Posts Tagged ‘Eurobond’

Notes From Underground: The FOMC, BOJ and German Elections Lead the Way to Quarter-End

September 18, 2017

As the earth rock keeps spinning we continue to monitor global events that could make investors/traders dizzy. This week the FOMC is EXPECTED to announce that it will begin its quantitative tightening (QT) by revealing the date of its plan to shrink its balance sheet by a net $10 BILLION of assets a month ($6 billion of Treasuries, $4 billion of MBS) and increasing the amounts quarterly so the program results in little market disruption. Remember, Chair Yellen has said she believes that it will be “like watching paint dry.” The world’s equity markets — especially the U.S. — are reflecting little concern about the Fed withdrawing “small” amounts of liquidity.

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Notes From Underground: Draghi, the ECB and Germany

August 15, 2017

The upcoming meeting in Jackson Hole has become the focus of the global investment community. Why? After Draghi’s comments in Sintra, Portugal on June 27 sent global bond yields higher, the financial world will gauge whether  Draghi’s speech will signal the beginning of their own balance sheet shrinking. If Draghi were to announce the end of the quantitative easing, the impact would be for the EURO to rise for European BOND YIELDS to rise and, most importantly, the greatest increase in yields would be in the peripheral bonds (and maybe the most significant impact will be on global equity markets). BUT LET ME BE CLEAR, I THINK THIS IS A VERY LOW PROBABILITY EVENT and I will do a deep analysis as to why. Yet again:

1. In yesterday’s Financial Times, there was an article titled, “Draghi Faces Easing Dilemma A Strong Euro Sparks Concern.” The article notes that the STRONG EURO keeps inflation down and therefore prevents the ECB from fulfilling its 2% inflation mandate. Draghi is caught in a dilemma of his own making and there really is no way out as long as it speaks to the idea of a 2% inflation target that is self-imposed by the bank. Many months ago I conjectured that President Draghi would prefer a strong rally in the euro before the September German election. A strong euro silences the Bundesbank as it allows for Draghi to use a strong currency as a measure of the success for the ECB’s policy. If the EURO rallies further it will harm the French, Italian and Spanish economies, which are starting to experience growth, than it will impact the Germans. A one-price euro will not lead to Germany losing its edge within the EU for a single currency prevents that so the peripheral nations will have to engage in wage restraint to sustain its recent growth. The idea of wage suppression will hinder a rise in inflation providing the greatest problem for Draghi’s ECB;

2. In Tuesday’s FT, Thomas Hale and Kate Allen wrote a story titled, “Hopes For European ‘Safe’ Bonds Lean On Pre-Crisis Techniques.”  The reporters visit the issues of “aiming to make the continent’s financial system safer, the idea involves taking sovereign bonds from different European countries and packaging them together into safe bonds that would then carry various levels of risk.” This is what we called financially engineered sub-prime debt a decade ago. Take the German bunds, French oats and bundle with Greek, Italian, Portuguese and Spanish sovereign debt and you have a AAA instrument. The urge to create a EUROBOND is the essence of Draghi’s ECB and there are numerous ideas of how to achieve this end. As the article point out, “It is also a way of bringing European sovereign debt markets closer together without explicit ‘mutualisation,’ where debt is collectively issued by multiple countries, an idea that has proved politically toxic in Germany, in particular.”

The politics of the eurobond have become difficult because the Germans are VERY aware that it is the Bavarian Burghers who will be the creditors of the entire project. Every debt instrument must be guaranteed by credible collateral and several of the European peripheral nations lack the credibility of a solid creditor and making matters worse the weak creditors do not have a printing press. Why would Mario Draghi wish to undermine his efforts to backdoor his way to a EUROBOND by slowing the accumulation of debt assets. THE ECB IS NOT THE FED FOR DRAGHI HAS SET IT ON A PATH TO FULFILL THE MANDATE OF THE PRESERVATION OF THE EURO. Draghi needs to maintain the status quo until September 24 when he believes that Chancellor Merkel will prevail in the German election. Merkel has been a willing partner with President Draghi in his efforts to create a more perfect European union;

3. Also in Tuesday’s FT Claire Jones reported on the effort of challenges to the ECB’s QE program. Germany’s HIGH COURT issued an opinion that said some of the ECB’s actions may violate EU law.

