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Monday, July 30

30th Jul - US Close: Are you cooking something?

Dull markets – and all the commenting is on the FED and the ECB. Next I am posting two separate posts for both events. Today's articles on euro crisis gave me few ideas: if even Draghi acknowledges there are redenomination risks priced in the bond yields, and Germany is laissez-fairing the whole issue, is Germany fed up with the currency union and prepared to kick out one or several members? Greece is an obvious candidate, but how about Spain and Italy? If they are too big to bail out, and too big to support via an eventual fiscal union, isn't devaluation and eventual return to markets the cheapest way? I mentioned this way back last October that when the talking heads start telling the same story, something is cooking.

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Previously on MoreLiver’s:

Markets – Between The Hedges
The Closer – alphaville / FT
Tyler’s US Summary – ZH
  VIX, Credit, And Treasuries Warn As Stocks Yawn

TV: Bloomberg, BBC
Debt crisis: live – The Telegraph
The Euro Crisis Blog – WSJ
Tracking Europe’s Debt Crisis – NYT
FX Options Analytics – Saxo Bank
European 10yr Yields and Spreads – MTS indices

The euro is coming to an end Die Welt / presseurop
Draghi, Merkel, Hollande and Juncker may be fond of standing behind the euro in a demonstrative display of unity. It no longer makes sense, writes the Die Welt am Sonntag. Europe's differences are too big for a single currency.

Banking Union Is Last Gambit to Save Euro Dream View / BB
The vision of a Europe without nations, with nothing to kill or die for, is very valuable. Although imagining it isn’t hard to do, building it is. By stating the vision, the euro’s fathers claimed all the glory. The difficult details were left to their successors, who must now either make good on Europe’s promise or recognize that this wonderful project was premature and try to unwind it in the least costly way.

A European political union is a foolish ideaOtmar Issing / FT
Political union is impossible to achieve within a few years. It cannot be a means of crisis management. And here comes the dangerous part: any proposals, for example, to extend the amount and scope of financial support mechanisms premised on further integration in the future.

51% of Germans Believe Germany Better Off Outside Eurozone, 71% Favor Greece Leaving; Implications on Constitutional Court RulingMish’s
Given that Germany is better off outside the eurozone, and the eurozone is arguably better off without Germany, hopefully, the constitutional court will say it's time to put all of this to voters, including whether Germany should stay in the eurozone. Unfortunately, I expect the court will OK both the ESM and the Merkozy treaty, but give further warnings to Merkel and the ECB that 500 million euros is the limit.

Proposed EU sovereign CDS regulation is uselessSober Look
Most analysts expect this rule to have very little impact on sovereign CDS or bond spreads or even investor behavior. Instead it will introduce tremendous bureaucracy, allowing EU regulators to hire armies of people to monitor compliance.

When Draghi isn't everythingFree exchange / The Economist
He has to know which euro zone he's allowed to save before he can save it…But this is no longer the ECB's crisis to solve. It might have been, at one point. Political leaders, by acknowledging the real possibility of exits, have taken on full responsibility for whether and how the crisis is brought to an end.

Last week they spoke comforting words, but I saw only the frightening aspects of the euro-crisisFabius Maximus
Although entertaining as gallows humor, last week’s statement by ECB President Mario Draghi illustrates important but seldom discussed aspects of the euro-crisis. Here we read and annotate the text.

Was Mario Draghi’s promise to save the euro unrealistic?Wonkblog / WP
German opposition matters: Germany’s Bundesbank is the largest shareholder in the ECB. It doesn’t have a direct veto, but criticisms by the Bundesbank might make financial markets worried that the ECB will eventually scale back its bond purchases. And that would defeat the whole point of Draghi’s plan, which is to restore market confidence.

Quantifying “convertibility risk”alphaville / FT
 Nomura takes a look at the FX risk premium (=renomination to sovereign currencies): A crude measure is simply the CDS adjusted 5-year spreads of member states to
Germany. As of today those spreads are around 50bp and 80bp at the 5-year maturity for Italy and Spain respectively, down from 135bp and 180bp three or four days ago.

Europe: Urgent or Not?Marc to Market
Draghi may have tried to deliver a fait accompli to European officials by promising to deliver a game changer, but we think the market will be disappointed. We anticipate that pressure will return. Can Spanish 2-year yields really decline another 200 bp or the can the 10-year decline another 100 bp ? The return of pressure will underscore the urgency and push European officials to address the more difficult decisions in September.

Moody's: "The ECB Can Do No More Than Buy Time"ZH
Its actions alone will not resolve the debt crisis. Resolution will ultimately rest on achievement of fundamental changes to member states’ budgetary positions and debt stocks, on structural economic changes required to stimulate growth, and on institutional reform to the economic and fiscal governance of the euro area. Each change will take years to accomplish.

Insight: ECB thinks the unthinkable, action likely weeks awayReuters
The ECB is thinking the unthinkable to save the euro, including resuming its controversial bond-buying program and possibly even pursuing quantitative easing - in effect printing money.

Economists React: Don’t Expect QE3 This WeekReal Time Economics / WSJ
Analysts tended to argue that the central bank needs to see two more jobs data releases before reaching a consensus on the need for more stimulus. Many say they see the Fed as much more likely to act at its subsequent policy-setting meeting, scheduled for Sept. 12-13.

Fed May Be in Whatever-it-Takes Mode, But It May Not Take it This WeekMarketBeat / WSJ
If the Fed doesn’t act, if the Wednesday policy statement comes and it doesn’t include a QE3 announcement, the market is sure to get the usual knee-jerk reaction, a sharp sell-off as the bets are unwound with computerized speed and human alacrity. But it won’t take long before traders wrap their heads around the next FOMC meeting, or the August
Jackson Hole confab, and start putting the QE3 bets back on.

Bad Habits: The Greenspan Put The Psy-Fi Blog
So the markets are not pre-empting the Fed, nor is the Fed driving the markets: the markets are forcing the Fed to respond to its liquidity habit.  Weaning them away from this is going to take leaders with great vision and great determination: so most of us will probably be better off betting on the continuation of the Greenspan Put.

Charting The Diminishing Multiple Expansion Benefits Of Fed ActionZH
As soon as the Fed-sponsored money-supply 'flow' expansion ended, so the P/E multiple-expansion ended (and indeed reversed very quickly).

When money isn't everythingFree exchange / The Economist
There is no case (or no realistic case) in which a central bank loses the technical ability to adjust demand, but there are situations in which the central bank can only raise demand in ways that reduce the welfare of a critical constituency. In such cases, demand can only be raised through programmes which adjust the distribution of the returns to more demand across political interest groups, which requires fiscal action.

Alpha generation becoming difficult as risk asset correlations riseSober Look

EVM-lainojen ensisijaisuus on ihan roskaaTalouselämä

Voittaako länsimainen yhteiskuntamalli?Hannu Visti

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