Notes From Underground: ECB DAY IS HERE-A GUIDE FOR THE PERPLEXED

Thursday, DECEMBER 8 will it be a day that lives in INFAMY. The Bank of England will be the first mover tomorrow morning as the BOE announces its interest rate policy at 6:00 CST. It is expected that Mervyn King will direct the MPC board to keep rates steady and to keep the QE program at its present 275 BILLION POUNDS. At 6:45 CST the ECB will announce what it plans to do amidst the turmoil. Most analysts expect a 25 basis cut as Mario Draghi undoes the second inane rate increase promoted by Trichet. The more important factor will be if the ECB announces some type of ECB large-scale asset program in an effort to mirror the FED and BOE.

There is talk about the ECB also extending the duration of its LTRO so as to assure the availability of FUNDS for European banks for a longer. The LONG-TERM REFI OPERATIONS may not be in the initial ECB announcement but may be discussed in the press conference. Again, so much is at stake for the global financial system that trading is going to be illiquid and volatile so be patient and listen to what Draghi says and see if  his answers reveal any hint of a larger deal to come at or after the EU SUMMIT. The world’s eyes and ears will be upon the ECB and markets are hoping for a very robust response to the CREDIT CRISIS. By the very strong close in the S&Ps, optimism is certainly built into the market.

***As positive as the S&Ps closed today, the rally in the British pound was interesting. The U.K. released its MANUFACTURING AND INDUSTRIAL PRODUCTION DATA and both surveys were much weaker than expected. Yet, the POUND and the BRITISH GILT market both rallied strongly, which leaves the impression that the U.K. is serving as a haven for European investors desiring a close place (HOME BIAS) for their money. As rumors increase about Greek bank runs, depositors in other peripherals seek alternatives to domestic banks. Not all peripheral bank deposits can be placed in the strong core nations, thus ENGLAND is sought for a safe harbor.

The EUR/GBP will now become a good barometer of EURO sentiment for if the beleagured BRITISH ECONOMY can find a currency rally then the ECB has certainly not done enough to end the stress in the EUROPEAN FINANCIAL SYSTEM. Finances are rotten in Europe: Will the EUROCRATS find a way to finally get ahead of the massive problems in the BANKING SYSTEM? Throw in the domestic political needs of at least 17 nations and it becomes even more perplexing. Can’t wait for Friday???

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