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| Italian spread to Germany - easy to see ECB's SMP-actions |
Just after I said it that Spain is the new Italy…Terrible t-bill auction. France and Belgium are now part of the fun. It is easier to name the countries that are NOT in the circle of contagion: Germany, Netherlands and Finland.
News (Tue evening) – BTH
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
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| Then the French spread to Germany |
EURO CRISIS
Europe Gets It – Peter Tchir / ZH
What has Europe done, hasn't done (that they were supposed to), hasn't done (that wasn't in the plans)
What has Europe done, hasn't done (that they were supposed to), hasn't done (that wasn't in the plans)
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| French and German bond yields diverging |
It’s a capital ratio of two halves – alphaville / FT
Markets are not currently playing nice about handing capital to the banks, making new funding rather expensive. Given this, banks are taking aim at the denominator of the capital ratio by deleveraging their balance sheets. Some are even getting all fancy about it by re-jigging their models to have lower risk weights than previously… It’s like a veritable garage sale out there… and it’s going on all in the same street. Wonder what that will do for prices.
Markets are not currently playing nice about handing capital to the banks, making new funding rather expensive. Given this, banks are taking aim at the denominator of the capital ratio by deleveraging their balance sheets. Some are even getting all fancy about it by re-jigging their models to have lower risk weights than previously… It’s like a veritable garage sale out there… and it’s going on all in the same street. Wonder what that will do for prices.
Asset Swaps Are Adding To The Problem – Peter Tchir / ZH
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| No use picking stocks - it's all risk on/risk off |
Banks will often buy a fixed rate bond and enter into an interest rate swap to “effectively” turn it into a floating rate asset… Yes, there is that ugly term again, counterparty risk. Who is owed money on the swap by the banks that bought bonds via asset swaps? It is another dynamic that is at play that we just don’t know. It also makes it harder for banks to sell their assets because they would have to close out the interest rate swap at the same time.
The new government must quickly enact unpopular reforms to right the country's economy. This may cost its leaders their careers, but a consensus plan would be toothless and would come too late.
The euro zone crisis: A cunning plan? – Buttonwood’s / The Economist
The individual EU leaders are playing a kind of 3-D chess in which they are having to deal with at least three variables; market reaction; domestic political reaction, and the likely actions of other players, including the ECB.
Italy has managed to sustain a very high level of debt even when facing high interest rates by generating large enough primary surpluses. And it has done so with a political environment that has been volatile and in some cases driven by very poor choices. Does it mean that they can keep going like this forever? No, there might be a sense of fatigue and maybe the end of what it looks like an unstable model. But, at the same time, it is interesting to see when we look back at history that a similar episode did not automatically lead to default even with poor economic policy choices.
The ECB Needs the Fed Now More Than Ever – EconoMonitor
The figure shows that the ECB adjusted its target interest rate in a manner that seems to follow movements in the targeted federal funds rate, a response consistent with the Fed being a monetary superpower. Even the ECB’s attempt to break away and tighten in 2011 appears to be conforming to the irresistible pull of the Fed’s power.
Only countries not stressed are Finland, Netherlands and – of course – Germany.
RGE’s Nowakowski and Das Debate: Why Not Make the EFSF a Hedge Fund? – EconoMonitor
Now money is free but credit is tight… and a HF is just a type of bank, borrowing short/liquid to lend long/illiquid… but doing so without a banking license is a riskier proposition for its creditors…
"For years, people who have suggested doing less at European level have been accused of not being committed to a successful European Union. But we sceptics have a vital point. We should look sceptically at grand plans and utopian visions"
The Triumph Of Austerity (And Its Consequences) – The Capital Spectator
Hiding behind the excuse that we must fight inflation NOW requires a grand dismissal of economic history. There are times to impose austerity and don the hawkish posture, but there are times when that's exactly wrong. This is one of those times, particularly for Europe.
High correlation, no dispersion, no use for stock picking. All about macro and sector view. The crisis will end someday, and the tsunamis of macro volatility are going to get progressively less forceful and micro forces will reign. Interesting sector views: Finance: If everything gets moved onto exchanges by regulators, what would Interactivebrokers not be able to do better than most investment banks? Indeed.
