Give the pollsters their due. They were virtually perfect in the predictions of electoral outcomes. Can the electoral algos now reduce all that data and tell us the policies that will be produced to deal with the problems that plague the U.S.? The Obama victory was greeted by a market selloff as the investment world woke up to the possibility of tax increases and spending cuts leading to a recession and decreased profits. The elections were widely anticipated as the bookies in London and worldwide had predicted. I am left scratching my head, wondering what caused the steep decline in the U.S. equity and commodity markets? The EURO currency was not sold hard enough to think that the Greek situation was the catalyst. Besides, the Greek parliament passed the austerity budget tonight. There is no way that Europe will not provide the Greeks with the promised funds as the outcome would not be worth the 30 billion euros that are in question. If the Obama victory and coming government standoff should have led to a selloff in the BONDS for one would have to be insane to purchase U.S. bonds priced at FED manipulated risk levels.
Do investors really want to receive 1.6% interest on a 10-year note when the only way out of the fiscal cliff may be more FED money printing? The Republicans in the HOUSE may want to drive the economy off the cliff, but Chairman Bernanke is in far too deep to allow a 1937-type fiasco on his watch. The market may be worried that with the overall strength of the Obama victory he will veer left and not move to govern from the center. If those worries are to be supported the indication will be in the soon to-be-announced cabinet appointments. The first will be the Secretary of Treasury. If President Obama were to pick Erskine Bowles it would be a major statement that the President was in fact tacking to the center. I know some believe that Mr. Geithner will stay until the fiscal cliff is resolved but I think that is false as the current Secretary has proven ill-equipped to reach any serious compromise. A new person with credibility may be able to move the process forward in a far more expedient manner. Fiscal uncertainty will be with us for the coming weeks and it seems it will be a global problem.
***The yield curves in Europe have remained well-behaved as the Draghi forced steepeners have remained range bound since the July 26 intervention by the ECB president. The only big news out of Europe was an interview of Ewald Nowotny of the ECB Governing Council and the head of the Austrian Central Bank. The interview was titled, “Nowotny Opens a Can Of Worms With Comments on ECB Votes.” The ECB presently has a one country, one person vote plus the executive group, which is why Jens Weidmann lost the vote on OMT (outright monetary transactions) by a count of 22-1. Nowotny forwarded the idea of a weighted vote based on the capital contribution to the ECB. He says: “Germany has contributed 27.1% of the ECB’s 6.36 billion in capital, but has the same voting rights as Malta, which has paid less than 1%. Austria paid only 2.8%.” This is evidently a trial balloon being floated to see what it will take to calm German nerves about how far to go with any OMT plan.
This has previously been verboten and any attempt to initiate such an arrangement would require changes to the EU treaty. The combined weight of Germany/France would be 47.4%, providing the duo with a block over any ECB action. It is no coincidence that EUROCRATS are getting very nervous about continued German cooperation on any enhanced bailout mechanism. In yesterday’s Financial Times there is an article by Gerard Errera, former French ambassador to the U.K., titled, “France is Running Out Of Time to restrain Germany.” Mr Errera maintains that France must be ready to: “First, being clear, at last, about the level of sovereignty it is ready to share for the good of Europe. Second, undertaking the structural reforms and the economic policy it needs to prevent the competitiveness gap with Germany from widening.” The French economy is moving to center stage with the Spanish but with far greater political consequences for the ideals of a united and functioning EU.
***Monday night the Aussies held the overnight rate steady at 3.25%. As the market had thought a 25 basis point cut in the rate was possible, the AUSSIE DOLLAR rallied and sustained its gains. The problem for the RBA was that the Aussie 2/10 curve flattened by 5 points. A 48 basis point differential is reflecting problems in the Aussie economy and a tell that the bank is too tight. Tonight, the New Zealand government released its unemployment report and the rate jumped to 7.3% from 6.8%. This was a huge jump and way above the expectations of unchanged. Things may be slowing faster than previous thought. One number may be an aberration but it is certainly something to watch. The KIWI is weak tonight but it will be interesting to see if the NZ data puts further flattening pressure on the Aussie curve.