Notes From Underground: A HOUSE DIVIDED AGAINST ITSELF CANNOT STAND

A house divided is of course one of Lincoln’s most famous speeches. Unfortunately, the speech can be directed against EUROPE or the U.S. Yes, the S&Ps and other equity indexes suffered a large selloff as investors are growing disillusioned with the divisiveness that is persisting from the halls of Washington. The ramping up of incendiary rhetoric from both sides of the aisle is finally irritating some investors to raise cash as fears increase that nobody is going to be able to “stop the trains.”

It seems that some of the tea party crowd have Tim Geithner in their crosshairs, for every time Geithner cautions about the financial impact of intransigence, the fervent debt cutters harden their position. The new class of Republicans seem to have more disdain for the Wall Street-Washington nexus than their dislike for the profligacy of government. It is also easy to accuse EUROPE of being a “house divided” for the Germans were out in full force today undermining the agreement in Brussels. The EURO was lower and the peripheral bonds under pressure long before the slide in U.S. equities took place. The barometer on European debt, BUND/ITALIAN futures, was under stress in the early morning as it seems that investors are growing tired of the on-again, off-again EUROPEAN DEBT RESOLVE.

Wolfgang Schaeuble, the German Finance Minister, reportedly said that the German Government was against giving the EFSF a “blank check” to buy bonds of troubled European nations in the secondary market. When Merkel went back home, it appears that domestic politics forced a rethink on her part. The EUROPEAN DEBT CRISIS is so fragile that the EURO was very weak, even in the face of U.S. madness. The European situation became even messier as it was revealed that DEUTSCHE BANK reduced its exposure to Italian debt by 88% during the last six months. No wonder the IIF decided in the way it did as Mr. Josef Ackermann had already liquidated significant amounts of peripheral debt.

The hit to Deutsche Bank in  its Greek debt holdings is insignificant relative to its previous exposure to Italy. Schaeuble, in a letter to the German Parliament, said in reference to the role of the EFSF that, “in the future such purchases must only take place under very tight conditions, when the ECB establishes that there are extraordinary circumstances in financial markets and dangers to financial stability.” Again, A HOUSE DIVIDED CANNOT STAND.

THE DOLLAR rallied today but the rally was versus the EURO, while the SWISS and YEN suffered small losses but the AUSSIE and KIWI made all-time highs since the advent of their free-floating status. The YEN has some selling pressure as rumors surfaced about a possible BOJ intervention. I would be very surprised if the BOJ were to intervene in the midst of the U.S. budget debate for the impact of intervention would be of little substance in a world in search of havens.

Tonight the Reserve Bank of New Zealand (RBNZ) announced that KIWI were being held at 2.5% even though the post-earthquake economic situation was improving and the emergency cut will be rescinded. RBNZ Governor Bollard urged caution until the debt issues of the U.S. and Europe came to some positive resolution.

The global financial situation is very chaotic but as we come to the end of the month is important to realize that with all the chaos in European and U.S. debt markets, the S&Ps are down only 1% and the Nikkei is higher, and the DAX down a mere 1%. For all the confusion and economic uncertainty, the financials are stable. The best performing assets class has been the commodities as supply/demand factors have supported prices for the necessities of global economic growth. OUT OF CHAOS COMES ORDER  so spoke Mel Brooks.

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8 Responses to “Notes From Underground: A HOUSE DIVIDED AGAINST ITSELF CANNOT STAND”

  1. eric Says:

    Yra,

    I don’t have a Bloomberg terminal. Do you know, or maybe one of your readers know, where to find decent market quotes during the day on italian, spanish, etc 2/10 quotes?

    Thank you for your service

  2. yra Says:

    Eric –I do not but maybe there is a ecb based web site—I utuilize Bloomberg so I jave not looked elsewhere—maybe the Eurex .com is a possibility

  3. ken Says:

    OUT OF CHAOS COMES ORDER … so spoke Mel Brooks.
    This might be one of your best endings!
    Well Done!

  4. Greg Says:

    Eric – Google search “Italian 10 year bond index” and the first result will be quote from bloomberg. You can do the same for the two year

  5. JediTrader Says:

    I feel like the only play I am comfortable making in this environment is the flight to safety. There is too much uncertainty surrounding the USD and Euro to make a direct call there imo, but I would definitely be short USD/Swiss Franc… mostly a bullish move on the Franc and partially an uncertainty/bearish move on the USD.

    Beside that I would stick with the “fear of fiats” trade, and ride the trend in gold (again partial bearish USD factor).

    I agree with you that the S&Ps are hanging tough, which is a good sign – but it could just be a hopeful market. The next 30 days are going to be very interesting…..

  6. Mr.Kowalski Says:

    Jedi: Yes I completely agree about the next 30 days. It’s not only EUtopia and America’s Debt Ceiling drama, but others are showing some very serious signs of stress– China and Brazil to be specific. I fully expect a deal on our own debt drama, but Europe’s situation is very troubling for me. Watch the LIBOR– when rates begin to move up smartly, look out.

  7. yra Says:

    Mr. Kowalski–euribor will be just as important–but stress in the banks .Brazil is under stress and the Government is trying to push the real lower as they raised taxes on foreign exchange transactions yesterday.China we just don’t know but Europe will be Europe and be with us for quite a while

  8. JediTrader Says:

    Mr. Kowalski,

    Thanks for the feedback. I am somewhat familiar with LIBOR, but how is it best used as a short term indicator? I see that during the “Flash Crash” of 2010 it began to spike, after settling at recent lows.

    All of this stress with banking solvency in the EU, US, and the globe in general makes it a valuable rate to follow. I just want to better understand how you could use it to develop a trading idea…. Or determine if it is best used as a view of market psychology.

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