Summary: Stocks down, EURUSD first down heavily and then up, USDCHF and USDJPY breaking down, ECB’s bond buying spree is working for the Italian and Spanish bonds, but hurting the core.
Views: Keep the Brazil short. Otherwise no bets. The EUR/USD trade I recommended earlier today was a complete winner. Actually, all my recommendations in this blog have been winners. I’ll be more careful for a while to avoid any inflated self-esteem and gambler’s fallacy.
Today it will be really important to read and think. My links are extra good today. Go ahead and read them. I'm telling you, there are fortunes to be made:either ECB means business and will essentially federalize 1.2 trillion of debt, or alternatively will give up in two days. Given the central bank's reputation and lack of policy coordination, my vote is on the latter.
On the EURUSD chart to the left: given the volatility of everything else, the good old DEMUSD - ahem, EURUSD - has been behaving throughout the crisis like the lamest spread pair ever. Why take political risks when you can play the range here?
For the next two days I am not making the 'early' daily updates. My apologies to the regular readers.
For the next two days I am not making the 'early' daily updates. My apologies to the regular readers.
Quote of the Day: On Bank of America’s woes: It also means that another TARP is on the way. And once America realizes that another several trillion have to be put into its insolvent banking sector, it will get quite violent. The biggest irony: it is AIG which takes down the financial system for the second time after its lawsuit against BAC filed last night kills Bank of America. – “Tyler Durden” / Zero Hedge
EURO CRISIS
“Until the core commits real resources to the preservation of the euro zone, markets will maintain their scepticism. If euro-zone governments don't make their commitment, the ECB will justifiably abandon its efforts. The ECB bought the euro zone time, but it's not clear that it knows what to do with it.”
The ECB presses "pause" on the crisis – Free exchange / The Economist
“However, German Chancellor Angela Merkel once again made it clear on Monday that the size of the fund won’t change. Or, to put it another way, the German Chancellor isn’t about to commit political suicide by asking the German people to cough up any more funds to save the euro. Yet, without full German backing for the exercise, seeing that only Germany has enough money to make the euro succeed, euro sellers are likely to return.”
Euro Needs German, Not Just ECB, Support Now – The Source / WSJ
Merkel Under Pressure at Home on Euro Rescue – The Source / WSJ
“..there is a possibility of self-fulfilling crisis under the euro, in a way that wouldn’t arise with a national currency. And as I see it, that self-fulfilling-crisis argument is the justification for what the ECB is doing.”
“This is a recipe for further economic divergence and insolvency in the eurozone. To prevent this, the eurozone needs a “risk-free” interest rate.”
Eurobonds or Bust – Tilford via Project Syndicate
“Did the ECB just rescue Italy from a liquidity trap, or keep it there?”
Sterilising Silvio – alphaville FT
Watch the Euribor / OIS spread. Rise would lock up interbank markets and that would be nasty.
Market Upheaval (Updated) – naked capitalism
“Marked jump in Italian bank borrowings from ECB liquidity operations in July”, and failed/cancelled bond auctions.
The other ECB Italian backstop – alphaville FT
Older, but very much related article on how the Spanish banks increased their use of ECB financing whole Spring, while Spain’s bond auctions failed in June. This is exactly what happened to Greece, Ireland and Portugal as well.
(June 20th) The return of the sovereign-bank loop? – alphaville FT
Debt, growth and competitiveness. What Italy can do: fiscal and structural reform. What the world can do: bail them out?
Italy: Call in the G20? – Dadush & Stancil via voxeu.org
FINANCIAL CRISIS
Very nice roundup of the current themes
Read this when you have time. Really, read this.
Change We Can Believe In – The Big Picture
Nomura’s research piece shows we are on several metrics close to the levels when previous QE’s were announced. But as the sovereign risk is now considerably larger, maybe it is not enough for QE3.
The QE3 pain threshold – alphaville FT
“U.S. global corporations' overseas earnings--now roughly 60% of total profits for many big global corporations…This explains why the Fed has been so keen to trash the dollar: it magically increases corporate profits and thus drives stocks higher. The mainstream financial media's explanation for the weak-dollar policy is that the Fed is anxious to increase exports, but this is a sideshow; exports make up less than 9% of the U.S. GDP. The real action is in corporate profits, which thanks to the weak dollar are near all-time highs of almost 14% of the entire GDP.”
ML’s Rajan: Downgrade does not disturb repo markets, but might cause redemptions from money market funds – and that would hurt repo markets.
Why money market fund actions will be key – alphaville FT
A Reminder on the New Circuit-Breakers – The Reformed Broker
OPERATORS
Morgan Stanley and that downgrade – alphaville FT
Morgan Stanley on Complexity and Unintended Consequences – Infectious Greed