Notes From Underground: The markets owe its movements to DEBT, DEBT, DEBT

Today’s markets were all about DEBT. The European sovereign DEBT markets were rife with rumors about Portugal, Greece and Ireland all defaulting, which would lead to a restructuring or some other type of sovereign DEBT relief. It was rumored that Portugal was dropping out of the EURO altogether. All the rumors forced Chancellor Angela Merkel to say that the EURO was the glue that holds Europe together and that Germany would do its part to hold the EU together and that countries in trouble would be provided with the needed funds.

Today, the Irish insisted they didn’t need more funds at this time with others insisting that the Irish take the funds so as to assure markets that there was plenty of money available to get through the current turmoil. European leaders are worried that a crisis of confidence in any sovereign debt issuer can lead to a LEHMAN-like crisis of confidence.

In her speech today, Angela Merkel did not let up on the need for investors to share in the losses on sovereign BONDS, which of course was exactly what initiated this current round of stress that Trichet has warned would happen. However, Chancellor Merkel said, “Wall Street investors have also got to shoulder their liabilities. We can’t push everything on to the taxpayers.” The direct finger-pointing at Wall Street was a new wrinkle in the fabric of sovereign debt stress. The bottom line for the markets is that the EURO is under pressure as the world banks and large financial concerns are selling EUROs because of all the prevailing uncertainty.

Many central banks need the EURO to be an alternative to the DOLLAR as a piece of their RESERVES but with such doubts about sovereign DEBT there is nervousness. What happened to the rumors of Chinese purchases?

Europe was not the only area suffering under the pain of DEBT uncertainty. The lastest round of QE by the FEd has brought out the BOND VIGILANTES! Since the onset of QE2 at the September 21 FOMC meeting, the BOND, equity and commodity markets have been rallying as the global investment community bought all assets in anticipation of the massive FED intervention into the money markets.

With the November 3 announcement of the actual size of QE2, the market has found willing sellers of BONDs as the long end of the market has seen a sizable rally in rates. The 10-year note has risen more than 30 basis points in the last week as it wants to push the FED into a position to find out how serious Ben and company will be at holding down rates on the long-end of the curve. The market is in a very testy mood and Bernanke has thrown down the gauntlet to the BOND VIGILANTES as the argument continues about the necessity and effectiveness of a second round of QE.

Obama weighed in from the G-20 meeting and supported the need for the current FED policy, which made matters worse. There is a great deal at stake as the FED has placed themselves in a difficult position by putting so much on the line. If QE2 is meant to keep long-term rates low as short rates are a zero, the question is being pushed onto the FED as to how they will respond to the substantial rise during the last three trading days. I bring to the attention of those who trade that a new algorithm is in play because as the rates on the long end go higher, every asset class gets sold off, hence the late sell off in the precious metals as the NOTES and BONDS were hit.

The LONG END of the curve has a new relevance so we worn all to pay close attention to this change. If the BOND VIGILANTES are right this change will not last long and we will watch to see when commodities and equities throw off the chains of higher long rates while short rates hover at ZERO. The fact that real estate is still the major drag on the financial sector, how far will the FED let rates rise before they are forced to reach into that $600 billion of QE2 for more ammo.


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