Notes From Underground

In 2001 when the European Union was in a recession, financial analysts were pressing the ECB president,Wim Duisenberg, to cut interest rates. In attempting to gain credibility as a tough, hard-money institution, Duisenberg responded, “We hear but we do not listen.” Well, we would say to his successor, Jean-Claude Trichet, it is time to start listening.

The markets have be sounding the warning of a debt crisis for five months and all of the Eurocrats have been mouthing platitudes and blaming the “locust” speculators for feasting on unsubstantiated fears. After the Chinese passed on the $25 billion Greek EUROBOND offering, the credit crisis was in full force. After today’s ECB press conference, the market ended its patience for non-action and set to work exacting its “pound of flesh,” although it seems to have taken a great deal more. The European debt markets were roiled, to say the least, and we watched as our favorite indicator, Italian Bond Futures versus German Bund Futures, moved in opposite directions. The Bunds closed up 85 ticks , while the Italian Bond lost 175 ticks. The longer the ECB procrastinates, the higher the costs.

In reference to some foolish U.S. politicians raising the issue of the American taxpayer bailing out Greece, we say loud and clear: GET A CLUE. If Europe had taken that stance when Lehman collapsed, the global meltdown would have been more severe. The ECB anted up a massive amount of funds to aid the banks and did not invoke the spirit of schadenfreude. The IMF has already been funded and that is why we propose using that stockpile of GOLD to help generate an asset infusion to relieve the pressure on rising rates.

The rising LIBOR rates have shed light on the beginning solvency of the European banking system. In addition, the nearby EURODOLLAR futures contracts all closed lower as an indication of credit market stress. S&Ps get whacked and short rates can’t catch a bid … do you need to see more? If you do, run the charts of Deutsche Bank, Credit Swiss, Barclays and many others to visually see the damage done by the PIIGS. We have long argued that the GOLD rally was not an inflation play but rather a hedge against deflation–look across the board for confirmation. The global system cannot afford any more asset deflation and Bernanke et. al. know it and will do all in their power to halt it. LET A HUNDRED BUBBLES BLOW.

Now that many FED liquidity programs have expired, look for the FED to RENEW the DOLLAR SWAP agreements with the world’s central banks. Such an announcement will lead to a rally of equities and lend some short term support to risky assets, but we doubt it will have staying power. The YEN was bid today as a knee-jerk reaction to the risk-off world but we wonder how long the Japanese will be tolerant of a EUR/YEN cross at sub-115. Japan is trying to relieve incipient inflationary pressures and a strong YEN will only compound their problems so we await some action from the MOF or the BOJ.

British election results are slowly coming in and it looks like the TORIES will win 306 seats, which means a hung Parliament. Libs and Labor will not have enough seats to have a majority so it appears that the TORIES will be in the government. We just don’t know with whom they will coalesce. The POUND is up but after today’s robust selloff, this tepid rally has yet to tell us anything. We will write in the morning as we know more. Also, as a side note, U.S. unemployment comes out tomorrow morning and frankly, we do not give a damn. The consensus for NFP is 190,000 gain with the rate remaining at 9.7%. The number will be skewed by the census workers adding more problems to its interpretation. Work week is expected to be up .1% and average hourly earnings up .2%.

Also, we get the Canadian unemployment numbers at 6:00 A.M. CST. These numbers will be of interest after the large selloff of the Canadian Dollar today. Remember that the Canadian DOLLAR is deemed a commodity currency but all else aside it has the best fundamentals of any of the developed countries. Consensus is looking for 8.2% on the rate and a net of 24,000 jobs created. Growth stories may be a positive but CREDIT is the star of the show. Unlike the political elites of Europe, we know how to listen to markets. The rest is commentary.

Tags: ECB, Euro/Yen, Eurodollar, Fed, Gold, IMF, LIBOR, PIIGS, Pound, S&P, Tories, Yen

This entry was posted on May 6, 2010 at 9:33 pm and is filed under Sovereign Debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.