 |
| Markets are too optimistic. |
The writings against the divinity of the LTRO keep coming out. While majority of commentators accept that it was necessary to save the banks, ECB's iron hand in subordinating private debt holders has set a nasty precedent. For the moment stock markets are ignoring the discontent of the bond markets.
Spain and especially Portugal look really bad at the moment, and both of them are going to have a friendly chat with the Troika. Given Spain's size, I think that's it for any remaining solidarity. The figures what the Portuguese banks did with the LTRO are terrible. The Minsky moment is approaching, and the true resolve of the eurocrats will again be tested.
Given how the eurocrats handled the Greek "rescue" (=bailing out German and French banks with Dutch and Finnish money, and taking couple of years to do that), I am not very optimistic of the European end-game. The final straw was the news that Germany pressured the troika report writers to leave out nasty parts about Greece's needs for a third package. Thursday's PSI deadline is approaching fast. I'm not sure they will get the second bailout package in time.
Dysfunctional EU is not all there is. The oil markets are currently driven by speculative demand and low inventories, while the physical traders are net short. If and when the economy tanks again, there will be a lot of position liquidation and thus this could become a rerun of 2008 - and a correction or reversal in prices.
In FX, EURUSD is a good medium-term short towards the recent crisis bottoms (I suggested a possible top around 1.35 some time ago). Yen is the one currency everyone is watching. I feel the yen has more room to weaken. The inflation targeting policy, the terrible fundamentals and the international flows have been grossly underestimated. The safe haven-role of yen will be diminished after the realization that it is not a one-way street, just like swissie wasn't. All these point to further weakness of yen.
In FX, EURUSD is a good medium-term short towards the recent crisis bottoms (I suggested a possible top around 1.35 some time ago). Yen is the one currency everyone is watching. I feel the yen has more room to weaken. The inflation targeting policy, the terrible fundamentals and the international flows have been grossly underestimated. The safe haven-role of yen will be diminished after the realization that it is not a one-way street, just like swissie wasn't. All these point to further weakness of yen.
News – Between The Hedges
Euro Crisis Press Summary – Open Europe
Slow take-up of voluntary Greek write-down plan raises prospect of forced restructuring; Latest poll shows continued rise of fringe parties in Greece
Markets – Between The Hedges
Recap – Global Macro Trading
Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
EURO CRISIS: GENERAL
A Dutch exit? – Buttonwood’s / The Economist
Lombard Street Research, a London-based consultancy, has produced a report on the costs and benefits of euro membership (or exit) for the Netherlands
Is the German debt crisis strategy working? Yes, in terms of bringing Europe back from a near-death experience. No, in terms of actually solving the debt crisis. The question now is: Will Germany’s efforts continue to bolster confidence even as the underlying problems persist? I wouldn’t count on that.
A confrontation between Spain and the EU is likely in the coming weeks. There is no good outcome and that what makes it a tragedy. In Greece’s case, implementation was/is a problem. Portugal is implementing reforms but still not be able to return to the capital markets as envisioned. Spain is (understandably) reluctant to implement additional austerity and wants to miss this year’s deficit target after blowing through last year’s. Can EU fine Spain? Really?
EURO CRISIS: ECB / LTRO / SMP
Vampire Squids, Zombie Banks, and Caminhada Banco Mortos – Peter Tchir / ZH
These seem to be the 4 largest banks in Portugual and any other large presence seems to be subsidiaries of Spanish banks. So the total market cap of these 4 institutions is €4.2 billion market cap and total assets of €233 billion. These banks are likely getting the lion’s share of the €48 billion of ECB money. That would imply 20% of their funding is coming from ECB programs? That doesn’t include LTRO.
ECB liquidity is not a free lunch – Gavyn Davies / FT
Some observers point to the danger of a zombie banking system, kept alive artificially as a wing of the central bank. And, in a much-publicised “private” letter to Mario Draghi in February, Jens Weidmann, Bundesbank president, expressed concerns that the latest two LTROs will expose the ECB to potential losses which will undermine its capital base.
