Unfinished business-Volcker
With markets trading in a rather “boring” mid day session, it’s always worth reading some extra material. Remember Volcker? Some thought by the ex Fed boss on financial reform, stability, Fed and risk;
It should be clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations, market efficiencies, and the techniques of modern finance. That faith was stoked in part by the huge financial rewards that enabled the extremes of borrowing, the economic imbalances, and the pretenses and assurances of the credit-rating agencies to persist so long. A relaxed approach by regulators and legislators reflected the new financial zeitgeist.
All the seeming mathematical precision that was brought to investment, all the complicated new products, including the explosion of derivatives, that were intended to diffuse and minimize risk, did not work as had been claimed. Instead, the vaunted efficiency helped justify an explosion of weak credit and an emphasis on trading along with exceedingly large compensation for traders.
Full article here. Courtesy Jessie.
Troubled Currency
So, what’s going on in Europe? We are faced with constant news regarding the euro, who is running what country and contagion spreading to core Europe. The amusing part, in the middle of the Euro collapse, is today’s quote out of Romania, “we still aim to join the euro…”. What will happen is very hard to predict, but we are reaching the inflection point. Spiegel’s take on the new Euro zone;
Economists across the Continent have been warning about it for months. Now, the European Union too has said that a recession in the euro zone has become a distinct possibility. “Growth has stalled in Europe and there is a risk of new recession,” said European Commissioner for Economic and Monetary Affairs Olli Rehn on Thursday in Brussels. He also said that unemployment in the 17-member currency union will remain stuck at 9.5 percent.
But with Italy facing massive market pressure to accelerate the passage of critical structural reforms — and to put an end to the era of Prime Minister Silvio Berlusconi — the euro zone continues to focus more on survival than on economic growth. And this week, that focus has led to yet another round of debate as to what the future of the European Union might look like.
Full article here.
Papademos new PM. What happened to keep it in the family?
So, it is now official. Papademos is the new PM of Greece. It has been very turbulent times in Europe lately, so one tends to forget who is the PM and who was the PM yesterday, last week, and this last century. Spiegel did a great recap of how the “old” Papps ruined the country over the past decade. Let’s see if the coming hundred years are better managed.
Papandreou’s grandfather, who was also called Georgios, founded the family’s political dynasty, serving first in various ministerial positions and later as prime minister. After the 1967-1974 military dictatorship, Georgios’ son Andreas Papandreou created the socialist party PASOK. In the 1980s, he gave so much to his cronies and supporters that the country’s debt ballooned.
Greece’s conservatives, meanwhile, were led more by a clique than a family, and they alternated with the Papandreous for turns at the helm. Konstantinos Karamanlis, the family patriarch, held office multiple times before his nephew, also Konstantinos, or Kostas, took over. Occasionally there was also a bit of room at the top for the Mitsotakis family. Konstantinos Mitsotakis served as prime minister and, more importantly, has maintained a position as the most powerful man in the New Democracy party for two decades.
VIX Update
The VIX spiked massively higher during yesterday’s session. Although we didn’t quite see any real panic unfold, the VIX managed to gain more than 30%. As Taleb says “never buy vol when you have to,buy vol when you can”. As the market lately has been rather stable, people have once again, sold too much vol at too low prices. This is now exploding in their faces, so we can expect more volatility ahead. Guest Post by Macro Story.
With a 30% rise in the vix one would expect implied volatility skew to move considerably lower as investors move away from out of the money options and into at the money but apparently not. The skew was down slightly on Wednesday from 124.87 to 122.87 which is suggestive of heightened “tail risk” in the market yet to be priced into the vix.
In most simplistic terms, probability favors a move higher in the vix.
Below is an updated implied volatility skew vix divergence VS the SPX. Quite a lovely correlation and indicative of further selling in equities.
Quick Chart Update
European session has been rather strong accompanied by weak volumes. The Stoxx 50 is actually trading at the same level as yesterday, this same time. Much ado about nothing, but let’s see what the US investors start doing when they come in. Some intraday levels below.
Italy is the battleground
As Asia joins the Euro sentiment, where Hang Seng is down 5%, expect more volatility ahead. Italy is the epicentre of this “latest” renewed fears. We have been covering the Italian theme for quite some time, and pointing to the many threats we face from an implosion of the countries debt and economy. Italy is simply too big to bail out. Yesterday’s sharp spike in Italian rates, made investors very jittery, especially as the short dated maturities traded higher than the longer maturities, and we got that famous inverted curve.
Bloomberg reports on the Italian developments;
The biggest signal yet that the single currency’s third- largest economy is falling prey to its two-year debt crisis forces German ChancellorAngela Merkel, European Central Bank President Mario Draghi and their peers to decide just how far they’re willing to go to defend the euro.
“The market is testing the commitment of the euro zone’s stewards,” said Eric Chaney, Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry. “Italy is the real crisis battleground.”
At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece,Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and eighth-biggest economy. Berlusconi’s offer to quit has still left his nation struggling to produce a government stable enough to deliver austerity after LCH Clearnet SA raised the deposit it demands for trading Italian securities.
…and that inverted curve below.
News That Matters
Ft.com
MF Global sold about $1.5bn of its European sovereign bonds at a loss just before filing for bankruptcy, the WSJ says, citing a person familiar with the matter. The extent of the losses on the sales, which totalled more than a fifth of its European exposure, http://ftalphaville.ft.com/thecut/2011/11/10/739621/mf-global-sold-european-debt-at-a-loss-before-bankruptcy/
Greece’s political crisis deepened on Wednesday after a deal to give the premiership to the speaker of parliament fell through at the last moment, reports the FT. Philippos Petsalnikos, speaker of parliament and a former justice minister, http://ftalphaville.ft.com/thecut/2011/11/10/739451/greek-pm-deal-falls-through/
Inflation in China fell sharply in October to 5.5 per cent year-on-year, the lowest in five months, clearing the path for what is expected to be a cautious policy easing to prop up growth, reports the FT.http://ftalphaville.ft.com/thecut/2011/11/09/739181/chinese-inflation-falls-sharply-in-october/
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