Open question to Goldman Sachs: ARE YOU ARROGANT OR DEAF? There’s a story in tomorrow’s Financial Times there is a story titled, “Goldman Sachs Makes Large Donation to Pro-EU Campaign.” It is being reported that Goldman has made a large six-figure donation to Britain Stronger in Europe. Whoever thought this up needs their head examined. There is nothing in the world more TOXIC than the big investment banks. In a potentially existential issue for British democracy, the idea of a large U.S. investment bank playing in the U.K. referendum will stir the anti-EU forces to push harder for a NO vote. The anti-euro camp has many strong, legitimate former officials working hard to push England further from the restrictions of an overzealous group of Brussels eurocrats.
People like previous Chancellor Nigel Lawson are responsible campaigners for the NO VOTE and the idea of Goldman pushing for a YES vote will fan the flames of NO. This shows a lack of sound judgement on the part of the executives in the Ebony Tower. Does Goldman understand the anti-Wall Street voices that are lifting the popularity of Bernie Sanders and others during the U.S. primary campaigns? I am shocked by this decision and certainly not awed.
***The Canadian central bank held its interest rate policy steady and while Governor Poloz noted renewed softening in the energy sector of the economy, the BOC was reticent to cut rates or embark on a QE program. As an aside, Prime Minister Trudeau was in Davos talking about the possibility of a sizable fiscal stimulus program for the Canadian economy. It seems that Trudeau will become the poster child for the policies put forward by Lawrence Summers. All eyes will look North for a stimulus program that could provide support for other nations suffering from a severe bout of economic malaise.
***Tomorrow at 6:45 a.m. CST, the ECB will announce its interest rate decision. The market is anticipating NO CHANGE. Last meeting President Draghi cut the deposit rate to a -30 basis points but was NOT able to increase the size of the monthly QE purchases. It seems that BUNDESBANK President Jens Weidmann was able to persuade some other ECB voters that 60 billion euros of asset purchases a month was enough and Draghi suffered a rare defeat. Currently there are five EU countries with two-year notes yielding less than the NEGATIVE 35 basis points, which the ECB is prevented from buying with its deposit rate at NEGATIVE 30. It is this that may prompt the ECB to lower the rate to NEGATIVE 40 but the bigger issue will be whether Draghi is successful in INCREASING QE.
If the ECB doesn’t increase the amount of asset purchases the EURO will PROBABLY rally because many analysts were publishing notes today expecting a Draghi surprise tomorrow with global financial markets under stress and European inflation trending well below the ECB target of 2 percent. Last Friday, Draghi met with German Chancellor Merkel in Berlin and was probably seeking some sort of GREEN LIGHT from Frau Merkel on an increase. (This would be an end round of Jens Weidmann.) If Merkel caved to Draghi’s desires it may be another blow to the German leader’s popularity. If Draghi convinced Merkel, she may do it as the prudent economic decision and hope that over time she can resurrect her stature with German voters.
The press conference at 7:30 a.m. will be a market volatility maker as Draghi tries to convince markets of his desire to keep all European sovereign debt yields very low, especially with so much turmoil in Italy. At one time President Draghi was the head of the Italian central bank so he is not deaf to its concerns. Today, YIELDS on the Italian 10-year rose 10 BASIS POINTS amid increased concerns about the financial health of ITALY. The yields on German BUNDS FELL SIX BASIS POINTS as investors scrambled to the safety of Europe’s best credit. For the record: 10-year yields in Spain ROSE 8 points, Portugal 16 points and GREEK 10-year yields ROSE 98 BASIS POINTS. There are certainly concerns about sovereign debt in Europe but Draghi will have to overcome ECB Executive Board Member Weidmann in order to increase QE.
If the Europeans increase liquidity in any fashion watch the GOLD/EURO cross to take a pulse of market sentiment. Also watch for a sizable rally in the debt of the so-called peripheral countries such as Italy, Spain and Portugal, especially as it appears the ECB has almost 25 billion euros left to buy for January. This is a guess based on data published by the ECB. The financial waters grow murkier and as discussed yesterday it is not only China. I ADVISE READING THE NEWEST MISSIVE FROM DANIELLE DIMARTINO BOOTH: “The Sweathogs of Sovereign?”