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Monday, August 8

8th Aug EARLY – Reaction to the ECB

Source: Maplecroft

Summary: ECB announced and started buying the Italian and Spanish bonds – yields are down a lot. Dollar is somewhat weaker, but nothing overly dramatic. Stock markets in Asia down heavily, but after the bond market reaction stocks in Europe are now practically unchanged.

Views: EURUSD is sitting near the top of the trading range, now 1.4335. Sell at the market, stop loss buy @1.4400, take profit buy limit @1.4180. Risk/reward 65/155. I expect the European and U.S. stocks to rally until Tuesday FOMC. Short-term longs or alternatively shorting after the rally is the game plan. On the European front, the drops in government bond yields make bond shorts attractive.

Joke of the Day: "We are going to buy hopefully enough Spain and Italy tomorrow (with whose money we aren't sure) to "shock and awe" the evil speculator out of our garden. Lets hope that works and you don't realise how screwed we really are." – Macro Man translation of the Euro statement

Chart of the Day: Maplecroft’s Fiscal Risk Map from last February summarizes high national debt and public spending, aging demographics, high dependency ratio and low senior labor participation rate. While the debt/GDP ratios are all the rage currently, it will not always be like that. By the way, Finland is ranked 11th, before Greece.


“Today the G-7 advocated both currency and and bond-market interventions "whatever it takes" yet sings the praises of ‘market-determined exchange rates’.”

To be effective, the ECB bond purchases would have to be massive and “..against its own rules and the promises given to German voters in the 1990s. Several key players in Germany would strongly oppose such a move.”

Purchasing More Debt Will Weigh on European Central Bank's Balance Sheet

“That the ECB needs to take these actions is a 100% sure-fire sign that investors have lost confidence.”

“..may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty. Germany’s Bundesbank opposes the move.”

“With the euro revealed as a failure, it is time to reassert sanity in the banking system”

MoreLiver’s view: The Euro-CDO suffers terribly if it would rely on Germany’s AAA alone.

If Greece pays back everything, €38.6b, if only a third, €65.5b

“The ECB should not just stop rate hiking: it should cut rates to zero and make big purchases of government bonds to prevent Italy or Spain losing market access…since this is a crisis of solvency as well as liquidity, orderly debt restructuring must begin”.

Chart: ECB’s bond purchases vs. periphery average bond yield

“So, they’ll buy bonds and provide liquidity while also requiring austerity. And as the periphery economies fail to strengthen the bond vigilantes will continue to control the outcome.”
The ECV fires another pellet…  – Pragmatic Capitalism

Structurally the only way to resolve the European mess is 1) adoption of a European nanny state complete with common bonds and common fiscal policies or 2) partial breakup of the Euro zone

Yes to QE3, but not yet – Humble Student of The Markets

“ECB finally ready to come to the table, expect more austerity”

BB TV interview covers lots of points, article summarizes them all:


“70 years after rice futures trading was halted on the Tokyo Grain Exchange, it was finally reopened today... only to be halted immediately.”

Roubini and Bremmer debate double-dip recession and whether China could end up like Europe's PIIGS.
Just How Bad is Bad? – Foreign Policy

Greenspan on Default – Modeled Behavior

“…the (Europeans) time is now for them to get everyone in line with the nuclear option and wipe out the bond vigilantes and commit to recapitalizing the Spanish and Italian financial institutions.”