Notes From Underground

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.

Tags: Aussie, BOJ, Bund/Italian, DAX, ECB, EFSF, Euro, Europe, European debt resolve, Kiwi, Mel Brooks, RBNZ, SPS, swiss, U.S., Yen

This entry was posted on July 27, 2011 at 9:25 pm and is filed under Currency, Europe, United States. 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.