In a “flash,” the LONG DOLLAR positions of the taper crowd came a crashing down upon committed U.S. dollar bulls. The position unwinding started during President Mario Draghi’s press conference. I was a very attentive listener to the Q&A session and am very hard pressed to see anything positive about Europe in Draghi’s answers. In fact, the EURO began its rally just after said that the ECB was “… technically ready for negative rates.” It seems that the ECB council was again discussing the possibility of having EONIA go negative in an effort to unlock the bank deposits currently sitting at the ECB. The fact that the ECB has drawn up plans for “GOING NEGATIVE” is not a bullish EURO indicator. The most bullish and honest statement from President Draghi was he maintained that the ECB has been the most conservative of all the central banks.
Posts Tagged ‘LTRO’
The much-awaited piece from Jon Hilsenrath about FED “tapering” appeared in the weekend WSJ, and, as promised by the abundant tweets, it delivered very little in providing any new insights into Fed halting of security purchases. The headline, “Fed Maps Exit From Stimulus,” wasn’t a map of any kind and merely seemed to provide the philosopher’s answer to question of what to do when confronted with the fork in the road … TAKE IT. The FED is caught on the horns of a dilemma for it wants to provide some clarity as to how it will end the large-scale asset purchases (LSAP) without sending the market into a downside tailspin. The massive increase in the FED‘s balance sheet has provided the rocket fuel to boost the demand for all types of risky assets but how do they know the economy has enough strength to sustain the rally on its own. It seems that the most important voice now will be Fed Governor Jeremy Stein–more important than Jon Hilsenrath–for he seemed to unnerve Chairman Bernanke with his April 19 speech in which he warned about the distorting impact the Fed was having on risk assets. It seems the Chairman has awoken to the idea that the FED has blown an asset bubble, especially now that the Japanese have added to global liquidity.
There is not much news that needed to be dissected so I think it is time for a quick look at yield curves. For simplicities sake I will keep the analysis to the generic 2/10 curves in the countries that have sophisticated capital markets. Why are the curves important? In looking back at the crisis that forced the ECB‘s Mario Draghi to announce “there will be no TABOOS and we will do whatever it takes” to sustain the euro currency and the entire European project. It was the 2/10 curves in Europe that were providing so much of the problem. The talking heads in the media continue to point to the 10-year debt instruments in Europe as being the most significant element. The Italian auction did this. The Spanish auction did that. I urge us to be more attentive to the shorter end of the curve and especially the two-year note.
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.
The tweet heard ’round the world is as meaningless as most of the other rubbish that passes for political discourse in the Grand Republic. It seems that Jim Cramer had it right from the beginning for traders and investors. The only thing that matters is how the markets accept the jobs data and what will its impact be on asset prices going forward. The market is definitely in the mindset of weighing the data in a “more good is good and bad is bad” mode.
As the markets toiled to regain their summer strength, ECB President Mario Draghi provided the elixir to keep the summer party kicking. NOT ONE TO BE BALLOON POPPER, THE ECB PRESIDENT LET IT BE KNOWN THAT THE DRAGHI MANDATE WILL PROVIDE FOR BUYING OF SOVEREIGN DEBT OF UP TO THREE YEARS. It seems LTRO IS ALIVE AND WELL AND LIVING IN FRANKFURT. Mr. Draghi let the markets know that in his opinion, ECB purchasing of short-term is part of the Bank’s mandate, “to intervene in bond markets to wrest control of interest rates and ensure the euro’s survival.” (BLOOMBERG NEWS)
The interest rate variable is alive, well and affecting global markets. Mario Draghi has played the “WIZARD OF FRANKFURT” as he has sought to forestall a financial implosion of Europe. Draghi’s comments in London on July 26, in that the ECB would stem the crisis at end with the tools at its disposal, markets had to believe that ECB policy would be “SUFFICIENT.” As we all know by now, President Draghi has been successful as the Spanish and Italian yield curves have steepened and the 2-YEAR NOTES have seen its yields dramatically drop–the Spanish went from 7% to 3.73%.
No real news out of the Geithner meetings. Schaeuble and Geithner offer up the same vapid phrases but interesting that the Geithner/Draghi meeting in Frankfurt yielded no news and it seems to be a blackout. Geithner and Draghi are two very verbose policymakers but as of yet … nothing. This evening though the S&Ps have regained all of today’s losses, which is very minor as the day was unusually quiet. The month end is tomorrow so fund managers will probably window dress as the S&Ps attempt to hold on to a 2% gain for the month.
In the realm of loving and promoting the irrational over the rational expectations of the MODEL BUILDERS, there is no better poster child than German Finance Minister Wolfgang Schaeuble. As I warned Mario Draghi to unpack his speedo, today BLOOMBERG NEWS ran an article, “SCHAEUBLE DECLARES MARKETS WRONG AS EUROPE COASTS INTO VACATION.” This is the German finance minister who has the audacity to proclaim that the markets are wrong and head off for vacation. It seems that the German hierarchy is convinced that all is well because the BUND market is healthy. Is Schaeuble so naive as to think that strong BUNDS reflect the health of Europe? Don’t German policymakers understand that the BUNDS and SCHATZ are at absurdly low levels because many other Europeans are “packing their suitcases” with EUROS so as to transfer their wealth to the perceived safety of the German financial system and thus for its haven status? It is astounding that the EUROCRATS believe that the markets will wait for the decision makers to return before any further market action will take place.