I. The euro area situation and ECB monetary policy
Activity is expected to weaken in most of the advanced economies. This is the result of a weakening of various components of aggregate demand, both domestic and foreign. And it is evident in ‘hard’ data as well as survey data.
In the euro area, downside risks to the economic outlook have increased, and the weaker degree of activity will moderate price, cost and wage pressures.
This is why the ECB decided to reduce its key interest rates by 25 basis points on 3 November, acting in full compliance with its mandate to maintain price stability in the medium term.
We are aware of the current difficulties for banks due to the stress on sovereign bonds, the tightness of funding markets and the scarcity of eligible collateral. We are also aware of the problems of maturity mismatches on balance sheets, the challenges to raise levels of capital and the cyclical risks related to the downturn.
In the money market, we see rising spreads between secured and unsecured segments, and a widening of repo prices between different types of collateral. Interbank activity remains subdued and concentrated in the very short-term maturities. This limited activity is reflected in increased recourse to our liquidity-providing operations, as well as to our deposit facility.
So far, the ECB has taken several non-standard measures to ensure that short-term funding does not represent a problem for euro area banks. The most important non-standard measures are the fixed rate full allotment procedures and the longer-term refinancing operations. We have also implemented three additional US dollar operations, which cover the end of the year, and we have launched a second covered bond purchasing programme.
Scientists say new experiments have replicated their initial superluminal result. However, the skeptical scientific community appears reluctant to overturn Albert Einstein’s special theory of relativity.
The team of European physicists that claimed to have measured a faster-than-light particle in September says new tests have confirmed the results of its first experiment.
In a result that could have a profound impact on the physics world, scientists from the Oscillation Project with Emulsion-tracking Apparatus (OPERA) claimed to have detected neutrinos moving faster than the normally accepted speed of light.
Neutrinos, fundamental sub-atomic particles that remain a mystery for particle physicists, were created and fired from a particle accelerator at CERN, outside Geneva, to a detector at the Gran Sasso laboratory in Italy, 723 kilometers (450 miles) away.
The OPERA team found that their neutrinos travelled 300,006 kilometers per second, which is just above the established speed of light, which is usually measured at 299,792 kilometers per second. Einstein’s special theory of relativity says nothing can travel faster than light.
Reducing pulse time
One issue that many skeptics centered on was the relatively long length of the proton pulses that create the neutrinos that the Italian detector receives. In new experiments run last month, CERN reduced the time of the proton pulses from 10.5 microseconds to three microseconds. In the new experiment, the neutrinos still traveled faster than the speed of light.
Full article here.
Our readers know our long term stance regarding the Spanish Economic situation. We have written extensively on the subject, and been pointing to some very specific problems the country faces. Among those is a collapsing property bubble, a very “strange” attitude towards never taking the STOP etc. Not wanting to realize what “positions” you have, and therefore not manage the risk accordingly, risks taking down many businesses. Among those many smaller banks, as the balance sheets look much different than they actually show.
In June we wrote” We have argued for the Spanish Property Sector to further detoriate. With over 1 million empty homes and local Cajas holding “hidden” debt we have a huge Elephant in the EU room, not many talk about. While the Troica is trying to save Greece, Spain is enjoying the hot summer months. We advice to keep track of those Spanish rates, still trading rather calmly”.
Well things have lately changed, but should not be of any surprise. Spanish rates will continue spiking higher, as investors soon realize what we have been pointing out for long. Spain is in much more pain than people realize. The Spanish Economy is chronically ill.
More on the Spanish Economy below.
Standard & Poor’s has become the third ratings agency this year to upgrade Brazil’s sovereign debt in a vote of confidence for the country that stands in contrast to the situation in Europe and the US,http://ftalphaville.ft.com/thecut/2011/11/18/753181/sp-upgrades-brazil%e2%80%99s-credit-rating/
The UK’s Serious Fraud Office is examining whether to conduct its own investigation into the bribery allegations surrounding Bernie Ecclestone, the Formula One chief, who has admitted paying almost $23m to a German banker standing trial in Munich on corruption charges, http://ftalphaville.ft.com/thecut/2011/11/18/753151/sfo-eyes-probe-into-f1-bribery-allegations/
Mario Monti, Italy’s newly appointed prime minister, has called for “sacrifices” and sweeping reforms to rescue the country from its financial emergency, telling Italians that they must play their part in saving Europe from its worst crisis since the second world war, http://ftalphaville.ft.com/thecut/2011/11/18/753061/monti-pledges-fairness-in-italian-sacrifices/
UBS has outlined long-awaited plans to shrink its business dramatically and refocus on its core wealth management operations, making deep cuts to its investment bank, reports the FT. The Swiss banking group plans to cut more of its investment bank staff and slash its risk-weighted assets in its investment bank almost by half over the next five years. But in a surprise sop to investors,http://ftalphaville.ft.com/thecut/2011/11/18/753041/ubs-to-take-axe-to-investment-banking/
The Europeans are running out of tools to combat their deepening financial crisis. The bailout fund is at best compromised, European banks are degrading by the day and borrowing costs are rising week by week. One of the very few tools that remaining is something called monetization. In essence, the European Central Bank expanding the money supply to purchase distressed government debt, most notably for Italy. Monetization proponents argue that such activity would melt European debt away. The reality is not so clear-cut, and the Northern Europeans are at best leery of this option.
In the Northern European mind, monetization will not solve the core European problem — competition. Southern Europe is already non-competitive with Northern Europe. The average Southern European worker is 1/4 to 1/3 less productive than the average Northern European worker. Throwing free money at them will only make them less competitive. And for those who can remember back a few years, it’s obvious that throwing free money at Southern Europe is in a large part what caused the current debt crisis.
Reader Erik asks a good question regarding investor sentiment. In particular, he wanted to know how bullish investors became during bear market rallies during 2008 and 2009. We will do our good reader one better, and look at the behavior of the sentiment indicator during the 2001 to 2002 bear market as well.
Before getting to specifics, let me first address several things about investor sentiment. It is my belief that most market participants look at investor sentiment as giving them some information about when a market will change direction because there are too many buyers or sellers on one side of a trend. In other words, if we can only determine when there are too many investors on one side of a trade then we could capitalize on that information by betting against the majority. But this interpretation is too naive. There are plenty of examples where trends change direction as investors become extremely bullish or bearish, and there are sufficient examples of trends moving higher or lower despite the extremes in investor sentiment as the old extremes (where the market use to change course) don’t apply anymore.