The initial check with no move on interest rates was offered by the Reserve Bank of Australia as it held its overnight lending rate steady at Tuesday’s meeting. The Aussie 2/10 curve flattened a bit after the meeting and the Aussie two-year note continues to trade at a lower interest rate than the official overnight rate of 3%, yielding just 2.88%. Many readers have asked about the impact of yield curves on equity prices and I will deal with this on an ongoing basis. For an immediate example, if the Aussie curve continues to stay flat I will venture to say that over the course of the year the Australian stock market will underperform. That doesn’t mean that it won’t have synchronized rallies with other developed markets, just by year’s end it will underperform other equity markets. If the RBA acts to cut rates and reset the curve on a more positive slope, the outcome, of course, should be of a better equity performance. To paraphrase Max Planck: Good trading and analysis advances one funeral at a time.
Archive for the ‘BOE’ Category
Tomorrow the Bank of England (BOE) and European Central Bank will grace us with their interest rate announcements. The BOE is expected to hold overnight rates at 0.5% and to keep the QE program at its present level of 375 billion pounds. The current weakness in the British pound will keep Governor Mervyn King from tampering with present policy, and, with a new Governor of the BOE in July, it makes no sense to expend any type of easing before the change of leadership unless some new crisis emerges. Current BOE policies and renewed weakness in the British economy have driven the EUR/GBP rate to 15-month highs, thus putting the pound in the middle of the “currency wars.”
First and foremost: Notes From Underground has become a global community and the outpouring of support and condolences to my family has been phenomenal. Again, my heartfelt thanks to all who expressed such wonderful thoughts.
Much has transpired since last Sunday as the Swiss franc and the Japanese yen have continued their recent weakness as intervention with the intention of forcing the YEN and FRANC lower have been very successful. Also, as usual, I will poke at this weeks circus in Davos, Switzerland. From my perspective, the entire conclave of insider trading–as the rich and business elites gather to discuss ways to save the world–in the last 20 years are a direct result of the political and economic movers and shakers exchanging ideas in the Swiss Alps. Yes, we go from crisis to crisis.
As expected, both the Bank of England and the European Central Bank maintained present policies and choice to wait until the economic situation became clearer. The BOE was boring as the decision was announced and Mervyn King does not hold a post-meeting press conference. While the ECB held rates at 0.75% and this time it was unanimous, the Draghi press conference was entertaining. I must admit that the caliber of questioning by the European press is of a far higher quality than American journalists interviewing Chairman Bernanke. Last night I mentioned that for this scribbler, the issues of competitive currency devaluation and the idea of targeting economic thresholds were going to be the most significant opinions possibly offered by President Draghi.
Mario Monti upset the Italian credit markets as he announced his early resignation over the weekend. In an apparent fit of rage after Silvio Berlusconi (aka Captain Viagra) pulled his political support from the sitting prime minister, Mario Monti headed off to the opera in Milan and apparently he was the fat lady that sang. It was a Wagner Opera that Mr. Monti saw so it seems that the political drama playing out in Rome is going to be a long, drawn out affair. I believe that the present Italian PM played a political gambit by announcing his early resignation in an effort to reveal the markets lack of support for the return of Berlusconi. As the Italian bond markets sold off and yields on 10- and TWO-YEAR NOTES increased by more than 25 basis points. It seems that there is little support from the financial markets for a return to the buffoonery of a Berlusconi-led government.
Due to the availability of virility enhancers, the Italian political arena is plagued by billionaires who still believe they remain relevant. The ability to sustain an erection does not make you politically astute. Today’s effort by Silvio Berlusconi to undermine the Monti government led to a selloff in the Italian debt markets which caused 10-year rates to rise 13 basis points. Mr. Berlusconi didn’t want to bring the present government down but merely wanted to exhibit his relevance to the Italian political establishment. What the Greek debt problems couldn’t do, a 76-year-old man with a bottle of Viagra was able to accomplish. Elections are going to be held soon and the Monti coalition will be called to account. Now with all the problems confronting the peripheral governments the attempts of a disgraced former prime minister to prove his manhood is just an exhibition of the absurd. Pay no attention to the man with unnatural bulge in his ego.
As the sun sets on the Greek drama, the most predicted outcome has indeed taken place as the IMF/EU and ECB/EFSF/ESM have come to an agreement about bringing the Greek debt load to a robust level of 124% debt-to-GDP ratio by 2020. There was no way the TROIKA was going to risk the entire EURO project on a mere 44 BILLION EURO payout to the Greek government. The game was played out to the 11th hour–oh those drama queens in Brussels–and although the OFFICIAL SECTOR did not take an official haircut, the core nations of the European financial system do stand to take a bath. IMF Director Lagarde was able to save face as the Greek debt levels will reach the previously promised levels of 120%. Madame Lagarde can now go to the IMF Board and report that all previously agreed to conditions have been ratified by the EU and await the signing of the memorandum of understanding with the Greek leadership. The IMF needed to get Greece out of the way so it can figure out the role it will play in the Spanish bailout and/or Italy.
In the very anticipated FOMC release, the FED announced that the Operation Twist would be extended from the June expiration until the end of the year. No surprise as Bernanke seemed to believe that the FED had to do something about the lethargic growth in the economy. Listening to the press conference held after the FOMC release, it seems that Ben Bernanke is the most troubled man in America. All of the FED‘s actions during the last two years have failed to generate the robust growth that TEXTBOOK MODELS HAVE PREDICTED. Europe continues to be the main theme as to why the GLOBAL ECONOMY IS FAILING TO GAIN ANY REAL TRACTION. Europe continues to plague the world as capital investment languishes in fear of European debt problems causing a massive new round of deleveraging.
First with a hat tip to RF for e-mailing the JOKE of the DAY:
Overheard in the Athens Airport:
Greek Immigration Official:Nationality?
Greek Immigration Official: Occupation?
Tourist: No. Just On Holiday
In a relatively quiet trading day, the GOLD market rallied $25 after spending most of the PIT TRADING DAY attempting to break and set up a correction to the recent rally. Shorts ran for cover. WHY? Two stories that gave the rally a rationale:
2. A STORY IN THE NEW YORK TIMES “GROWING AIR OF CONCERN IN GREECE OVER NEW BAILOUT,” by RACHEL DONADIO.