Sovereign credit issues have been front-and-center in terms of recent headlines as cost of funds and the balance between growth and austerity becomes unhinged among the once-upon-a-time risk-free entities. What has had less play very recently is the crisis that is going in the banking systems of the world as investors are as loathed to take any exposure to an opaque and clearly insolvent group of organizations. Credit (and to a lesser degree - equity) markets have shown their disapproval as spreads are as bad (if not worse) than at any time before, and yet the ratings agencies have yet to act decisively - especially in the US. All that is about to change as Reuters gently reminds us that S&P is about to update it bank credit ratings framework. The model is complex by nature but as we have seen time and time again, the agencies tend to lag prices (spreads) and in that case, we can expect downgrades as an early Christmas present. The impact of a downgrade can be very significant - aside from simply reducing investor appetite for risk (in its simplest form), it can trigger collateral calls and in a world where liquidity is hard to come by, and with the magnitude of funding (and rolling maturing debt) due over the next few quarters, we suspect this will be the catalyst for another leg down in equity prices as they snap back to credit's reality.
We wonder if the collapse in silver price yesterday may have been due to just a tiiiiiiny leak of the fact that overnight, the SGE announced an imminent margin hike. From Reuters: "The Shanghai Gold Exchange said it will raise margins on silver forwards to 18 percent from 15 percent from Monday if the silver contract hits its daily trade limit on settlement on Friday. The exchange said it would lift daily trade limits on silver forward contracts to 15 percent from 12 percent if the contract hits limit up or down on settlement on Friday."
It seems pretty clear that almost nothing from the big October 27th all-nighter is getting implemented. The bank recap program is still a vague notion, EFSF can't find aggressive buyers of its more straightforward bonds, and the leveraging schemes seems to have died on the vine. The IIF seems to be just beginning the process of negotiating what complex security they will create that pretends to be a 50% "haircut". Direct investments from China and Russia also seem to be off the table. We are back to the ECB and IMF. Even the reports can barely be bothered to talk about how Spanish or Italian bond yields are improving. We believe we are a long way from getting the ECB to fully turn on the printing press, and continue to hope that some alternative path is found. We really think that in the long run, some defaults will lead to a much better future, than printing will.
InIn diametrical contrast to the rumor that the ECB and the IMF would collaborate to bail out the insolvent continent whereby the ECB prints and the IMF distributes, something which every German on record has said will not happen, we now get news from German newspaper Frankfurter Allgemeine that the ECB has agreed on a €20 billion cap on sovereign debt purchases: something which means all chimeras of an all out monetization orgy can once again be summarily short down. Bloomberg reports: "European Central Bank governing council members have agreed on a 20 billion-euro ($27 billion) weekly upper limit for sovereign debt purchases as resistance among members grows, the German newspaper Frankfurter Allgemeine Zeitung reported. The ECB council meets every other week to decide on an upper limit for bond purchases used to stem rising yields as the European debt crisis widens, the newspaper reported, without saying where it obtained the information. Members met again late yesterday to discuss lowering the level, FAZ said. Council members from the Netherlands and Austria have added their voices to skepticism over the bond-purchase program, the newspaper said. Those objecting to buying include Bundesbank President Jens Weidmann, Executive Board member Juergen Stark and Yves Mersch, governor of Luxembourg’s central bank, FAZ said." Ah, to loosely paraphrase Amadeus, "the Italians Germans... Always the Italians Germans. "
- According to sources, ECB’s lending to IMF proposal is gaining traction, adding that talks on ECB lending to the IMF may start soon
- Market talk of the ECB buying Italian and Spanish government debt
- Fed’s Dudley said the Fed has done a lot to ease monetary policy and could do more
- According to BoE’s Weale, there is a “very strong case” for extending the BoE’s money-printing operations next year unless the outlook improves
Gold has bounced 0.5% today, after falling 2.5% yesterday. Gold is down 2.6% week to date and is headed for its first weekly loss in four weeks which would turn the short term technicals bearish. Spot gold has rebounded above the 50-day moving average that it fell below yesterday. The 50-day MA is moving close to crossing below the 100-day MA, which can be seen as a bearish technical signal. However, the last time gold’s 50 dma fell below the 100 dma in February 2011 it was prelude to rising prices in the coming months (see chart above). However, while the short term technicals may turn bearish, the long term technicals remain positive as does the all important fundamental picture as seen in the global gold supply and demand figures yesterday. The data was extremely positive but there was an element of ‘buy on the rumour’ and ‘sell on the news’ as the positive demand backdrop may have been factored into prices. Official intervention as ever cannot be ruled out and there is now a frequent pattern of somewhat odd sharp sell offs prior to options expiry – options expire next Tuesday.
- Franco-German Spat on Role of ECB Renewed (Bloomberg)
- Draghi Says ECB Must Stay Course, Presses Governments to Act (Bloomberg)
- Zoellick Says Europe May Get Support From China, U.S. Via IMF (Bloomberg)
- Spanish Vote Heralds More Austerity (WSJ)
- UK banks cut periphery eurozone lending (FT)
- US deficit ‘supercommittee’ hits impasse over tax (FT)
- Merkel Urges Monti to Take Quick Steps (WSJ)
- Gross, Fink Agree on ‘Dangerous’ Europe (Bloomberg)
- China Said to Warn Banks on Property, Loans (Bloomberg)
- Eurozone woes drive China back into US bonds (China Daily)
When at first you don't succeed... At this point they aren't even trying: the main upward moving rumor yesterday, for those who have an HFT algo's memory span, was that somehow the ECB would circumvent its charter, something which was expressly denied by every German involved, and lend directly to the IMF which in turn would lend to troubled countries. Because nobody would see through that particular ruse. Well the rumor is back, sending the EURUSDS a good 60 pips higher in no time almost breaching 1.36. Just to make the rumor that bit more credible, the unnamed source added some amusing details: "Germany, ECB still opposed to idea but may be willing to consider it according to sources, and if consensus forms a deal may be reached at December 9th EU summit according to sources." And just like yesterday we expect that the official German denial will be out in seconds. In fact, it appears that today the denial came in before the actual rumor.
- GERMANY'S SCHAEUBLE-NO PRESSURE FOR ECB TO UNLEASH ALL ITS FIREPOWER TO ADDRESS CRISIS, AS THIS NOT PROVIDED FOR LEGALLY- RTRS
- GERMANY'S SCHAEUBLE-IF WE DID DO THAT, CALM ON MARKETS WOULD LAST FOR A FEW WEEKS AT MOST - RTRS