Notes From Underground

Tomorrow the Bank of England and the European Central Bank announce their interest rate decisions. It is a foregone conclusion that the BOE will hold the overnight lending rate at 0.50% as the U.K. economy is fragile and struggling to gain some upward momentum in the face of budget austerity. The BOE will also hold its QE program at 200 billion pounds and not look to increase the liquidity add as the POUND is relatively weak against most of the world’s currencies. Mervyn King is not worried about the inflationary impact of high food and energy costs, for he is more concerned about higher prices being a severe headwind for the average wage earner, which places him in the Bernanke camp.

The ECB‘s decision is not clear-cut. It seems that the market has unanimously agreed that Trichet will raise rates as he has used the words “EXTREME VIGILANCE” several times during the last few weeks and those two words are deemed to assure the market that rates are immediately going higher.

I AM NOT GOING WITH CONSENSUS. TRICHET MAY WELL PLAY WITH THE MARKET AND REFRAIN FROM RAISING RATES. I wish to remind the readers of NOTES that the Euro elite despises speculators so what better way to disrupt the markets then to not stick to the script. A rate raise at tomorrow’s meeting would only be a flexing of EGO of the ECB‘s president at a time of tremendous uncertainty in the European capital markets.

Today there was a rise in Italian debt, adding a new worry to the European landscape. Do I need to remind Mr. Trichet that most of Spain’s mortgages are adjustable rate, tied to the EURIBOR? With the real estate market in severe distress and unemployment at 21%, the last thing Spain needs is an increase in borrowing costs.

A rate increase by the ECB would be an added weight tied around the necks of Greece, Portugal and Ireland. If you want the debt-stressed sovereigns to drown, just throw them off the ECB EUROLAND. It is no time for Trichet and company to be the BIG SWINGING DICKS just to prove a point. Jean Claude, you cannot admonish the RATINGS AGENCIES for their actions while merely tilting at the windmills of inflation.

The only impetus to the ECB raising rates beside Trichet’s EGO is the fact that the SWEDISH RIKSBANK raised rates today for the seventh consecutive time, bringing overnight lending costs to 2%. The Swedish kroner actually lost ground to the EURO as the market felt that the RIKSBANK statement was cautious on the outlook for Sweden due to the debt crisis in its European trading partners. The Swedish move can cut both ways: Giving Trichet added pressure to raise or listening to the bank’s outlook and holding rates for fear of the negative impact on growth from the DEBT CRISIS. I think that Trichet will decide to unsettle the markets and hold rates.

If I was Trichet, I would be attentive to the yield curves in the PIIGS, which inverted further today: Greece 2/10 is now at NEGATIVE 1050 basis points; Portugal at a new high of NEGATIVE 265 and Ireland also making highs at minus 219 basis points. In a time of fiscal austerity, these 2/10 curves are reflecting a coming severe recession.

In contrast, China, which also raised rates today by 25 basis points, still has a positive-sloped curved after its recent tightening moves. Yet the 2/10 is a mere 58 basis points. China can probably slow its tightening as the flatness in the curve is indicating that its anti-inflation policies are having the desired effect. An aside to traders: The Chinese raised rates and the GOLD market rallied another $20 today, a $50 DOLLAR price increase after last week’s selloff. It seems that some FUNDS liquidated long positions as the quarter ended under great duress in the commodity markets. Remember, the grains took a severe beating on June 30, adding to the pain of a difficult quarter for many fund managers. Just a thought as we go forward into  a new quarter.

There were several stories today that followed up on last night’s POSTING about the ensuing battle between the EUROCRATS and the three major American based ratings agency. German Finance Minister Wolfgang Schaeuble let it be known that the only voice on default that really mattered was that of the ECB. Chancellor Merkel also warned in a Bloomberg story: “… against too much weight being placed on the ratings companies,saying that the so-called troika of the IMF, ECB and the European Commission mustn’t ‘surrender our ability to make judgments. I place my trust above all in the assessments of these three institutions,’ she told reporters in Berlin.” Around and round she goes and where she stops nobody knows. And yet, Trichet wants to raise rates in this SEA OF POLITICAL UNCERTAINTY. Sarkozy had better make room on his BALCONY!

This is a long blog tonight and I want to finish by alerting all the readers to the lead story in today’s Financial Times. The Brazilian finance minister warns the G-20 nations that the LOW-LEVEL CURRENCY WARS continue as the Brazilian REAL has made recent highs. It is something to pay attention to as it comes on heels of the appointment of Christine Lagarde, who was supported in her bid for the IMF Presidency by Brazilian leader Dilma Rousseff. Ms. Rousseff has been weary of a rising REAL as the currency strength as been a severe problem for Brazilian industry.

The commodity sector has been a boon for Brazil but high interest rates and a strong currency have left the manufacturing sector in a weakened position. The rising concern brought forward by FM GUIDO MANTEGA is a potential issue of conflict in the hands of Lagarde. Remember that one of Sarkozy’s main desires is for a restructuring of the global currency structure. So now it is on the morrow and Monsieur Trichet.

Tags: BOE, debt crisis, ECB, Euribor, Euro, extreme vigilance, Gold, Guido Mantega, hedge funds, IMF, inverted yield curve, Lagarde, PIIGS, Pound, QE, ratings agencies, Real, riksbank, Rousseff, Schaeuble, Trichet

This entry was posted on July 6, 2011 at 7:13 pm and is filed under Debt Market, ECB, Europe. 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.