Thought the European deal reached yesterday was a done deal? Apart from all those pesky details like, where all the money will come from, the German Constitutional Court is not allowing the ink to dry, just yet.
Friday, October 28, 2011
Thursday, October 27, 2011
Data Watch: Thursday
While markets will undoubtedly spend much of their time digesting the Euro-zone 'deal', one eye will remain on the incoming data.
Official doc: the self-congratulations + nitty gritty details...
Can be found here
My personal fave:
My personal fave:
We call on the Eurogroup to finalise the terms and conditions for the implementation of these moalities in November, in the form of guidelines and in line with the draft terms and onditions prepared by the EFSF.
I'm a big 'modalities' fan ...
Wednesday, October 26, 2011
European Leaders Come to an Agreement Putting the Euro on Life Support for Months to Come
The main points of the agreement:
- EFSF to be leveraged 4x - 5x bringing its total firepower to 1.4 trillion
- Banks to take a [voluntary] 50% haircut (estimated to amount to ~100 bln) on their Greek debt holdings.
Apparently, the term 'voluntary' has a different meaning in Euro-speak.
- EU banks will have to raise 147 bln of extra capital
- EFSF to be leveraged 4x - 5x bringing its total firepower to 1.4 trillion
- Banks to take a [voluntary] 50% haircut (estimated to amount to ~100 bln) on their Greek debt holdings.
Apparently, the term 'voluntary' has a different meaning in Euro-speak.
- EU banks will have to raise 147 bln of extra capital
Germans were right to be weary of 'Super Mario'
He hasn't even become president, but Mario Draghi is already making dovish comments:
Morning Data Releases
From the US, we get the Durable Goods Report with -1.0% m/m for headline 'Orders' and a 0.5% m/m rise in non-defence Capital Goods ex-Aircraft. At 10:00, the US is expected to report New Home Sales rising 1.7% m/m to 300k annualized.
After S&P affirmed its 'AAA/A-1+' long and short-term sovereign
credit ratings, as stable, Canada will see the release of its Monetary Policy Report.
After S&P affirmed its 'AAA/A-1+' long and short-term sovereign
credit ratings, as stable, Canada will see the release of its Monetary Policy Report.
Banks Borrow EUR 56.9 bln in 12 Month LTRO
This puts the actual figure below the median of both Bloomberg and Reuters survey results. However, the three month EURIBOR-OIS spread continued to edge up (to 80 bps) and banks continue to deposit evermore cash in the ECB's Deposit Facility (see chart below).
Italy May Hold Early Elections
Italian newspapers have published reports that Italy, the third largest country in the Euro-zone, is poised to hold early elections. With its 10 year benchmark bond hovering just below 6%, making refinancing evermore difficult and painful (despite ongoing BTP bond purchases by the ECB).
Tuesday, October 25, 2011
Stress Measure: European Interbank Lending
One of the simplest ways of gauging the health of a banking system is the terms on which they agree to lend to one another. Though this is not the only (or even the best way) its simplicity makes it popular.
In the case of the Euro-zone (discussed in the prior post) one can simply take the three month EURIBOR fixing rate and subtract the three month OIS (Overnight Index Swap) rate. The wider the spread (or the bigger the difference), the more banks are demanding compensation for the credit risk they perceive in lending to other banks in Euros.
The following chart illustrates how mistrust amongst banks operating in Europe has been increasing in the past few weeks. Notice, however, that we are nowhere near post-Lehman levels. Bank recapitalizations in the Euro area are aimed, in part, on alleviating this mistrust, so banks are willing to lend.
In the case of the Euro-zone (discussed in the prior post) one can simply take the three month EURIBOR fixing rate and subtract the three month OIS (Overnight Index Swap) rate. The wider the spread (or the bigger the difference), the more banks are demanding compensation for the credit risk they perceive in lending to other banks in Euros.
The following chart illustrates how mistrust amongst banks operating in Europe has been increasing in the past few weeks. Notice, however, that we are nowhere near post-Lehman levels. Bank recapitalizations in the Euro area are aimed, in part, on alleviating this mistrust, so banks are willing to lend.
The Other Euro-Zone Event to Keep an Eye on Tomorrow...
The results of the ECB's 3 month and 12 month LTROs (Long-term Refinancing Operations), which it offered today, will be published at 11:15 am CET (03:15 am ET) on Wednesday.
The last time the ECB conducted a 12 month LTRO was in December of 2009. It discontinued them, thereafter, citing an easing in 'financial stress'. At the last ECB meeting, it announced they would be reintroduced given that 'stress' has re-emerged.