ECB Intervenes: Briefly Brings Italian Yields Under 7%... And Sends French Yields To Fresh Record Highs – ZH
Peter Tchir: Mr. Sarkozy's reckless abandonment of fiscal prudence in any form is starting to have real consequences. I'm sure he won't pause and change policies since it will be obvious to him that it is evil speculators and not his EU policies nor the French banks' bad decisions nor his bailout of Dexia that have led to this divergence.
Italian Yields Back Over 7%, CDS Passes 600, Futures Tumble On Abymal Spanish Auction, Lack Of Monti Government Consensus – ZH
(Spain) sold €3.2 billion of bills, below the €3.5 billion target, with the yield soaring to 5.02% from 3.61% at Oct. auction leading to Spanish 2-, 10-yr yield spreads to Germany both significantly wider to records. Reactions to Spanish t-bill auction.
(Spain) sold €3.2 billion of bills, below the €3.5 billion target, with the yield soaring to 5.02% from 3.61% at Oct. auction leading to Spanish 2-, 10-yr yield spreads to Germany both significantly wider to records. Reactions to Spanish t-bill auction.
Thin Ice – Bruce Krasting
On (external debt) basis France has double the debt of Italy. I call this the Money Center Bank Syndrome. The banks have debt outside their borders (they have assets too). This debt is getting sucked into the French government bond market as world investors trim exposure to the country (“If you can’t reduce exposure to the banks, sell government bonds”)… The Merkozy’s of Europe will be making “calming” statements over the next few days. We are dangerously close to a death spiral, and they know it. But they have nothing on their shelf but words.
Who Will Rescue Europe’s Rescue Fund? – The Source / WSJ
One more immediate problem for the EFSF is that French investors, one of the major sources of demand for traded EFSF debt, have less of a reason to buy the stuff these days, according to Mr. Penn. Because French investors had treated EFSF bonds as a close substitute for French government debt, the fact that EFSF debt offered a better yield than French paper was a major attraction. No longer.
One more immediate problem for the EFSF is that French investors, one of the major sources of demand for traded EFSF debt, have less of a reason to buy the stuff these days, according to Mr. Penn. Because French investors had treated EFSF bonds as a close substitute for French government debt, the fact that EFSF debt offered a better yield than French paper was a major attraction. No longer.
Why Isn't Anyone Talking About Writing Off 3 Trillion Euros of Bad Debt? – of two minds
Those who made the bets should rightly lose everything--yes, be wiped out… There is no way to avoid the 3 trillion in losses. the only question is who should absorb those losses: those who stood to gain, or the innocent chumps whose only crime was being a taxpayer or owner of euros?
Who has the better central bank, Europe or the U.S.? – Wonkblog / WP
ECB vs. Fed: Balancing growth and inflation (0-1), Pumping money into the market during crises (1-1), Getting involved in politics (1-0)
ECB vs. Fed: Balancing growth and inflation (0-1), Pumping money into the market during crises (1-1), Getting involved in politics (1-0)
EU Proposes Rating Agencies Can Be Sued – MarketBeat / WSJ
Flash Comment: Euro area decent growth in Q3 – Danske Bank (pdf)
…but Q4 will be bad, a mild recession or if policy makers fail, a severe one.
RESEARCH
After controlling for institutional preferences for stock characteristics, we find that stocks held by hedge funds as marginal investors are more sensitive to changes in aggregate liquidity than comparable stocks held by other types of institutions or by individuals. Stocks held by hedge funds also experience significantly negative abnormal returns during liquidity crises.
Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence – FRB
Recent empirical evidence suggests that the variance risk premium, or the difference between risk-neutral and statistical expectations of the future return variation, predicts aggregate stock market returns, with the predictability especially strong at the 2-4 month horizons.
Recent empirical evidence suggests that the variance risk premium, or the difference between risk-neutral and statistical expectations of the future return variation, predicts aggregate stock market returns, with the predictability especially strong at the 2-4 month horizons.
OTHER
Yield forecast update – Danske Bank (pdf)
Further monetary easing to push European rates lower
Krugman vs Summers: The debate – Felix Salmon / Reuters
Krugman predicts japanification, Summers does not. The two met and debated.
What Types of Stocks Should You Be Looking for Today? – Institutional Investor
Stock correlations at extreme highs, while return correlations to factors at extreme lows.