Wednesday, October 26, 2011

Daily US Opening News And Market Re-Cap: October 26

  • German Chancellor Merkel said that all models that involve the ECB are not on the agenda tonight, however both leverage models are going to be discussed
  • According to a senior EU source, IMF thinks 60% Greek debt write-down is not enough, and it should be 65% or more
  • Widening was observed in the Greek/German 10-year government bond yield spread ahead of the EU leaders' summit today
  • According to a draft statement from the EU heads of state, banks would need guarantees on liabilities for more direct support for access to funding. It further said that there is broad agreement on requiring banks to have capital ratio of 9%, to be attained by June 30th 2010
  • There were reports that the Italian PM Berlusconi may resign



Merkel Goes For The Nuclear Mutual Assured Destruction (But Mostly Suicide) Option

As Merkel ends her speech to the Bundestag on her way out to the Euro Summit, here are the main rhetorical conclusions:
But none of that compares to what just was the use of the nuclear mutual assured destruction option, to wit
  • Merkel: No one should take another 50 years of peace in Europe for Granted
And scene: Hank Paulson would be so proud

Italy On The Ropes Again After Secret Berlusconi Promise To Step Down In Exchange For Compromise Achieves Nothing

Over the past few days, Italy has promptly re-emerged as a main cog in the illusion that Europe is a well-greased machine (yes, we know, funny) after it became clear that the country continues to refuse to implement any actual austerity measures following the requirement to do just that months ago when it got access to the ECB's sterlizied bond monetization scheme. In fact it got so bad that yesterday the entire Italian government was rumored to be on the verge of collapse as it was once again unable to reach a resolution on what the EU demands are prompt actions taken to raise pension and/or retirement age. According to the Telegraph, Italy may have found a compromise, one which actually ends the regime of Berlusconi... but not yet. Telegraph reports that Silvio Berlusconi has reportedly drawn up a "secret pact" under which he will resign in December or January, paving the way for Italy to elect a new government in March. "The embattled prime minister made the deal with his key coalition ally, Umberto Bossi of the devolutionist Northern League, in return for Mr Bossi's support for pension reforms, according to unconfirmed reports in two Italian newspapers – La Repubblica and La Stampa. Italy is under huge pressure from the European Union to reform its pensions system and extend retirement ages as part of a plan to rein in its enormous public debt and revive its moribund economy." "Don't make a fool of me in Brussels, and I promise that we'll go to elections in March," Mr Berlusconi told the Northern League leader, according to La Repubblica." This would all be great, if only for one small snag: the "plan", like everything else in Europe, is worthless. The FT reports that the compromise agreement "lacks specifics and risks falling short of what eurozone leaders have demanded ahead of Wednesday’s summit in Brussels....In the end, Umberto Bossi, the fiercely eurosceptic leader of the federalist League, made minor concessions that would raise the general retirement age to 67 years by 2026, but rejected changes to Italy’s length of service pension system that allows many workers to retire at the age of 61 with 35 years of contributions. Even Mr Bossi did not sound hopeful that the proposals would go down well in Brussels. In the past he has said he “doesn’t give a damn” about pressure from Europe over Italy’s pension system." He may change his tune once BTPs drop under 90 and go bidless.


Mario Draghi Says Situation In Italy Is "Confusing And Dramatic" - As Is All Of Europe Today

With European coverage today about to confirm with absolutely certainty that the only option for Europe is to baffle everyone with intolerable and ridiculous amounts of bullshit, and failing that, to delay, delay, delay (we are already hearing of another summit in 4 days), probably what is most indicative of what to expect out of Europe is what incoming ECB president Mario Draghi said is the situation in Italy which he called is "confused and dramatic." That pretty much sums it up. Anyone expecting any actionable result out of the drama queen country or continent, will be disappointed. In the meantime here are sporadic news which attempt to paint a picture of the total confusion in Europe...

Gold Breaks Out and Consolidates Above $1,700/oz – Financial Alchemy Risks Severe Inflation

Gold has extended yesterday’s 4% rise in the US, with further gains seen overnight in Asia and consolidation in Europe. Safe haven demand continues due to increasing risk of a failed outcome from the European Union leaders' meeting scheduled later today and due to significant macroeconomic and monetary risks. The cancellation of a European finance ministers meeting and downplaying of expectations by euro-zone officials about the outcome of the EU summit is adding to investor concerns about contagion emanating from the nexus of European banks and large sovereigns including Italy. There are conflicting reports that Berlusconi has agreed to step down. U.S. Treasury Secretary, Timothy Geithner warned of the “catastrophic risk” posed by the turmoil. The Bank of England dismissed the chaotic efforts to save the eurozone from financial meltdown as a temporary solution to the region’s woes. Governor Sir Mervyn King said long term issues such as towering levels of debt and structurally weak economies still needed to be tackled. ‘The aim of the measures to be introduced over the next few days is to create a year or possibly two years’ breathing space,’ he said. King’s warning follows that of former Fed Chairman Alan Greenspan who warned on CNBC two weeks ago that the EU was doomed to fail because the divide between the northern and southern countries is just too great. The key problem facing bureaucrats and bankers of massive swathes of debt in the European and global financial system is not being tackled. They are attempting to rectify a problem of too much debt by further electronic and paper money creation and the creation of even more debt.

Guest Post: Whilst We All Await The Outcome Of The EU Summit I Want To Draw Your Attention Elsewhere

Whilst the US equity markets closed down 2% last night, it is clear that there is little appetite to put on new trades in front of this summit meeting as evidenced by the lack of interest in Asia. Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble. The fall on Wall St was, in my opinion, more on the back of further weak data from the housing market in the US and consumer confidence which is collapsing fast, as the Case Schiller disappointed yet again. Is operation twist going to help? If the answer is no then Bernanke will have to try something else and this view is building as the fall in equities was accompanied by a fall in the Dollar and a steep rise in precious metals, all signs that fears of further QE are building.

Frontrunning: October 26

  • Incoming ECB head gives euro zone pre-summit boost (Reuters)
  • Fears Euro Summit Could Miss Final Deal (FT)
  • Merkel Puts Rescue Fund to German Vote (Bloomberg)
  • Iron ore in record slide as China demand slows (Reuters) BHP, Rio CDS Soar
  • MF Global slumps 47% on unexpected loss (FT)
  • Bankers fear political moves will kill off CDS (FT)
  • EU Banks Warn of Credit Drought in Push for Capital (Bloomberg)
  • Analysis: Obama's moves pack political rather than economic heft (Reuters)

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