For the last 2 years, if the Eye on the Market had a single dominant theme, it was that a common monetary policy does not by itself create a durable monetary union; that European asset markets were not adequately pricing in the risk that the European Monetary Union could fail, or require massive transfers to save it; and that austerity with no FX devaluation is doomed to failure. During this time, our skepticism about the EMU and European asset markets has been rewarded at every turn. For those interested, here’s the latest grisly news of the week….
• European manufacturing and new orders surveys are generating the worst readings since May 2009 (particularly sharp declines in France and Italy); German growth fell from 5.0% in Q1 to 0.5% in Q2 • Both Italy and Spain struggled in August to attract interest in their public debt, and now both countries face much bigger auction schedules in the fall. Spanish and Italian banks also have large funding needs which are likely to be a problem if their respective sovereigns cannot borrow from the debt markets. Asian buying is critical; Spain relies on Asia for 5x the demand they get from the US. Current IMF and bilateral EU borrowing facilities are not big enough if Italy needs to access them. • EU bank shares have plummeted due to funding concerns, as the IMF and EU argue about capital adequacy of EU banks • Italian government bond yields rose by 0.5% yesterday as Italy struggles with ECB demands for a zero-deficit plan1 by 2013; the ECB does not appear to be in a rush to restore stability before the Italian plan is “fully confirmed and implemented” • The IMF-sponsored Greece adjustment program is in shambles2, for all the reasons we expected it would be • Imbalances at the root of the region’s problems have not improved fast enough (see chart). Without an FX devaluation to close the gap, the periphery is consigned to a self-reinforcing cycle of low growth and austerity. While many see the EMU as an integration project, it has resulted in the largest growth and employment disparities in decades (see charts on page 5)
All European Markets rebounding today, on relatively low volume. The bounce could continue, and the squeeze we wrote of yesterday, risks killing “fundamental” shorts (short term only) as we melt up on very light volume. Below some European Index Charts. All in all we see the bounce as a dead cat bounce.
Dax has been the dog, and we expect the rebound to continue short term. Just recently today we have seen the first intraday outperformance vs STOXX in several days.
STOXX 50 looks simliar to DAX. Expect a further move up, and then a revisit of the lows. Note how close the STOXX 50 is to it’s 2009 rock bottom levels. The ones who bought the bottom are up some 30 % in two years. Worth the risk?
….and the real Dogs; Italy, Spain and Greece.
By Gold Core,
Gold is trading at USD 1,843.60, EUR 1,314.10 , GBP 1,155.30, CHF 1,584.10 and JPY 142,390 per ounce. Gold closed marginally lower in all currencies yesterday except for the Swiss franc which fell nearly 7% against gold and other fiat currencies.
Gold’s London AM fix this morning was USD 1,844.00, EUR 1,311.99, GBP 1,153.44 per ounce. Gold fixed lower in all currencies (USD 1,891.00, EUR 1,330.75, GBP 1,172.86 per ounce).
The German constitutional court rejected the challenge against the Eurozone ‘bail outs’ but said that the ruling shouldn’t be seen as “blanket” approval for future bail outs. Going forward Angela Merkel and the German government must seek approval from the Parliament’s budget committee for new guarantees it assumes under the European Financial Stability Facility.
Dow Jones Industrial Average, a fata morgana? The article “Stockmarketcrash 1929, mystery unraveled?” is a must read. Original Dutch version at the end of the article.
Guest Post by Wim Grommen;
In the twenties of the last century the world, and especially the United States, experienced an economical high. As a result of this, share and stock prices rose to unprecedented heights, beyond reasonable values. The underlying economy had decreased in strength without this being reflected on the stock exchange. Investors were euphoric and stock prices were forced up against all economic logic. (1)
In my view the causes for the rise of the Dow Jones to unprecedented highs were the introduction of a new calculation method for the Dow on 1 October 1928, the introduction of the Dow-divisor, the extension of the Dow from 20 to 30 funds on 1 October 1928 and splitting the stock between October 1928 and November 1929 which was the last part of the acceleration phase of the second industrial revolution. These 3 factors caused the Dow to rise exponentially from 238 tot 381 points in de period October 1928 to September 1929, while the underlying economy strongly diminished in strength.
Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.
As Markets trade in a relatively tight range, here is some HFT reading. What is the impact of THE algo going crazy?
From DB Research, full paper here, although they “forgot” mentioning the predatory algo.
Over the past years, high-frequency trading has progressively gained a foothold in financial markets, enabled and driven by an interplay of legislative measures, increased competition between execution venues and significant advances in information technology.
— The terms “algorithmic trading” and “high-frequency trading” are frequently mixed up in the public debate. In contrast to traditional trading strategies, high-frequency traders do not aim to establish and hold long-term positions. Rather, they enter into short-term positions and end the trading day “flat”, i.e. without carrying over significant positions to the next business day. Algorithmic trading strategies, on the other hand, typically aim at reducing the adverse market impact of large-sized, institutional orders.
— Strategies employed by high-frequency traders are manifold: They may be differentiated into statistical arbitrage, liquidity detection and liquidity providing strategies (market-making).
The Swiss National Bank’s decision to set a SFr1.20 floor versus the euro has sparked a flurry of strategic adjustments by investors and added to the volatility that has been roiling markets of late,http://ftalphaville.ft.com/thecut/2011/09/06/670711/snb-move-on-franc-sparks-more-volatility/
Banks, exchanges and trade repositories should be forced to disclose more timely and comprehensive data because increased transparency would help investors to price risk and discourage contagion panic,http://ftalphaville.ft.com/thecut/2011/09/07/671016/fpc-member-calls-for-more-disclosure/
Google’s offices in Seoul have been raided by South Korean regulators, the FT reports, citing two people familiar with the situation. Google itself refused to confirm the Korea Fair Trade Commission had visited its offices. http://ftalphaville.ft.com/thecut/2011/09/07/670956/regulators-raid-google%e2%80%99s-seoul-offices/
The Manhattan district attorney’s office has issued subpoenas in recent weeks into the way Goldman Sachs marketed some CDOs before the financial crisis, the WSJ says, citing people familiar with the matter. http://ftalphaville.ft.com/thecut/2011/09/07/670926/subpoenas-issued-on-goldman-cdo-sales/
The Institute of International Finance, which represents the biggest financial groups, claims in a study that higher bank capital rules will drive up the cost of credit, hampering global growth and wiping out 7.5m jobs. The FT reports the IIF, http://ftalphaville.ft.com/thecut/2011/09/07/670896/banks-say-capital-rules-will-cost-7-5m-jobs/
Twenty high-profile economists have written to the FT arguing that George Osborne should drop the 50p top rate of income tax “at the earliest opportunity” to boost growth. The economists say the move is essential to create an internationally competitive tax regime that will allow Britain to enjoy long-term sustainable economic growth. http://ftalphaville.ft.com/thecut/2011/09/07/670886/economists-argue-50p-rate-should-be-dropped/