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Friday, October 19

19th Oct - Weekender: Best of The Week

This week's main events were: EU summit agreeing on the banking union, Spain still playing time, better than expected data from China, US presidential election uncertainty increasing. A very important, but currently less discussed topic is the possibility of the central banks to write off the QE-acquired sovereign debts. As debt monetization has a bad ring to it, the discussion will be held in the background for political reasons.

Previously on MoreLiver’s:
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Once "Jollying The Markets" With "Faith, Hope And Charity" Fails, What Comes Next: A Primer On Europe's Next StepsZH

Grexit: First Borg, then Buiter, now JakobsenSaxo Bank
The main macro input on Europe is now the German election (September 2013) and the total apathy left behind by the discussion on fiscal multipliers from the IMF has left the central planners 'rudderless on the open sea of debt crisis'. The EU Commission will try to find a compromise on extend-and-pretend for Greece but...

How would ECB bond purchases affect the level of interest rates?Nordea

Eurozone Bank Supervisor Plan Found To be "Illegal"ZH
FT: A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers

The case against EU membershipThe Telegraph
In the event, Britain’s timing could hardly have been worse. We joined the EEC in 1973, at the very end of Europe’s Wirtschaftswunder.

Low expectations ahead of this week’s EU SummitNordea

EU-Summit preview: don't expect too muchDanske Bank (pdf)

In the Picture: the EU’s October summitThe World / FT
The EU summit that begins on Thursday has enjoyed less fanfare – and less frenzied speculation over its potential outcomes – than many others. That’s because decisions on some of the hot topics will be deferred until later dates.

EU summit: Leaked Q&A to summiteersBrussels blog / FT
The issue of a collective budget for the 17 eurozone members has come roaring out of nowhere to become one of the most contentious issues heading into today’s EU summit.

EU Aims for Euro-Area Bank Supervision to Start in 2013BB
European leaders committed to their goal of establishing a euro-area bank supervisor by year-end, opening the prospect of direct aid to Spain’s banks.

Europe advances towards single banking supervisorReuters
European Union leaders took a big stride towards establishing a single banking supervisor for the euro zone, agreeing it would enter into force next year, opening the way for the bloc's rescue fund to inject capital directly into ailing banks.

Spain's exposure to the rating agenciesSober Look
The recent downgrade of Spanish debt by the S&P is not going to have a significant effect on the bonds' eligibility as collateral at the ECB. The ECB takes the best of the four ratings of Moody’s, S&P, Fitch, and DBRS to determine the eligibility for repo collateral.

Rating agencies have a funny way of agreeing about Spainalphaville / FT
After the two notch downgrade by S&P about a week ago, both agencies now have the sovereign on equivalent ratings. It’s pretty hilarious to compare and contrast the reasons for each agency’s (in)action.

Greece and Spain Marc to Market
European officials’ ability to reduce the tail risks appears to have been quite successful.  And they have achieved this without spending a single penny.  Yet the tension between the interests of the creditors and the interests of the debtors has not been resolved.

Spain Banks Face More Pain as Worst-Case Scenario Turns RealBB
Spain’s banks face more loan losses as the pace of an economic slump risks turning a worst-case scenario dismissed in stress tests into reality.

Seven Varieties of DeflationJohn Mauldin / The Big Picture
One of the questions I (and other analysts) get asked most frequently is whether I think there is deflation or inflation in store for the US. My quick answer is “Yes.” A brief answer is that we are in a deflationary period and have been for over 30 years, but like all cycles it will come to an end. A great deal of the “when” depends on how the US deals with its deficit following the election.

The Ultimate Presidential Election Guide For InvestorsZH
Credit Suisse’s deep look – 42 pages

Weaker growth in Q3 and bottom is reached Nordea

China: Finally signs of recoveryDanske Bank (pdf)

Hold the Press: The IMF Changes SidesMarc to Market
A significant event has taken place this week.  It will alter the balance of power between creditors and debtors and help shape the contours of the ongoing policy response to the end of historic credit cycle.  The IMF has not only delivered a mea culpa of sorts, but urges its members to do so too.  

IMF: Austerity is much worse for the economy than we thoughtWonkblog / WP

Robustness of IMF data scrutinizedGlobal Economy / FT

The maths behind the madness: interactive guide to government-debt dynamicsThe Economist
Spain has lots of work to do. Keeping all things equal, the country would need to grow by 7.7% a year, or nominal bond yields to fall to a Teutonic 0.5% to stabilise government gross debt at its 2011 level of 70% of GDP. Fat chance: the IMF forecasts GDP growth to average just 0.5% a year and bond yields of 7.7% between 2012 and 2017. A bail-out for Spain it seems, is not a case of if, but when.

Understanding The Bond BubbleThe Short Side of Long
A look at both the stock and bond markets

New Financial Forecasts: Another EU summit, another clearance?Nordea (pdf)
Next weeks EU Summit is not expected to reveal much new. More discussion of Greece, Spain and perhaps Cypress and Slovenia but if anything expect more defensive clearance. The fact that Spanish bonds managed to rally after the S&P downgrade indicates the risk-on crowd is still here. Hence, we still believe investors on balance are looking to take on more risk going into the end of the year but it’ll not be a straight line and volatility will continue to be rather high.)

G10 Weekly: US Earnings – what’s up…or is it down?Nordea (pdf))
US Earnings – what’s up…or is it down? * Riksbank preview: A fine balance

Citi On The Five FX Issues Waiting To Play OutZH
QE, electoral politics and fiscal cliff, emerging markets, euro, reserve managers

Stability through simplicityThe Physics of Finance
We can and should work hard to explore the space of what might happen, and so gain some forewarning of dangers, but we will still encounter surprises and we should expect to do so. So our approach to regulation ought to be centered on that premise -- that we face a world of uncertainty.

Buffet vs Modigliani-MillerThe View from The Blue Ridge
We think the same behavioral errors that tempt “gamblers” to buy lottery tickets, seduce “investors” to speculate in high risk stocks.  The result: a structural overvaluation in excitement and a systematic undervaluation in high quality stocks.

Macro hedge funds stink at market timingSober Look
And now they are positioned with a long bias. Given Macro funds' average track record recently, that bet does not bode well for the equity markets going forward.

Reckoning with Risk 12/12: The Greatest Risk of AllAbove the Markets
Final piece of a 12-part article – see the bottom of the post for links to the previous ones.

Will central banks cancel government debt? Gavyn Davies / FT

The idea that central banks might cancel their government debt holdings, or restructure them into zero coupon debt, is gaining traction.

Nyt se on virallista: talouden löylykisa onkin vikatikkiJan Hurri / TalSa
Kriisimaat ovat lamassa ja muukin Eurooppa uupuu uuteen taantumaan. Ongelmat ovat osin omatekoisia, sillä ennenaikaiset vyönkiristykset ovat heikentäneet muutenkin huteraa taloutta. Nyt osa talouspäättäjistä myöntää, että "talouden löylykisa" ei sittenkään vahvista vaan päinvastoin heikentää taloutta.

Kohti "todellista" talous- ja rahaliittoa Sampo Terho / US Puheenvuoro

Talousjournalismin lyhyt historia SK
Voittoja ja tappioita sekä uutissulku ”isänmaallisista syistä”

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