It has been the best of times. It has been the worst of times. President Sarkozy began the year with such high hopes and aspirations as he desired to raise his stature on the world stage. He won his early skirmishes against Chancellor Angela Merkel by first defeating Germany’s desire for Axel Weber to attain the ECB Presidency and then forcing the German Chancellor’s hand for a larger pool of capital for the European Financial Stability Facility. But the taste of victory has now faded as the FRENCH BOND MARKET is suffering under the weight of its deeply troubled banks and the GERMAN/FRENCH 10-YEAR BOND SPREAD CONTINUES TO WIDEN. France is deemed to be very vulnerable for its banks own so much EURO SOVEREIGN DEBT that of course is deemed to be riskless and require no haircut or capital to support it.
During the summer, Sarkozy had tried to get the EFSF to buy sovereign debt on a Euro-wide basis but MERKEL squashed the idea and said each individual country would have to deal with its banks–and so began the worst of times. Chancellor Merkel had suffered several electoral defeats and suddenly awoke to the need to take care of her political career by waking up to the anger of the BAVARIAN BURGHERS. German democracy seemed to be a problem for Sarkozy’s plan of a German-financed EU-wide bailout. Sarkozy thought he held the upper hand by utilizing the dire situation of the PIIGS to set the agenda for Germany to be the fiscal agent for Europe.
This will probably be written in history as the worst decision by a French leader since Napoleon the THIRD was lulled into the WAR of 1871 that resulted in German unification. The markets are finally reacting to the difficult situation that France and others are in while waiting for Germany to decide what the price of backstopping the whole European edifice will be. To make matters worse, Luxembourg Prime Minister Jean-Claude Juncker is reported to have raised the issue of German debt being a “cause for concern.” Juncker, why not just yell FIRE in a crowded theatre. Yes, German Banks are also plagued with issues of credit sustainability because of large holdings of sovereign bonds,but was this really the time to raise the issue?
It is no wonder that Bill Gross has an article in Wednesday’s Financial Times basically throwing his hands up in disgust with the entire European charade. All the mistakes made by EUROCRATS have added up to a giant mess and at the end of the day there will be plenty of blame to go around. As a result, deleveraging, fiscal tightening and potential defaults are on the economic and investment horizon. Investors should be in a ‘risk-off ‘ mode. When it is finally over, a lot of parties will owe the world an enormous ‘SCUSI’. The result of French hubris and German intransigence has the potential to bring the global economy to a grinding halt. The EURO is their currency. The DEBT is their SOVEREIGN PAPER. The failure to act is the WORLD’s PROBLEM.
This afternoon, Boston Fed President Eric Rosengren raised the possibility of coordinated intervention by the ECB and the FED. This statement from a regional FED President reflects the great concern about a credit default from Europe. Let’s see: When SOCGEN was in trouble because of Jerome Kerviel in January 2008, the FED cut interest rates on a U.S. holiday (Martin Luther King’s birthday) to calm the markets. Now Europe is facing an existential threat and the ECB cannot muster a significant rate cut … PATHETIC. Hey Mario, it is time for leadeship and the slaying of the “legend” of the UBERMENSCH Trichet. These are not the best of times for indecision.
***The GOLD has been struggling to rally during this turmoil. Why? It could because of the deleveraging to which Bill Gross alludes, as commodity traders remember the fallout from the Bear Stearns debacle when all assets got crushed. It is too early to make that call. Another reason may be the huge liquidation of some of John Paulson’s GOLD as his fund is moving to raise cash to meet redemptions. Paulson has been a long-term GOLD BULL and he built up an enormous position using the ETF market. The movement out of the position means that some trader/investor bought a large amount of GOLD and may well be using every rally to lighten up. Not sure and only CONJECTURE, but the recent bout of selling means someone has GOLD to GO up at the $1800 an ounce level. Paulson, coupled with the demise of MF GLOBAL, means that there is ongoing liquidation of positions.
It will be interesting to see if the GOLD can take out its recent highs on an ECB/FED coordinated intervention. Get your support and resistance levels in order and be prepared for any major financial package. If nothing gets done, any hope of a decent Christmas season will be dashed by European indecision. Also bothering the GOLD is its inability to make new highs against the EURO throughout this chaos. Just something to watch.
Tags: Axel Weber, Bill Gross, ECB, EFSF, Eric Rosengren, Euro, euro sovereign debt, Fed, Financial Times, France, French bond market, Germany, Gold, Jean-Claude Trichet, Mario Draghi, Merkel, MF Global, Napoleon, OAT/Bund spread, PIIGS, PIMCO, Sarkozy
November 16, 2011 at 9:28 pm |
Risk off…what would lead Risk On?
The leaders keep fading.
BAC looks to drop another 10% for a start. That doesn’t bode well for the mortgage mess, nor the financials.
The Oil has blown it’s wad on the upside today, with the oil service sector and related ETF’s NOT following suit.
Tomorrow is another day for the rumor mill and we’re towards the bottom of the recent range. Maybe we’ll get a posiive rumor for a change so we can rally to nowhere.
November 17, 2011 at 6:43 am |
[…] customers in Europe pull money out of banks, there is huge short term cash financing problems. The bazooka clearly wasn’t big enough, and I doubt seriously there is a bazooka big enough to temper the […]
November 17, 2011 at 7:28 am |
Jeff–you are right and that is why the BIG Bazooka is a myth for the market will push you to fire it.IN all this confusion I cannot remember whether I fired 5 shots or 6 and this is the most powerful hand gun known to man
November 17, 2011 at 8:58 am |
So what is the proper metric to evaluate how immenent a FED/ECB intervention is? Eurodollar spread inversions? If so, how inverted do they get before the central banks pummel the market with liquidity?
November 17, 2011 at 9:25 am |
Danny, I’d consult the 3-month and 1-year EUR/USD cross-currency basis swaps as it is the best real-time gauge for U.S. dollar funding stress. Currently the 3-month has fallen to -129bps and 1-yr is at -84bps, both at the lowest levels since December 2008.
If these basis swaps continue to fall, funding is going to get more expensive for banks and they will be forced to tap the central bank swap lines and remaining ECB lending operations at OIS+100bps (plus an additional 20% for collateral), an option that is just as expensive.
If there is any intervention, I think it will be the Fed cutting the borrowing rate to OIS+50bps
***(If you have a bloomberg terminal at your disposal, the tickers are EUBSC GPO and EUBS1 GPO )
November 20, 2011 at 5:32 am
***http://www.bloomberg.com/quote/EUBSC:IND , alternatively.
November 17, 2011 at 9:57 am |
Anon–thanks for your input.As I watch the dec euribor11 it is a very good indicator as a proxy for funding in the european banks and after the recent rate cut it ran up to 9890 and now trades 9860–indicating stress in the short term funding which is why the ECB had better get off its ass .The BTP/BUND is correcting as the ECB is in buying Italian debt and probably spanish but as the volatility in that spread on a daily basis means the ECB is not cutting ahead of the curve but merely being a reactionary agent
November 17, 2011 at 2:51 pm |
Thought everyone would find this amusing…….
http://www.zerohedge.com/news/watch-nigel-farage-dance-euros-grave