The power of the ECB’s 3-yr LTRO program was in full force today as the Spanish 3-month BILL AUCTION provided the spark to ignite the kindling of the massive amount of liquidity provided to the banks via the LONG-TERM REFINANCING OPERATION. This has not been a secret as we have repeatedly discussed how the 2/10 YIELD CURVES HAVE RECENTLY GONE FROM INVERTED TO POSITIVELY SLOPED. The move has been so dramatic that the Italian and Spanish curves are almost the same as the German. Bloomberg had the closes on the Italian at +164, the Spanish at +172 and the German at +174. This movement is quite dramatic and the Spanish auction today merely confirmed the power of the recent ECB action.
Violent moves in the curve pushed the global equity markets substantially higher and the DOLLAR was sold off as the RISK-ON paradigm was back in vogue. The only problem with the paradigm is that the EURO CURRENCY put on a very lackluster rally relative to the EQUITY MARKETS. When the S&Ps has rallied 3% as it did today, the EURO would have generally kept pace, especially as the newswires have been reporting how so many investors/traders are SHORT EUROS. The fact that the EURO failed to stage a more significant rally may be an indicator that the ECB action is actually aiding the desire to weaken the EURO and the risk-on matrix may be losing one of its main indicators.
An AGGRESSIVE LTRO PROGRAM SHOULD WEAKEN THE EURO FROM A PURE FUNDAMENTAL PERSPECTIVE BUT IN AN ALGORITHMIC PARADIGM-INDUCED WORLD CHANGE TAKES TIME. As TRADERS/INVESTORS, IT IS IMPORTANT TO KNOW IF THE CHANGE IS GENUINE OR JUST THE EFFECT OF A HOLIDAY THINNED MARKET? ARE THE PROBLEMS OF EUROPEAN DEBT RESOLVED?
The answer is of course no as the 10-year notes of ITALY AND SPAIN are still close to the recent highs in yield. Also, the FRENCH/GERMAN 10-year differential is still out more than 100 basis points, indicating that there is still a great amount of unease in buying longer term French paper. Again, pay close attention to the EURO in relationship to the RISK-ON PARADIGM. As George Harrison wrote:
Watch Out Now,take care,Beware of thoughts that lingerWinding up inside your head*(Leon Russell also recorded Beware Of Darkness)
Tags: 2/10 curves, 3-yr LTRO, Dollar, ECB, equity markets, Euro, risk-on, Spanish bill auction, SPS, Treasuries
December 20, 2011 at 8:32 pm |
Anither great post. Thanks for providing some concise analysis among the noise. I agree with the paradigm shift in EURUSD as a risk metric but maybe gave up on it too quickly, while your note here has given me pause. I’ll be watching… Although as you said, ECB balance sheet expansion and loosening of credit markets there would lead us to believe that is Eur negative. My question is what kind of upward pressure will be placed on usd, if any, if eur does indeed weaken, considering both being used so widely in fx reserves.
December 21, 2011 at 10:39 am |
If Congressmen can legally trade on inside information, why should they be foreclosed from sharing their largesse with their campaign contributing constituents? At Teapot Dome Secretary of the Interior Albert Fall was convicted and made to pay for his indiscretions. We haven’t seen anything done to the Dodds, Franks and insider tipsters who have made a mockery of our security and banking regulations.
December 21, 2011 at 7:08 pm |
Mattw: A good discussion and a very good question as we go forward.The DOLLAR does benefit in the SHORT TERM as the present winner of the safe haven beauty pageant,but as Howard would say –the man with one eye is the king in the land of the blind.Dollar assets are in demand in a collateral challenged world.There was a good piece by John Glover of Bloomberg [hat tip JA] about the ECB being the recipient of good collateral and it is a problem because the ECB does not rehypothecate,thus the effect is strangling the repo market.Thus DOLLAR assets become desirable for lending purposes which is annoying all those trying to short the U.S. Treasury market.This problem is causing Ben Bernanke and Tim Geithner major agita
December 21, 2011 at 7:18 pm |
Asherz:The problem with Wall Street-Washington Nexus was well discussed in Simon Johnson’s magnificent piece in the April,2009 Atlantic–“The Silent Coup”.The best book on understanding the Wall Street mind set is the book by Frank Partnoy–F.I.A.S.C.O.The idea that no talking head on T.V. discusses Partnoy’s book is the act of lazy “journalism”.