SUMMARY: Bad macro from U.S. (Productivity down, labor cost up for Q2 2011 = bad for employment). U.S. bond yield approaching historical lows last seen in the aftermath of the Great Depression. Italy and Spain are partially boxed in by the ECB bond buys. While their bond spreads are not moving, CDS prices are still moving up. Austerity plans announced in France and Italy, while at the same time plans in Greece are not working. Switzerland’s national bank told that a temporary peg of CHF to Euro is ‘permissible’.
VIEWS: Above tells me markets are not taking the ECB seriously and the euro crisis is still going strong. Because of the ECB’s box-in of Italy, Spain, Greece, Portugal and Ireland, the crisis show has moved even closer to the core: France. Any further signs of weakness will hamper EFSF’s credibility and then the crisis could become completely dominated by Germany vs. everyone else. Check yesterday’s links, it was a good day for material.
Stocks: At some point in the near future, stock bear market will abate and safe haven bonds will become less fashionable. Even with the economy going nowhere and earnings surely disappointing in the medium term, stocks still yield something, offer protection against inflation and are basically “real”. While insiders were selling stocks before the recent drop, now they have been buying a lot. I have been bearish on global equities since early spring. I am getting a lot more careful with my short view. Also, see Macro Man's post.
FX: EURUSD range continues. JPY edging very close to ‘magic 76’, while CHF taking a breather after SNB’s very strong efforts to curb swissie’s strength. There could be an interesting opportunity soon to go long CHF/JPY, as the pair has been in an uptrend and has now been retreating for couple of days.
Quote of the Day: Ben can send the helicopters but the risk-off & fear & double dip & EZ crisis grenades can shoot down, as in Afghanistan – any helicopter – Nouriel Roubini’s tweet
Quote of the Day 2: The world is led by debt junkies who think that debt doesn’t matter. They are leading us to a greater crisis where the only thing that does matter is debt, and for political reasons, some governments will not be willing to pay in full. – Aleph Blog
EURO CRISIS
Analysis from the banks: France’s AAA could handle doubling the EFSF, but not more.
Vive La Republique! – alphaville FT
Current LIBOR/OIS spread rise due to ECB’s liquidity measures, not rise in euribors. Also stress shows up mostly in short-end, so this is more near-term caution than systemic panicking.
Funding stress in Euroland, continued – alphaville FT
Greece’s Budget Deficit Jumps — Bailout In Jeopardy – The Daily Capitalist
EFSF was designed for peripheral crisis, not healing the core. Massive liquidity is needed instead.
August 2011: The euro crisis reaches the core – Gros via voxeu.org
French banks are big lenders to Asia. Rest of the European banks are even bigger, with Euro-zone lending to Singapore is 26% of its GDP and 24% of Hong Kong’s.
France’s Pain Makes Singapore, Hong Kong and S. Korea Lame – MarketBeat WSJ
HSBC’s chief economist’s opinion piece
FINANCIAL CRISIS
“Neither the Fed nor the Securities and Exchange Commission has forced United States banks to make as detailed disclosures as the European stress tests did of its banks. So it’s a matter of having to trust the banks and the regulators.”
The Macro Man had the exact same dream as I did.
I Had A Dream – Macro Man
Swiss rates go negative – alphaville FT
S&P500 earnings yield to bond yield extremely high. Time to soon to sell bonds, load up on equity?
One Picture for Relative Value – SurlyTrader
Correlations among stocks and daily volatility of stocks from 1926 to pre August sell-off, from JPM
Equity Correlations and Volatility – The Big Picture
CHINA
China: inflating away debt – beyondbrics
Whack-A-Mole in China’s Bubbly Housing Market - EconoMonitor
China extends Orwellian influence over US: write or say something Beijing doesn’t like and you’re out. Rule number one is to take out the intellectuals first. Expect lots of self-censorship in academia.
OPERATORS
BAC in further trouble – The Trader
The difference between S&P and Moody’s – Felix Salmon / Reuters
DIVERSION
Years of liberal dogma have spawned a generation of amoral, uneducated, welfare dependent, brutalised youngsters – The Daily Mail
Frank Partnoy’s (of F.I.A.S.C.O. fame) opinion piece