Market can’t decide whether to dump risk ahead of the weekend or dump it
as the interventionist spirit has clearly been moved by the latest
round of market turmoil.
The G-20 communiqué issued late yesterday promising a “strong and coordinated response” provoked a shoulder shrug in Asia, followed by a swoon for much of the European day before a tentative stabilization ahead of the US session. It is clear that the ponderous international organizations, the G20 and the IMF, who are continuing to meet this weekend in Washington, will kick the jawboning on Euro Zone stability into high gear.But it’s also clear the market is very nervous about how much confidence can come from pronouncements after the painful post-FOMC disaster this week. That and the very weak recent record of any kind of sign that even Europe itself is “all-in” on the EuroZone project, much less the rest of the world. Still, as we have discussed before, we are heading into Maximum Intervention, a theme we have discussed extensively of late.
As for other developments during the day, the Finnish parliament’s finance committee did recommend to parliament to pass the new ESFS measures. The vote by all of parliament on the plan is to take place next Wednesday. Our quote of the day has to go to the ECB’s Coene who said that the ECB may act as soon as October “if the crisis deepens”. Shouldn’t it be something like: the crisis will continue to deepen until we act enough – and even then it will only re-deepen until we do the right thing?
Sarcasm aside, there were only incremental moves in the usual measures of EU sovereign debt worries. As for the EURUSD interest rate spread equation: Operation Twist is so far not doing much to the short end of the US yield curve (2-year rates barely budged a half basis point higher today, while the ECB comments did provoke a 6-tick rally in the June ’12 Euribor futures.
Chart: EURUSD
EURUSD fiddling and hesitating as new lows traded in the last 24 hours, but didn’t see follow through. Many of the coincident measures (basis swaps, forwards and interest rate spreads, etc…)suggest that fear levels are not worse than they were at recent lows, though French and Italian CDS prices closed at the high for the cycle yesterday. Next week will be pivotal for the pair.
The G-20 communiqué issued late yesterday promising a “strong and coordinated response” provoked a shoulder shrug in Asia, followed by a swoon for much of the European day before a tentative stabilization ahead of the US session. It is clear that the ponderous international organizations, the G20 and the IMF, who are continuing to meet this weekend in Washington, will kick the jawboning on Euro Zone stability into high gear.But it’s also clear the market is very nervous about how much confidence can come from pronouncements after the painful post-FOMC disaster this week. That and the very weak recent record of any kind of sign that even Europe itself is “all-in” on the EuroZone project, much less the rest of the world. Still, as we have discussed before, we are heading into Maximum Intervention, a theme we have discussed extensively of late.
As for other developments during the day, the Finnish parliament’s finance committee did recommend to parliament to pass the new ESFS measures. The vote by all of parliament on the plan is to take place next Wednesday. Our quote of the day has to go to the ECB’s Coene who said that the ECB may act as soon as October “if the crisis deepens”. Shouldn’t it be something like: the crisis will continue to deepen until we act enough – and even then it will only re-deepen until we do the right thing?
Sarcasm aside, there were only incremental moves in the usual measures of EU sovereign debt worries. As for the EURUSD interest rate spread equation: Operation Twist is so far not doing much to the short end of the US yield curve (2-year rates barely budged a half basis point higher today, while the ECB comments did provoke a 6-tick rally in the June ’12 Euribor futures.
Chart: EURUSD
EURUSD fiddling and hesitating as new lows traded in the last 24 hours, but didn’t see follow through. Many of the coincident measures (basis swaps, forwards and interest rate spreads, etc…)suggest that fear levels are not worse than they were at recent lows, though French and Italian CDS prices closed at the high for the cycle yesterday. Next week will be pivotal for the pair.
The rest of the day and the opening Monday are not likely to see any reduction in volatility after a tumultuous week, regardless of the direction markets decide to move over the next couple of trading sessions.. The emerging market currencies are seeing an enormous relief rally as we are writing this – are we about to see a more two way market? Or is the market merely unwinding its latest anti-risk positions ahead of the uncertainty of the weekend?
Watch for Trichet and Stark out speaking this weekend and for the Fed’s Dudley later today – he of the important New York Fed. Will Stark be a bit more stark in his commentary now that he has essentially resigned in protest over ECB policies?
The latest Hilsenrath piece from the WSJ suggests that Bernanke is not about to give up and that the Fed chairman will want to continue to tinker with policy until (reading between the lines) he is dragged kicking and screaming from the Eccles Building. The next logical step could see the Fed quickly move toward declaring targets for inflation and unemployment, but it appears that the Fed is finally being seen more universally by market observers as inept and unable to provide what the economy needs. After all the idea is ludicrous that, as Hilsenrath puts it, “clarity” is what is causing the market and economy to hold back because e of “lingering fears in financial markets that the bank might prematurely tighten monetary policy”. The lingering fears are about what we are going to do with all of the debt!
Have a wonderful weekend and stay careful out there
Economic Data Highlights
- UK Aug. BBA Loans for House Purchase rose to 33.5k vs. 33.3k expected and 33.7k in Jul.
- US Fed’s Dudley to Speak (1730)
- US Fed’s Williams to Speak in Zurich (1730)
- Euro Zone ECB’s Trichet to Speak (2030)
- Euro Zone ECB’s Stark to Speak in Washington (Sat 1540)
- New Zealand Aug. Trade Balance (Sun 2245)
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