In a case brought to Karlsruhe by “… right-wing members of Germany’s establishment” the German Constitutional Court issued a statement that there are “… significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the ECB.” The court decided to refer the case to the European Court of Justice to get a sense of what the ECJ opinion is before hearing the case. The process could take a year before the German Court hears the case. The article cites a point made by German lawyer Hendrik Haag that “the wait for the ECJ decision may well be an elegant way out for the ECB. It may put pressure on the ECB to be a bit quicker with tapering the ECB programme.”

I TOTALLY DISAGREE WITH THIS LAWYERLY ASSESSMENT. In my view it gives the ECB further time to increase the balance sheet so furthering the effort for a EUROBOND. I will await Draghi’s speech from Jackson Hole but again, THE ECB HAS A MUCH DIFFERENT DESIRE THEN THE FED. Mario Draghi will play for time to hope for the best for his guardian angel, Chancellor Angela Merkel.

Heads up: I will be on CNBC with Rick Santelli tomorrow morning around 9:20am CDT.

Notes From Underground: Wake Up! Wake Up! For Your Light Has Come

June 11, 2017

This line comes from the Jewish liturgy of welcoming the Sabbath. I use it here to make a note to my readers about a possible signal that the NASDAQ 100 sent on Friday. Now I don’t hold myself out as anything but a third-rate TECHNICIAN (reader of chart formations), but having been taught by one of the greatest technical minds (thanks H.G.), I know to watch certain formations for signals in a POSSIBLE change in sentiment. THE CHART THAT CAUSES CONCERN NASDAQ 100 made ALL TIME HIGHS LAST WEEK BUT CLOSED BELOW THE PREVIOUS WEEK’S LOWS. Do I know when the market will reward a short position?

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Notes From Underground: In Honor of French Independence, Europe Imprisons the Greeks

July 14, 2015

And so it goes. As the light lifts off the European “bailout” it appears that most analysts agree that the “Agreement” was a lose-lose for the European Project. The Germans stood firm and placed unduly harsh demands upon the Greek electorate that had the temerity to openly reject the terms of debt resolution. Merkel had favored a real compromise until Alexis Tspiras deployed the nuclear option and went to referendum in an effort to better be able to negotiate with an intransigent Djisselbloehm and his ECOFIN council of Grand Inquisitors (see the Brothers Karamazov). The punishment meted out to the Greek nation is a loss for them but ultimately the real loss will be on Spain, Italy, and, of course France. The Germans have revealed that the use of Berlin’s money to support the EU is going to come at a price and it is the acceptance of an economic model for Europe that is German, its backdrop of course being sound money. Not the strong dollar mantra of the U.S. Treasury Secretary but an actual strong currency, at least until the German financial system enters a fragile state.

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Notes From Underground: Mama, Don’t Let Your Children Grow Up To Be Global Macro Traders

September 4, 2014

Well, NOTES FROM UNDERGROUND gets an A+ for analysis and an F or incomplete for EXECUTION. Caught off guard by Draghi’s timing, the market never provided a rally for the more cautious trader. The euro currency began its break 55 minutes before the official ECB rate announcement as Reuters ran a story revealing the governing board’s discussion of a supposed EU500 BILLION ABS program. A leak during the meeting should provide reason for the ECB to investigate its security breaches and find out who is making money from revealing important information ahead of the governing officials. It must be like Congress, where elected representatives are allowed to be insider traders.

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Notes From Underground: Are the Sanctionists Playing Russian Roulette With the U.S. Global Financial Position?

