Notes From Underground

Due to the availability of virility enhancers, the Italian political arena is plagued by billionaires who still believe they remain relevant. The ability to sustain an erection does not make you politically astute. Today’s effort by Silvio Berlusconi to undermine the Monti government led to a selloff in the Italian debt markets which caused 10-year rates to rise 13 basis points. Mr. Berlusconi didn’t want to bring the present government down but merely wanted to exhibit his relevance to the Italian political establishment. What the Greek debt problems couldn’t do, a 76-year-old man with a bottle of Viagra was able to accomplish. Elections are going to be held soon and the Monti coalition will be called to account. Now with all the problems confronting the peripheral governments the attempts of a disgraced former prime minister to prove his manhood is just an exhibition of the absurd. Pay no attention to the man with unnatural bulge in his ego.

****Today the Bank of England and the European Central Bank maintained the status quo and held rates and QE programs steady. However, at his press conference President Mario Draghi caused the euro currency to drop when he stated that interest rate cuts were discussed during the ECB meeting. The EURO had been steady post-rate announcement but dropped more than 1% following the Draghi comments about slowing economic activity and interest rate cuts. Draghi also let it be known that the ECB was prepared to deal with the possibility of taking ECB deposit rates NEGATIVE. It was this mention that caused the EURO to accelerate its decline and also put a bid to the GOLD market, which looked as if it was poised for further selling. The GOLD/EURO cross rate was hovering below the long-held 200-DAY MA. (The MA was 1299 and by the close of New York the GOLD/EURO was back above 1311.) The GOLD/SWISS was also in line with the same 200-DAY MA and also wound up closing above that support area of long duration.

Negative interest rates in a non-deflationary environment are not attractive for investors. I am left to wonder whether that “sly fox” Mario Draghi was intentionally attempting to put a ceiling to the recent EURO strength. Ben Bernanke is a hedgehog who knows QE while it seems that President Draghi has many tools in his monetary box. The idea of taking the ECB deposit rate into negative territory is certainly a piece of monetary magic we will be looking for. Remember, the FED remains opposed to taking the Interest On Excess Reserves (IOER) negative for the fear of what it will do to money market funds. The ECB evidently is working on contingency plans to deal with the fallout from negative rates.

*** Tomorrow is UNEMPLOYMENT FRIDAY in the U.S. and Canada. The U.S. data will be meaningless from a market perspective because of the disruption from the Superstorm Sandy. A weak number is expected so if the number were to be stronger than 150,000 NFP it would be constructive for the equity market–better underlying strength in the national economy. The Canadian number should be watched closely to see if manufacturing jobs have picked up with the recently robust auto sales. Consensus is for the unemployment rate to remain at 7.4% and for jobs to increase by 11,000. Canada will probably be a better indicator as the U.S. numbers will be analyzed to death because of Sandy’s impact. Be patient and wait for the markets to respond to the algo-driven headline traders.

***In Thursday’s Financial Times, there was a very important article by ex-Central Bank of Mexico Governor Guillermo Ortiz, “Lesson From Latin America For Greece.” Mr. Ortiz makes the case for debt forgiveness and real restructuring as the key to getting Greece and the other peripheries on a genuine growth path. As Mr. Ortiz writes: “But even if Greece did meet that 2020 target, it remains a largely meaningless figure as it does not guarantee regaining market access. As the Latin American experience illustrates, market confidence is not recovered through illusory arithmetic but by credible measures towards achieving solvency.” This is a very direct appeal to debt restructuring as an important tool to true resolution of the problems overhanging the European economies … sage advice from an emerging world central banker.

Tags: Berlusconi, BOE, ECB, Euro, gold/euro, gold/Swiss, Guillermo Ortiz, Italy, nonfarm payrolls, QE

This entry was posted on December 6, 2012 at 9:16 pm and is filed under BOE, ECB, Italy. 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.