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Thursday, April 19

19th Apr - Final Calls

Interesting rumors that instead of the usual %/GDP share of 10-15bn, Switzerland could provide a lot more funds for IMF to help backstop the euro area. Also China is seen contributing a lot. In exchange, the CHF peg will be accepted by all and the Chinese will not be bothered for a while for their undervalued currency.

I believe the leaders know that Spain is on the brink here, and they are planning their response accordingly. Instead of a decisive action during the weekend, we will hear about the IMF's additional resources and announcements of promises of further action if needed. As before, they know that the threats of rate cuts and LTRO/SMP. are more effective than the actual events.

Reader Speden Speli, thank you very much for pointing out my option pricing error - I am embarrassed to admit it, but I had calculated the price of the three-month put with one-month vol (which is much lower). This is what happens when I haven't used a pricer for ten years. A 3-month 1.20 put would end up costing you 95 pips, not 60.

Quote of the Day
In any market analysis of the stress in Europe and employment issues in the US, every conversation comes back to when will central bankers act…What is the strike price of the central bank put now? In Europe, we know Germany will wait as long as possible and in the US, previous action came only after double digit declines in stocks. – The Big Picture

Markets – Between The Hedges
The Closer – alphaville / FT

Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
Tracking Europe’s Debt Crisis – NYT
FX Options Analytics – Saxo Bank

The bank-sovereign linkage in the EurozoneSober Look
The periphery banks are now inextricably tied to the path of their nation's sovereign debt. One of the things that made the Greek bond restructuring so difficult was the fact that the Greek sovereign bond write-down instantly made Greek banks insolvent. Greece had to use €50 billion of the EU financing just to recap the banking system. This issue has become acute in other Eurozone nations.

Mario Draghi on competitivenessMacro Matters
However (Draghi’s) argument that achieving an internal devaluation in the euro zone by inflating core countries relative to peripheral nations will destroy the external competitiveness of Germany or the euro zone as a whole is just wrong.

The role of the central bank and euro area governments in times of crisisECB
Speech by Peter Praet, Member of the Executive Board of the ECB at the German Federal Ministry of Finance, Berlin, 19 April 201219 April 2012

Thoughts on the importance of the French electionsPragmatic Capitalism
Regardless of the outcome of the French presidential election, there is no going back to Paris-Berlin parity and the risk is that instability and uncertainty in Europe increases going forward. In the current environment, higher volatility is likely to be associated with a weaker euro.

Sovereign debt and bank risk: New
Europe’s sovereign debt crisis has reignited the debate over the link between sovereign and banking risk. This column presents data from the July stress test and December Capital Exercise of European Banking Authority. It finds that holdings of sovereign debt is not the main driver of bank stock market performance but that investors do take into account the riskiness of sovereign debt in the bank’s host country.

EURO CRISIS: PIIGS (with France)
No one likes the French, nor the IBEXMacrowonders
Well those auctions, the French and the Spanish ones are not calming markets...French spreads to bund are breaking their recent highs and 1.4 level making it the worse relative performer YTD. Even worse than Spain...We are closing in those pre LTRO high for both Spain and France...One thing is sure France does not belong in that safe asset universe anymore.

France, Spain Hold Bond AuctionThomson Reuters
Of all institutional investments in French and Spanish sovereign debt, the countries with the most total ownership belong to those countries whose debt is in focus. French investors own more than two thirds of all French sovereign debt held by institutions. (full pdf)

Spanish Kevlar GlovesMacro Man
What do Europe sellers expect to happen? To TMM it would appear that the only scenario that supports selling right now is one where Spain crashes, doesn't receive assistance, defaults and the euro and then Europe break up. Now call us picky but though that indeed is one potential outcome there are a lot of other scenarios and most of them involve some internal resolve, even if it does involve printing your amount of money.

Pimco Buying and Holding Italian, Spanish Debt, El-Erian SaysMarketBeat / WSJ
“It is important to make a clear distinction between individual countries; Spain isn’t insolvent! Italy isn’t insolvent!,” El-Erian told the newspaper. “If Spain can convince investors that it is making progress in restructuring its banks, it won’t need external help.”

IMF: eurozone at centre of coming stormeuobserver
Lagarde said she has already received pledges of over €240 billion out of its €300 billion goal - most of which would come from the eurozone countries themselves, the rest being committed by non-euro states such as Japan, Sweden, Denmark, Norway and Switzerland. The US has so far not put up any cash on top of its regular contribution.

IMF and China are new BFFsalphaville / FT
There seems to be something of a love-in going on between China and the IMF, though admittedly you have to wade through a weighty report to glimpse it.

On the Swiss, the IMF and the G-20Bruce Krasting
The side deals on the Swiss IMF participation should be interesting. What would the Swiss get in exchange for a giant check? One thing that will be up for discussion is the SNB’s currency peg. A month ago, the IMF blasted the SNB over the peg. My guess is that the criticism goes away if the Swiss write a check for $25 large. What a system…

Provisional Agenda for the Twenty-Fifth MeetingIMF
25th meeting of the IMF Committee in Washington, D.C. on April 21, 2012.

Five reasons why the Fed would prefer to avoid QE3MacroScope / Reuters
for a mix of tactical and practical reasons… And yet 11 of 15 primary dealers polled by Reuters following a disappointing March payrolls report still believe the central bank will ultimately embark on another bond-buying stimulus plan.

Flies in the Fed’s ointmentalphaville / FT
Yep, nearly time to start talking about the next FOMC meeting, a two-day affair that begins this Tuesday. Any big decisions regarding further quantitative easing are more likely to be taken later, closer to when Operation Twist is scheduled to end in mid-June.

Anji Capital Bets the Euro Will Tumble to 1.03 Swiss FrancsMarketBeat / WSJ

Are Dividend Stocks Getting Too Expensive?MarketBeat / WSJ
at least one analyst is wondering whether the “dividend trade” has gone too far, too fast.

Goldman On The Three Risk WorldZH
The strength of the US growth cycle; the sovereign and financial risks in the Euro area; and the risks of ongoing deceleration in Chinese growth. The risks are correlated, but can decouple. Asset sensitivities to these factors also pictured.

The Options Tweeters You Need to Follow NowSchaeffer

The Story the Chart we Like Tells usMacrowonders
There was never a treasury bubble, just disinflation...the Fed knows it and its negative Real Rate policy is boosting Gold...and saving us from Deflation...meanwhile college tuition fee inflation is deflating housing...The BOJ, unlike the FED needs political pressure to ease...Elsewhere, the Spaniards, unlike the Italians are broke...and they are not paying their least the Greeks are doing better...

Good news/bad newsFree exchange / The Economist
Some investors see lower interest rates as an unvarnished good; asset prices (like equities and houses) are the discounted value of future cashflows and, if the discount rate goes down, values go up. But what do low interest rates tell you about the likely growth rate of those cashflows?  We only have to look to Japan to see the answer.

Complete 2012-2013 European Bond Issuance CalendarZH