March 25, 2014

The theme of this blog has been and will continue to be that nothing is as it seems on the surface. In an effort to be as non-partisan as possible, a question arises over the G-7’s immediacy to place sanctions on Putin’s pals as retribution for Russia’s aggression on the Ukraine and Crimea. The use of sanctions under the control of the U.S. Treasury Department and its potential harmful effects on any nation’s economy forces the question: Why would global financial entities desire to do business in dollars or with U.S. domiciled financial institutions? Any time that the U.S. government questions the foreign policy demands of another country, will sanctions be the initial response? If China tomorrow chooses a military response to the issue of the Senkaku Islands, would the U.S. push for sanctions against Chinese financial institutions out of respect for the U.S. alliance with Japan?

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Notes From Underground: A Major Point of Clarification

October 20, 2013

It has been brought to my attention that many readers believe my continued criticism of the European financial markets equates to an OUTRIGHT BEARISH POSITION on the EURO. I have not discussed being short euro unless it is on some cross-rate without any DOLLAR exposure. My continued hammering of the European situation is to minimize exposure to the European banks and financial institutions that so many pundits continue to promote. THE EURO HAS BEEN BULLISH BECAUSE THE QE PROGRAMS PROMOTED BY THE ECB HAVE CONTINUED TO BE PAID DOWN, (UNLIKE THE U.S. WHERE ANY TALK OF TAPERING RATTLES THE GLOBAL FINANCIAL MARKETS). Less ECB liquidity floating in the markets has been a positive factor for the EURO CURRENCY, especially during the time of political buffoonery in the U.S. Money flows out of nervous emerging markets has avoided the DOLLAR and sought refuge in the world’s next largest reserve currency, the euro. Even with the positive forces pushing on the euro, there are other currencies that have RECENTLY outperformed both the DOLLAR and EURO: the Aussie, kiwi and even the lowly British pound. Until the ECB has to pump liquidity into the system to avert some problem bank or sovereign, the euro is a difficult short.

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Notes From Underground: George Soros Gets It Right; Cyprus Follows Britain Down An Ugly Yellow Brick Road

April 10, 2013

Over the last few years of writing Notes From Underground, I have taken his eminence, George Soros (aka the palindrome) to task for advocating that the German polity surrender its sovereign authority to a federal EU entity as he pushed for a harmonization of fiscal authority and then an EU-wide EUROBOND. Previously, Mr. Soros has pushed that the Eurocrats not pursue this Eurobond through a nation-by-nation vote but rather just foist it upon the citizens of Euroland. In a paper released yesterday, Mr. Soros is again pushing a Eurobond backed by a union-wide banking structure and a Euroland harmonized tax system, in which all nations surrender some sovereign authority to a centralized power. There will be no BUNDS, OATS, SPANISH or ITALIAN bonds. It will just be a Eurobond backed by the full credit of the EU fiscal authority. This time around though, Soros does advocate the German government should seek the consent of the electorate.

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Notes From Underground: It’s Raining Liquidity All Over the World

September 9, 2012

Friday’s unemployment report solidified the TRIFECTA of LIQUIDITY for the week. ECB President Draghi seeded the “liquidity clouds” at Thursday’s press conference by announcing the installation of the OTM (outright monetary transaction), which will allow the ECB/ESM to purchase unlimited amounts of sovereign debt of up to three-year duration–of course with conditions for those asking for help. Draghi is hoping to buy the whole EU project enough time so that a FISCAL UNION CAN BE FORMED WITH THE ABILITY FOR THE EU TO ISSUE A TRUE EUROBOND.

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Notes From Underground: How Many Pinheads Can Sit Atop An Angela?

May 22, 2012

As I looked at the photos from the G-8 conference, this caption became obvious. The German Chancellor is the belle of the ball as her Germany has what the World is crying for: surplus wealth in a debt-laden world. The pressure was on Chancellor Merkel to provide enough EUROS for short-term triage on the European nations hemorrhaging wealth from the huge amount of debt owed to many global creditors. As the communique revealed, there were few concrete proposals provided by the G-8 “brain trust” except that Germany “ought” to provide the financial backstop for all of Europe and, thus, the rest of the world. President Obama is well aware that any financial collapse in Europe will weigh heavily upon his reelection potential.

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