6th of June is approaching. Expect something “big” to happen, as a Grexit is too premature at this stage. With equity markets down sharply over the past weeks, the central planners are not overly happy. In order to pump up the confidence (and the markets), these are the optons. By Peter Tchir of TF Market Advisors.
The ECB meeting on June the 6th seems key to me. Markets and economies are teetering across the globe. More and more people are coming to the conclusion that a Greek Exit would be catastrophic. Central banks won’t want to act as though they are panicking, but neither will they want to wait much longer to act. The regularly scheduled ECB meeting on the 6th is an ideal date for the first salvo to be fired.
Globally Coordinated Swap Lines
The easiest thing for central bankers to do in conjunction with the ECB would be to reduce the cost of the swap lines and once again extend their maturity and potential size. This is largely symbolic. The rate cut would help those that are using it, but 25 bps on that is not going to be a game changer for any bank in the near term. The lines are already in place, so any maturity extension or reiteration of commitment to swap lines is purely optics. On the other hand, it would show that once again all the major central banks are working together, are aware of the problems, and are committed to employing strategies to resolve it. It should calm growing chatter that the Eur/USD basis swap is trending weaker lately. An announcement like this is largely feel good, but since it costs next to nothing relative to what they are already doing, it is an easy step for central bankers to take and enhance any other policy announcements on that day.
ECB Rate Cut
The ECB should cut rates 25 bps on that morning. It would add to the “feel good” nature of yet another swap line announcement. The cut is unlikely to do much for sovereign debt yields. Unlike in the U.S. where treasury yields are sensitive to the Fed’s short term rate, the connection in Europe has long been broken. German and French yields trade far better than the ECB’s overnight rate and won’t move on the back of it. Italian and Spanish bonds yield far more than the overnight rate because of real credit and currency conversion risk. Spanish and Italian bond yields may improve on the announcement but it will be because of the “symbolism” of the cut and the ECB’s willingness to be aggressive.
The Economist on Financial Innovation.
FINANCIAL INNOVATION HAS a dreadful image these days. Paul Volcker, a former chairman of America’s Federal Reserve, who emerged from the 2007-08 financial crisis with his reputation intact, once said that none of the financial inventions of the past 25 years matches up to the ATM. Paul Krugman, a Nobel prize-winning economist-cum-polemicist, has written that it is hard to think of any big recent financial breakthroughs that have aided society. Joseph Stiglitz, another Nobel laureate, argued in a 2010 online debate hosted by The Economist that most innovation in the run-up to the crisis “was not directed at enhancing the ability of the financial sector to perform its social functions”.
Most of these critics have market-based innovation in their sights. There is an enormous amount of innovation going on in other areas, such as retail payments, that has the potential to change the way people carry and spend money. But the debate—and hence this special report—focuses mainly on wholesale products and techniques, both because they are less obviously useful than retail innovations and because they were more heavily implicated in the financial crisis: think of those evil credit-default swaps (CDSs), collateralised-debt obligations (CDOs) and so on. Full article here.
Must read guest post by Saxo Bank’s Sten Jakobsen. Don’t forget reviewing the Stress Chart Indicator.
‘If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew’. – Qur’an: 2.280’
There is not much to cheer about for 2011 and looking into 2012.
It is remarkable that the US was able to sustain a positive – barely – year again – now two years of near zero performance. Impressive? Hardly – The FED and US government has been throwing everything at this market – low interest, Operation Twist, QE 1 through 5, easier regulation for banks (In house models vs. harsh gross regulation).
A different story is Europe minus 20 pc is not a good year, and as we close the year economic activity is collapsing in Asia, moving towards major deflation in Europe, and slowing/maintaining low growth in the US. This creates environment/outlook for:
1. Major risk of ECB moving towards QE in Q1 of 2012. Europe will “fall of the cliff” in economic growth terms in Q1 – forcing German yield towards zero – but….. the initiation of QE could medium-term mean higher rates. I remain of the idea that early 2012 will be long-term low in interest rates in Europe, but also globally. The low interest rate environment have created negative impacts on spending, investment and savings which only can be solved through more market less government intervention.
2. We coined Q4-2011 the “Maximum Intervention” in our Outlook Report and it clear became an almost idiotic list of initiatives which all of them really only created more of the “extend-and-pretend” concept. This is overview of “measures” involving ECB in Q4. Joke! Q1-2012 could be the critical test of this fractional economy
It seems many just learnt a new word last week; re-hypothecation, and are truly devastated by the meaning of the phrase. So the funds at your bank can be deposited as collateral for exchange of cash or other assets, that further can be used for speculation?
Yes, this happens every day, or how else do you think people can finance their day to day trading operations? At BIG banks, one can only hope the Risk Manager is doing a good job. At MF Global, it is rather obvious that at least the Risk Manager was not doing a proper job, while the managers all seem confused about where the money is. With this lack of competence at a big bank, you can imagine what the procedures are at a smaller bank. The best piece on OPM we have read lately. By Armstrong Economics;
The shocking collapse of MF Global with the amount of missing client funds now rising to $1.2 billion, is so devastating, we are at the precipice of complete financial disaster. The United States boasts far too much of its greatness and “liberty and justice for all” but its actions reveal nothing but greed, distain, and contempt of the rights of man that include his right to property. Jon Corzine was a bond trader at Goldman Sachs and has been known as an aggressive trader all along. He intervened at the SEC and changed the direction of MF Global. What is at stake now is exposing the political corruption of the New 3York media, courts, Justice Department, Commodity Futures Trading Commission, Securities Exchange Commission, and political process has come together in such a way that the fate of the nation is truly hanging in the balance. Why do I make such a bold statement?
A Euro Basis Swap is simply a derivative product that allows the holder in the case of a Euro swap the ability to swap EUR for US dollars.
In simplest terms the more negative the value the greater the demand for USD. As witnessed by the rapid decent the central banks were forced to act when they did to facilitate those no longer able to access USD through normal market operations.
The central bank swap lines allow banks to now work directly with their central banks who in turn swap currencies with each other. Below is a chart that shows the correlation with the Euro basis swap and the USD. Data is limited to one year but you can see the trend is highly correlated (thanks to reader grogan for the Euro data).
For the sake of repeating what needs to be a daily theme we are in a credit driven event that equity will be forced to acknowledge. Watch the EUR and USD for signs of how this trade is developing.