We thought we were finally getting a little relief rally in the equities, with a thaw in the Libor/OIS and the EURO FX market attempting to hold onto its late gains of yesterday, when rumors about the Chinese State Administration of Foreign Exchange (SAFE) wanting to dump euro-denominated assets. There was no name to the spokesperson who made the statement. We are very skeptical of this rumor because if the Chinese were serious about wanting to dump euro debt, we doubt they would announce their intentions. As we mentioned yesterday, it was the Chinese deciding not to buy Greek debt that set the current debt crisis into motion. Adding to the euro’s problem was the 5 year BOBL auction in Germany that did not get the fulfillment of BIDS, thus a “failed” auction.
However, the BUNDS’ price action did not reflect a genuine fail but reflected the investors waiting for other debt with higher yields. These two rumors set the stage for a selloff in the EURO FX and and a move higher in LIBOR. but not to a great degree as the SEPT 10 Eurodollars closed basically unchanged, which quashed an early attempt at a rally. We are heading into the Memorial day trade so markets are going to be vulnerable to all sorts of innuendo and rumor: trade accordingly.
Treasury Secretary Geithner arrived in Europe to meet with European leaders and by chance was met with the EURO selloff. We will be watching and listening to any coordinated moves between the FED and ECB, like a move to lower the lending rates on the DOLLAR swap lines, which is currently priced at 100 basis points over LIBOR. If this rate was lowered in an effort to ease the upward pressure on interbank lending, the action could rally all risked-based assets. Thin markets and nervous financial policy makers can be hazardous to your trading health. Is it SAFE to be short?
Tags: bids, BOBL, Bund, Dollar, ECB, Euro, Eurodollar, Fed, LIBOR, SAFE
May 27, 2010 at 2:40 am |
Bloomberg:”Chinese officials have been meeting with foreign bankers in recent days to review the country’s holdings of euro-zone debt in light of the region’s fiscal crisis, the Financial Times said without saying where it got the information.”
“The country’s State Administration of Foreign Exchange, which manages the reserves under China’s central bank, holds about $630 billion of euro-area bonds in its reserves and has expressed concern about its exposure to Greece, Ireland, Italy, Portugal and Spain, the newspaper said. A spokesman for the agency declined to comment to the Financial Times.” The lack of attribution does not dispel the validity of this story, despite the denials today. The Chinese have warned the US as well about its profligate ways with all that implies. “We are very skeptical of this rumor because if the Chinese were serious about wanting to dump euro debt, we doubt they would announce their intentions.” Warnings presage future action.
May 27, 2010 at 3:07 am |
Fred I am not sure about this response—is it directed at the U.S.—alot running together here—-if your implication is more about the U.S. then Europe I am ultimately in agreement—and as I read that story in the FT i was not sure about that number of 630 billion of euro bonds