wrote:
Watch Out Now,take care,Beware of thoughts that lingerWinding up inside your head*(Leon Russell also recorded Beware Of Darkness)