European Credit Signals LTRO Ineffectiveness – ZH
European credit markets, which are now trading at their worst levels post LTRO are much more concerned at the unintended consequences of the massive subordination and dependency than the equity market appears to be.
What is the ECB endgame? – Marginal Revolution
How long would it take for de facto bank nationalization to lower the economic growth rate? How long would it take before re-privatization is an option? By the way people, we’re exploring the best case options here, they did avert disaster in December! For now.
EURO CRISIS: GREECE
IIF's Memorandum Revealed: Disorderly Greek Default To Cost Over €1 Trillion – ZH
IIF: It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion.
collective-action clauses will have to be invoked, a person at the central bank told German weekly magazine Der Spiegel.
everyone is now scrambling to get some color on how many funds are currently part of the Bingham group of ad hoc hold out creditors and how many bonds they represent. If the above is even remotely indicative of holding patterns 3 days ahead of the deadline, the PSI ain't gonna happen.
Triggering CACs at this stage may be one of the few ways to actually deliver the debt relief which Greece needs. It presents many challenges and unknowns but it still seems better than pursuing a path which seems to be fundamentally flawed.
Podcasts
Commerzbank’s Rieger Says Greece Will Default – BB (mp3)
YEN
Easing into a long yen – alphaville / FT
HSBC think that once investors calm down a bit the long-term effect of the BoJ’s QE will be yen positive.
Faros Trading: Yen to Weaken – MarketBeat / WSJ
capital flows, and not Japan’s current account, will be the driver of the currency’s direction, arguing that yield differentials will widen in favor of non-yen currencies in 2012, likely causing a “virtuous circle” of capital outflows and leading to a longer-than-anticipated decline in the Japanese currency.
capital flows, and not Japan’s current account, will be the driver of the currency’s direction, arguing that yield differentials will widen in favor of non-yen currencies in 2012, likely causing a “virtuous circle” of capital outflows and leading to a longer-than-anticipated decline in the Japanese currency.
OIL
Will Oil Continue Heading Higher? – EconMatters
Low inventories, oil analysts have a historical downside bias
Managed money goes LONG oil – alphaville / FT
Good charts. The short side is represented by physical traders and dealers. (sounds very 2008 to me – sell on rallies!)
OTHER
“Not to Be Used Externally, but Also Harmful if Swallowed”: Projecting the Future of the Economy and Lessons Learned from Texas and Mexico – Dallas Fed
I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing.
Hopium Tank On Empty – ZH
economic data is disappointing in the last few weeks relative to expectations as the Citi Economic Surprise Indicator drops to three-month lows.
economic data is disappointing in the last few weeks relative to expectations as the Citi Economic Surprise Indicator drops to three-month lows.
After conducting a secretive test of the banks' health, the Federal Reserve granted most of their requests in March 2011 -- over loud objections from economic luminaries in Washington and across the country. Now, for the first time, we tell the story of why the Federal Reserve caved, and how Wall Street still owns the place.
Central bank policy driving corporate spreads – Sober Look
Barclays: The start and end of each major accommodation tends to be near the inflection point in the credit markets.
Rising income and wealth inequality threaten the global economy – Saxo Bank
Steen Jakobsen: The main policy response in this time of crisis remains one of buying time. This solution will not last however; it will only make social inequality more severe. The source of income and wealth equality is an equal right to capital and to work. Currently the only parties with free access to capital are overburdened banks and governments. Simply put, governments are eating an ever increasing slice of the pie, leaving only crumbs behind for private capital.
OFF-TOPIC
How To Make Financial Content – The Reformed Broker
How to write a book on investing: Grab your favorite rules and ideas from a few of the other 20,000 books on investing that came before yours.
The Big Reveal – The New Yorker
Why does the Bible end that way?