Notes From Underground

The wires are burning with the possibility of the ECB moving forward with a quantitative easing announcement. I would give it a 1% chance, or, in options pricing terms, A CABINET BID. It is too early for President Draghi to impose a QE plan for next month the European authority reveals its asset quality review (AQR), a stress test by any other name. The ECB would be wasting its ammunition until it sees how the market reacts to new information on the health of European banks and thus the European financial system. If the results are as dismal as I believe, Draghi will want to initiate his asset-backed security program so as to create a market mechanism for relieving the banks of their problem loans. The market maker for these ABS instruments will be the ECB as they will be the only buyers willing to pay inflated prices for NONperforming loans. High prices will need to be paid to keep the banks solvent for if the haircuts on the troubled loans is too large the banks will collapse.

Think in terms of the Treasury and FED paying ridiculous prices for AIG and other debt instruments in the midst of the Lehman crisis. The Draghi press conference will be important for Draghi providing more insight into an ABS program. NOW IT MAY BE THAT THE ECB CUTS RATES ANOTHER FEW BASIS POINTS FROM THE PRESENT 0.15% to 0.10 % a cut that the EURIBOR MARKET has already priced in with the Dec. 2014 contract already trading at 0.9987 or 13 basis points. A NO ACTION BY THE ECB would probably create a short-lived rally in the EURO. I will be trying to sell the EURO with a wish order roughly 80 to 100 points above the market–1.3230-1.3250. I will be cautious in my price because the market is very short the EURO and the ALGO NEWS READERS will push the EURO higher on no action.

The Bank of England will announce its intentions at 6:00 a.m. CST prior to the ECB and I expect no change from the Monetary Policy Committee. At the last meeting, Governor Carney had two members dissent in a desire to see an increase in the official bank rate. Since the last meeting the British pound has been under downward pressure so the committee may want to see how the recent weakness in the pound impacts the economy going forward. Also, the MPC may want to wait until after the Scottish Referendum on Independence from England on September 18. Before this week the market was certain that the “NO” votes were going to prevail but recent polls show a very close vote. The uncertainty to the results from a breakup of the U.K. are enough to keep the Bank of England leaving interest rates at 0.50%. Another problem for the British pound and the uncertainty emanating from the Scottish vote is that many people have been long pounds and short euros and the uncertainty about the referendum is causing an unwinding of the EUR/GBP cross, which could put a bid to the EURO in the short-term.

***On the geopolitical front, problems continue plaguing global markets and Europe. The Ukraine is causing some angst for investors as they fear the European actions to confront the Russians and Putin’s plans for eastern Ukraine. The idea that the EU is going to send a rapid deployment force in Eastern Europe is just nonsense. A European force would be a token gesture that would prompt Putin to expedite his plans. Putin could deploy a much better supplied and vibrant force far quicker than the Europeans and his supply lines are much shorter. In understanding the hollow threat from NATO and the EU I would invoke Bismarck’s comment about the British Army: “If the British Army landed in Europe, I’d get the Belgian police to arrest them.”

The Ukraine is not the beginning of a wider conflict for the U.S. has no real interests in the Ukraine that would spark a direct shooting event. Not one drop of NATO blood will be spilled in containing Putin. Europe on its own is powerless. The French did announce this afternoon that is was not delivering the ships to Russia, but the French government made sure to let its allies know that it was not cancelling the contract for failure to deliver would cause the French to pay more than a billion dollars for noncompliance. So from the Ukraine to the ECB it’s all bluff and bluster.

Tags: BOE, British pound, ECB, EU, euribor futures, Euro, Europe, Mario Draghi, Mark Carney, QE, Ukraine

This entry was posted on September 3, 2014 at 5:42 pm and is filed under BOE, Currency, ECB, Europe. 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.