The world’s equity markets continue to float on the continued liquidity provided by the world’s central banks. Last week the European markets saw short-term rise on the announced payback of LTRO (Long Term Refinancing Operation), which was money lent by the ECB to European banks to prevent the wholesale selling of sovereign and commercial debt that had fallen in value. The European Central Bank took the devalued bonds and provided the banks with cash euros. This prevented a total collapse of the sovereign debt markets. Now banks that are flush with liquidity are taking back the debt and paying back the EUROS resulting in a short-term tightening in the EURIBOR RATES. Prior to the last ECB meeting, I advised that the ECB could cut rates for the market had already priced in a rate cut. Last week’s action, while a tightening, is actually a market reversing expectations, which is why the global equity markets had so little reaction.
Posts Tagged ‘Euribor’
A long time reader of the BLOG (hat tip, SM) called and posed an interesting question about the 25% unemployment rate to which the markets seem to continually refer. The reader has a friend whose son is living in Spain and maintains that the unemployment situation in Spain is not nearly as bad as economists say because of the large underground labor pool. While I do not doubt that many people work in the “shadows” so as to avoid the TAX MAN, it seems that Spanish authorities would want to be very open about the positive impact of the underground economy on its citizens purchasing power. If the underground economy is so large in Spain, statisticians should be able to account for it and thus reduce the nation’s overall unemployment situation.
I’M UP ON THE TIGHTROPE,ONE SIDES HATE AND ONE IS HOPEIT’S A CIRCUS GAME WITH YOU AND ME
Today the new President of the ECB, Mario Draghi, established himself as a true leader and moved to undo the damage of the über arrogant Jean Claude Trichet. The two rate increases in the last six months by the European bank were an overshoot of mammoth proportions as the peripherals were in the midst of a severe credit crisis and moving toward austerity budgets. Spain, which maybe in the worst condition of all–21.5% unemployment and a deflating housing market–was not in need of a EURIBOR increase as its mortgage rates float in reference to the bank rate. If Trichet did not understand the depths of the credit crisis then he should have never been the ECB president. It was always reported that the ECB decisions were unanimous, but today’s move by Draghi indicates that Mr. Trichet rode roughshod over the bank’s policy making for it was reported that it was a 25 basis point decision by unanimous consent.
The word out of Washington about the BUDGET RESOLUTION is that taxes ought to be raised out of fairness. The President of the U.S. is consistently talking about fair. Give up that specious argument. Is it fair that the savers of this country are being punished so as to bail out the WALL STREET TOO BIG TOO FAIL BANKS? Is it fair that an incompetent Treasury Secretary was allowed to obtain the Treasury position even though it appeared that he cleverly tried to avoid paying taxes? Is it fair that the Wall Street banks were bailed out while mortgage paying homeowners were granted no relief against the coming exploding ARMS mortgages that have worsened the foreclosure problems and continued being an albatross around the neck of the economy?
Tomorrow will bring interest rate announcements from two key central banks, okay three , if we count the BOJ but the Japanese have so many problems it is a forgone conclusion that Mr. SHIRAKAWA will hold the line and, if anything, find away to flood the market with more liquidity. The Bank of England (BOE) will announce at 6:00 a.m. Chicago time. Though there are a few analysts who think the Mervyn King-led BANK will raise to head off the increase in inflation, I would say that the chances are maybe 5 percent.
Notes From Underground: Did Dudley DO RIGHT on his mounting a possible expansion of monetary easing?October 4, 2010
First things first. The Financial Times ran a weekend front-page story revealing that Sarkozy and the Chinese have been holding secret meetings for the last year on the issue of global currency stability. It was unclear what efforts Sarkozy was pursuing but he was looking to get Chinese support for whatever he is going to try to accomplish when he gets the leadership post of the G-20. The French have been trying to replace the U.S. DOLLAR as the world’s reserve currency since the days of DeGaulle and Jacques Rueff. We have warned that Sarkozy is desperate to make a grand play on the international stage as his political support in France has badly eroded. Wen Jiabao is in Europe this week for talks with the EU on many issues.
NEWS OUT OF EUROPE: The Spanish Banks were all in a rage as the ECB moved to shorten the duration of the TERM DEPOSIT FACILITY, as the terms were shifting to three months from one year. The Long-term Repurchase Operation (LTRO) that was agreed to a year ago provided the needed funding to get European Banks through a difficult liquidity period at a very friendly below-market rate. Now that the ECB has put an end to that program the still-stressed banks are concerned that the ECB removal of the LTRO will cause short-term problems since liquidity is still an issue.
The case for a bullish DOLLAR has certainly been made in NOTES FROM UNDERGROUND during the past five months. Since the Chinese walked away from a potential bid on 25 billion of euro-denominated Greek debt, the pressure on the European debt markets has led to a reduction in EURO-based assets by large private investors, pension funds and even some central banks. The overall effect has been a further deleveraging of the global financial system and thus the increased fears of global deflation taking firm control of the credit markets.