Yes, another day and the markets had to try to understand the significance of Cyprus. The newswires were filled with analysts claiming this was a “tempest in a teapot” and that the doomsayers were blowing the Cypriot problem into a pseudo crisis. Again, a world that is highly leveraged is subject to a “single spark starting a prairie fire” and the fear of contagion and an electronic bank run are very real if the major policy makers don’t invoke the trust of the electorate and investors. The perceived actions by IMF Director Lagarde (the joker) and the liquidationist mentality being thrust from Berlin and Chancellor Merkel (the thief) have created a situation where European bank depositors are nervous, especially so in the peripheral banks. THE MAIN COMPONENT OF THIS UNCERTAINTY WAS THE MOVE IN THE FRONT MONTH EURIBOR CONTRACTS,AS THE JUNE 2013 FELL 10 TICKS ON A DAY WHEN OTHER INTEREST RATES WERE LOWER. NOTHING SAYS BANK FEARS THEN A COUNTER MOVE IN THE EURIBOR AND LIBOR MARKETS. An increase in bank yields with equity markets falling is a sign about the fear in the bank deposits market. It seems that the policy makers that are leading the previously “revered” TROIKA (IMF,European Commission and ECB) have initiated fear for a mere pittance.
As the Dylan song continues: “There’s too much confusion, I can’t get no relief.” For all those traders, keep a close watch on the Euribor markets and do your technical work to look for possible levels of increased downside momentum. Yes, the EURIBOR had been building in a rate cut as I have previously discussed so the market may be merely taking back some of the ECB anticipated easing, but that would be contra to a market sensing economic turmoil. Thus, it is most likely an indication of concern about the banks. The markets have other areas of vulnerability but at this juncture calm has prevailed. The selloff in the SPOOS and GLOBAL EQUITIES has been well contained as it seems investors are looking to havens to park their funds. Stocks have been a favored haven as well as investments deemed not to have the taint of European banks.
Anyone notice that the Japanese Bonds (JGBs) have made all-time highs on the CQG futures chart? The YEN has been a weak currency for the last four months, especially against the EURO, as Japanese investors (Mrs. Watanabe) have moved their funds to places of higher yields and possible appreciation. If the banking problems in the EU become more unstable, look for some repatriation of YEN back to Japan, especially as we near the Japanese fiscal year-end … just something as traders to watch. As always, look at the EUR/YEN technicals to see possible corrections in what has been a very powerful trend.
***Tomorrow the FED will release its FOMC statement at 1:00 p.m. CST followed by a Bernanke news conference at 1:30. The turmoil in Cyprus and its impact on the markets would keep the Fed on its present course.It will be of interest to see if the FOMC comments about headwinds from the global financial crisis. But more importantly, I will be watching how the committee votes. Before this week’s turmoil in Europe, Fed Governor Jeremy Stein had delivered a speech warning about the growing risks in the bon markets because of the Fed’s QE program. The response to Governor’s Stein’s speech in the financial sector was so great that Chairman Bernanke and Vice Chairman Yellen were forced to speak on the issue. I WANT TO SEE IF JEREMY STEIN VOTES AGAINST FURTHER QE that would be a significant statement and give the noted hawks on the Fed some major support. Otherwise, the Bernanke press conference will be the main event.
***In a followup to last night’s post on the hypothetical use of Cypriot natural gas as collateral for a Russian loan to bail-out its banking system, Jim Sinclair forwarded a piece about the Cypriot gas fields. I will post the piece tonight and thank Jim for the update. Also, the article with the map notes that Turkey has been
reticent to recognize the Cypriots claim, but if the gas fields are Russia’s collateral, the Turks may well rethink their stance. Again, the law of unintended consequences set into motion by the Joker and the Thief.