Even A Risk on/Risk Off World Isn’t This Simple, Or Is it?
This is the S&P 500 since July. We’ve had earnings, elections, open ended QE, attacks on embassies, doubts about the viability of social media as a business, weak economic data out of China, bouts of strength with U.S. economic data, budgets, and stress tests, yet I would argue that the ECB has had the single biggest influence on the market.
While it is impossible to tell what drove the overall trend, let alone any given day, there is a strong case to be made that the ECB has played the biggest role in the “risk on” trade, and for that matter, even the recent “risk-off” trade. The moment Draghi said he was prepared to do “whatever it takes” the market rallied. The ECB press conference immediately after was a bit of a disappointment, but reading between the lines, and the odd use of “transmission” by two ECB members was a good sign that something was in the works.
OMT was announced, and while not the full and easy QE we get out of the U.S. Fed, it was fairly impressive. My initial reaction was to give it an A for Effort but C for Execution. It was the first clear sign that the ECB was looking to take new actions and was working hard to address market concerns. It would rely on the ESM to play a role and was a little short on details, but seemed good.
Guest post by Peter Tchir.
Let’s Get Europe Out of the Way
I would love to be able to say that Europe is fixed. It isn’t and this particular summit was particularly disappointing. They announced some vague plan to plan a bank supervisor. I still don’t understand why people really think a bank supervisor would change anything. Just think about the Spanish bank bailout. Money was supposed to be available in July, then August, then September and as far as I can tell, not a single distribution has been made. This problem is even more complex than other ones, because Germany is part of the problem. Germany may be the land of luxury automobiles and industrial efficiency but it is also fertile ground for state sponsored Zombie Banks.
Spain is not asking for a bailout yet, and allegedly it wasn’t even discussed. I cannot tell whether it would be worse if it wasn’t discussed or that they are lying to us and it was discussed but no conclusion was reached.
Talk about various ways to manipulate the Greek debt problem. Plans range from further punishing the PSI bonds which I think would meet with incredible resistance and accomplishes nothing, to ways to get the ECB off the hook and dump losses on ESM. I am not sure there is any particularly good solution to the official sector problem because owning 10’s of billions of mismarked bonds and loans is a difficult problem to overcome.
Guest post by Marc Chandler of Marc to Market.
Guest post by Market Oracle.
It is barely four weeks since the European arm of the global central bank crime syndicate (ECB) announced its policy of wanting to print unlimited euro’s to monetize bankrupting PIIGS debts that was welcomed by the markets who’s participants would be lining up to offload PIIGS bonds bought at far higher interest rates (lower prices) onto predominantly German tax payers because it is Germany that backs the Euro as a sound currency rather than the Greek or Spanish versions of the Zimbabwean Dollar.
However the promise made by Super Mario Draghi for unlimited Euro-zone PIIGS bond buying programme “One More Try” (OMT) is already unraveling because the fine print of a list of strings attached does not match the promises made and because of the fundamental fact that just like all of the previous bailouts, all it would do at its very best was to buy a little more time for the Euro-zone by kicking the can into the middle of 2013, because it does near nothing to address the problem at the core of the Euro-zone which are the persistently very high and expanding deficits as a percentage of GDP right across the euro-zone that ensures bankruptcy as a consequence of inability to cover government spending let alone service debt interest repayments.
Guest post by Peter Tchir.
The Laundry Has Been Done
I hated investment advice based on “least dirty shirt”.
Now, here we are with DAX up more than the Nasdaq YTD, both in Euros and when converted to dollars. The IBEX index is now up some 35% or so since the July lows.
Anything that was hated or viewed as a good short is rallying the most
- Europe, especially Spain and Italy
- Banks, especially European banks
- Risky debt, especially periphery debt and high yield, along with CDS
ESM Action next? “…whatever it takes….”
From Spiegel. The court battle against the permanent euro bailout fund, the ESM, has become the largest in German legal history. Yet despite widespread concerns, fund head Klaus Regling is preparing for action. The most important question surrounding the fund, however, remains to be answered: Will it work?
Before that can happen, though, the ESM must still clear some legal hurdles. On Sept. 12, the German Constitutional Court will rule on lawsuits seeking to prevent the government of German Chancellor Angela Merkel from participating in the new bailout fund with its €700 billion ($880 billion) firewall.
Some 37,000 Germans have joined the complaint, making it the largest such case in the history of the court. Most prominently, however, the list of plaintiffs includes Peter Gauweiler, a politician with the Christian Social Union, the Bavarian sister party to Merkel’s Christian Democratic Union (CDU), former Justice Minister Herta Däubler-Gmelin of the center-left opposition Social Democrats (SPD), and a group of professors led by economist Wilhelm Hankel, a prominent critic of the euro. They all fear that joining the rescue fund necessarily means that Germany’s parliament would lose its constitutionally guaranteed right to oversee the budget.
With Europe threatening the World Economy, here are a few thoughts by Paolo Manasse via Voxeu.
Many observers of the European Sovereign debt saga had long realised that the ECB was the only European institution up to the task of avoiding a breakup of the euro (see for instance Eichengreen 2009 on this site). The newly forged institutions, the ESFS/ESM, are both ill designed and inadequately funded (Manasse 2011).
The sharp criticism of German piecemeal approach, however, forgets that the ECB was created “in the image and likeness” of the Bundesbank; price stability is its core mandate. That was the price to be paid for convincing Germany to give up the Deutsche mark, and to share the same currency with inflation- and deficit-prone Italy. Now that the survival of the euro seems to hinge on the monetisation of southerners’ public debt, one way or another (primary or secondary purchases, anti-spread firewall), it is not surprising that the Bundesbank, backed by the FDP and CSU parties, is simply saying “no”. Weidman’s alleged resignation just proves the case. Full article here.
Williams joining Mauldin could be a great product. Meanwhile, here is the last “old school” pdf by Grant Williams.
QE3 IS coming folks. Maybe not quite yet, but soon and when it does, it will be a coordinated blitz between the Fed, the eCb, the boe and the pbOC with the boJ tagging along because… well, why not? Not only will it be coordinated, but it will be gigan- tic. It’s really all they have left now. The fear of falling that surrounds deflation has paralyzed the world for the last four years and drastic measures have been taken to stave off that which central planners fear the most.
Lately, the big problem the world has faced has been Europe’s unwillingness to get its head out of its a** come to a collective decision about how to tackle the suffocating debt, but in recent weeks Mario Draghi has seemingly lost patience with political leaders and has begun to force the issue.
Coincidentally, this week, as he opted not to attend Jackson Hole, in an op-ed published, im- portantly, in Germany’s Die Zeit, Draghi signaled just how Europe was going to finally turn on the printing presses:
A few market observations by Peter Tchir.
Looking at the market of the past few weeks, it reminds me of trench warfare. A lot of boredom, followed by brief outbursts of carnage, and in the end, nothing changes.
Since August 3rd, the S&P has been stuck between 1391 and 1418. In the meantime, volumes have eroded. Since July 31st and the Knight fiasco, S&P mini volumes have dropped significantly and seem set to have one of the slowest full days of the year.
Maybe it is because it is August, but that excuse just doesn’t seem right. We have had busy Augusts in the past. Heck, just last year we had great volatility in the month. So it isn’t just that.
There is no shortage of news. We have had summits in the past, and Fed meetings, but typically we get volatility leading up to them. Markets have moved on every single utterance by any European politician or central banker. Now Merkel could stand up naked on the Parthenon shouting that Greece should go, and the markets might sell off a couple of points. Draghi wheeling around a printer might cause a bigger reaction, but even then, I’m not sure.
That may be an exaggeration, but what has happened?