In plain English, European banks no longer trust eachother, so they are reluctant to lend to one another (except at ever higher rates). The 12 month LTRO enables banks to borrow from the ECB at the average of its benchmark rate (currently 1.5%) over the term of the loan.
The result will give us an indication of the liquidity squeeze banks are feeling and the degree to which they mistrust one another. The more they borrow, the greater the 'stress'.
How much is a lot? it may be tempting to make a comparison to the last set of 12 month LTROs, however, this time
The last time the ECB conducted a 12 month LTRO was in December of 2009. It discontinued them, thereafter, citing an easing in 'financial stress'. At the last ECB meeting, it announced they would be reintroduced given that 'stress' has re-emerged.
In plain English, European banks no longer trust eachother, so they are reluctant to lend to one another (except at ever higher rates). The 12 month LTRO enables banks to borrow from the ECB at the average of its benchmark rate (currently 1.5%) over the term of the loan.
The result will give us an indication of the liquidity squeeze banks are feeling and the degree to which they mistrust one another. The more they borrow, the greater the 'stress'.
How much is a lot? it may be tempting to make a comparison to the last set of 12 month LTROs, however, this time
European Summit Tomorrow
After failing to agree on much at this past weekends summit with assurances that all will be well at Wednesday's meeting, European leaders have already begun to employ the tried and true MBA method of "managing expectations." Notice how they are always managed 'downward'?
It's kinda like before earnings season, when companies lower their earnings guidance to the point where the final announced earning almost always surprise on the upside-- no matter how grim. Of course, it's easier for a citizen of a Euro-zone country to move out of the stock market than it is for him to leave the Euro-zone (Greece has already imposed a 15% tax on it's citizens who move their deposits from a Greek bank abroad...)
It began earlier today when the scheduled meeting for EU finance ministers was abruptly cancelled. If that wasn't a big enough hint a draft communique
It's kinda like before earnings season, when companies lower their earnings guidance to the point where the final announced earning almost always surprise on the upside-- no matter how grim. Of course, it's easier for a citizen of a Euro-zone country to move out of the stock market than it is for him to leave the Euro-zone (Greece has already imposed a 15% tax on it's citizens who move their deposits from a Greek bank abroad...)
It began earlier today when the scheduled meeting for EU finance ministers was abruptly cancelled. If that wasn't a big enough hint a draft communique
War of Words Between Britain and France Heats up
Nicolas Sarkozy tells David Cameron to 'shut up' in euro clash, according to The Independent. The ratcheting up of discord follows a humiliating defeat in the Commons for Cameron in which 79 of his own party's backbencher voted to hold a referendum in the UK on leaving the European Union.
Monday, October 24, 2011
EZ DataWatch: PMIs decidedly downbeat
Eurozone PMIs continued to slide for the sixth month in a row to its lowest reading since July 2009. With a preliminary release of 47.2, the survey marked it's second below-50 contractionary print in as many months. Both the Manufacturing and Services components registered declines with Markit commpenting that non-core (Germany & France) countries exerted disproportionate drag on the EZ-wide survey.
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| EZ Composite PMI |
EU Weekend Summit: low expectations going in were met
EU leaders met for the umpteenth summit. But, rather than proclaiming to have 'solved' the crisis through their 'collective wisdom' as in the past, they merely agreed to reconvene on Oct 26th. The outcome was largely in line with expectations following Germany's Merkel musings in the prior week that a second summit would likely be needed.
Germany scored a small victory by getting Sarkozy to admit his idea of giving the ESFS a banking license, allowing it to leverage itself via the ECB, was officially dead. The two other options to lever the ESFS remain:
a) inducing private sector participation by insuring the first 10%-20% of losses.
b) creating an SPV (special purpose vehicle) to purchase 'at risk' sovereign debt.
This was largely expected, as was the decision to recapitalize EU banks with EUR 100 bln (with details unspecified)
Given that excessive leverage, structured products and government meddling got them into this mess, it only makes sense that more of it will get them out...
The main new tid bits were:
Germany scored a small victory by getting Sarkozy to admit his idea of giving the ESFS a banking license, allowing it to leverage itself via the ECB, was officially dead. The two other options to lever the ESFS remain:
a) inducing private sector participation by insuring the first 10%-20% of losses.
b) creating an SPV (special purpose vehicle) to purchase 'at risk' sovereign debt.
This was largely expected, as was the decision to recapitalize EU banks with EUR 100 bln (with details unspecified)
Given that excessive leverage, structured products and government meddling got them into this mess, it only makes sense that more of it will get them out...
The main new tid bits were: