European 10 yr rates - free chart service from Bloomberg

Some practical links these days......

Spain:

http://www.bloomberg.com/apps/quote?ticker=GSPG10YR:IND

Portugal:

http://www.bloomberg.com/apps/quote?ticker=GSPT10YR:IND

Italy:

http://www.bloomberg.com/apps/quote?ticker=GBTPGR10:IND

Germany:

http://www.bloomberg.com/apps/quote?ticker=GDBR10:IND

Spain may be on the edge of bankruptcy...but.... BARCELONA!

This morning blog will be a tribute to Barcelona - I watched the best 90 min of soccer EVER last night - Barcelona was humiliating one of the best teams in the world: Real Madrid - enjoy this.........may the spreads be with them :-)   Barcelona vs Real Madrid the goals and if there is/was a football God, then Messi would be the football -jesus!!!



--

EU with its life on the line needs to do debt-swap or in our version: debt-swap for EU survival.....

A key premise for all our predictions in Limus Capital is to look at reaction functions for present consensus:

This is my partner Jesper Christiansen and I discussion from this morning - we do not claim to know or have inside knowledge, but the reaction function will dictate whether EU survives both in the short-and long-term.

The EU is facing it's biggest test in its history and so much so that an inability to secure a 'deal' up to or at the coming summit in December will mean major consequences....

There is vested interest by EU, lobbyist, and bureaucrats around Europe to maintain status quo - who does not want tax-free, high paid simple jobs, so there will be move to save the EU certainly, but increasingly the simple truth is dawning on investors:

There are now several countries in the EU for whom being outside EU would be a benefit. When the PIIGS lose their "cheap funding" by proxy of Germany it also loses its ability to maintain excess spending - next step becomes the market gets saturated for bond issuance for this smaller Quasi-Germany's(PIIGS), and here lies central premise to our thinking: You can continue to print money only to the point by which the marginal cost of capital increases above and beyond the FAIR PRICE as seen by the individual countries....We see 5.00% nominal rates as this point....Printing money is fun while it lasts but ultimately the bill arrives.....

The reaction function of the EU in the time ahead of December 15/16 Council Meeting.....

Clearly the EU and policy makers have continued to underestimate the reaction function of both investors and market in general. QE2 rates are continuing up despite theory would dictate differently...

Game Theory dictates that Germany will need to not only move on its stance but also provide debt relief, but how will they be "paid".....

Germany debt to GDP is a reasonable 75% to GDP, it's current account 7% of GDP, and its size of the GDP 3,3 trl. USD vs EU's total of 17 trillion (19%)

We think the ONLY real solution to this issue is to GIVE money from Germany to the PIIGS - a debt swap (A debt for Euro existence swap :-)) - and before you fall of your chair laughing...hang on...:


ECB is running out of capital (Cap. reserves: 78 bln. EUR -balance sheet 1.9 bln hence leverage 1-to-27 in ECB already)... to buy and support the PIIGS bond market. They are now long 70 bln. EURO plus and about 50 bln. EURO covered debt...hence ECB needs new-buyer of last resort. 

This could be EFSF, but if EFSF in the present situation starts buying PIIGS bonds it will deplete its ability to be a stand-by emergency fund... so there will be a need for further contributions to EFSF. We do not think this is likely. Germany and more to the point the Constitutional Court in Karlsruhe will come into play...

Turning EFSF into the European version of TARP is relatively elegant short-term solution as it will safe-guard and be an offer to Merkel (German banks owns the biggest chunk of PIIGS debt) to 'save' the EU but also get capital injections to the overall bank sector. It will fly best politically in our estimation but...it will not solve the solvency issue of governments - and here we come full circle as ONLY forgiveness of debt will help. It's not use to pay for your 'cousins overdraft' for the next year or two years, if he is unemployed, faces higher and higher charges from the bank, and is down with stress!

A debt swap from PIIGS to Germany would increase solvency in PIIGS and slightly deteriorate Germany solvency - however we estimate a swap for the 250 bln. EUR worth of debt in PIIGS system would take Germany's debt to GDP from 73 pc to 85 ish.... still inside range of overall G-7 but clearly at a point where credit rating and forward looking growth would be impaired.

Whether the Germans feels this is unjust or not is not really the point. The EU is now in its worse crisis and SOMEONE needs to save it - the only person in the room is GERMANY.......what German does next will tell us where EU goes...

  We remain with our scenario of the EU disintegrating before 2013 - as the most likely solution and reaction function will be a mini-max solution where EFSF gets more funding, gets expanded mandate but will fail to secure solvency both at the bank and a sovereign levels, and do not forget we are probably on a riot-point for many citizens around Europe.... so 2011 will be final test of EU, social tensions, and with increase likelihood a move towards the dramatic Crisis 2.0

Nice week-end despite all

The window on historic low rates may be closing

The move which seems to hurt the most people is the ever higher yield across all markets. Unlike the crisis in 2008 when yields collapsed in expectations of accommodative policy the rates are now testing top side recent range seen.

What is behind this?  As always there are several factors in play but here a few:

• The main driver to me has been the 'failed' QE2 - where all the benefits  (lower rates) was created ahead of the actual event - and by moving to a panic QE2 (at least relative to stable macro picture) meant market lost faith in FOMC.
• Add to this the impossible political stalemate in Congress (with no incentive for anyone to structurally change the US economy) and market is getting feeling the next two years are LOST in terms of addressing crisis
• Reaction function: By going ahead with QE2 the US, almost as per usual, decided to operate without any consideration to its partners. Bottom line: QE2 will force China to hike rates even more due to commodity prices exploding......
• Euro Debt crisis: EU is again at it, Germany trying to maintain its AAA status with credit market, but ultimately by bailing out country after country even Germany will have to pay higher rates on their debt as they dilute themselves....
• Market positioning - clearly everyone and his dog was long 10 years US awaiting the 'free gift' from FED and Treasury.

I'm concerned as the fixed income does not seem to back down, even the North Korea skirmish only managed to move bonds up to technical correction levels, which to me indicate, like it or not, we are on the edge on Crisis 2.0 - many will claim I'm an idiot but market never lies....

We need two or three confirmation for this:

1. USDJPY needs to break recent range - and break to downside (82.80 my level)
2. S&P needs to break 1150.00 (1195 now)
3. 10 years breaking the tough resistance 3.00/3.03

Stock market is benefiting from exit in fixed income as investor reverse out of bonds into stocks, but if rates break the resistance levels in the charts above we need to get prepared for November having been the macro turning event for this move post March 2009 - but it's still early days and the resistance in rates is formidable with no less than three key levels around here 2.90 to 3.15, so maybe yet again we will do nothing except for delaying the ultimate pain.

Happy Thanks Giving to all my friends in the US.

Steen

Crisis 2.0 coming ? US$ funding hard to get...

Bank of England today offered unlimited US$ funding:

24-nov-2010

BOE: The Bank Of England said Wednesday it was offering an unlimited
supply of U.S. dollars in a 6-day repo operation, settlement date 26
 November maturing Dec 2 2010. The Bank said the repo would be at a
fixed-rate, with the rate to be set at 1.19%.

• This is key as... it indicates serious issues getting funding in US dollar similar to 2008.
• The interbank market is B+S EUR vs USD to create US dollar funding .....in 9-12 month tenor.... 1y up 8-10 basis point last two days
• The coming IMM DEC roll can also create funding issue... plus ..
• MRO will also be under pressure..(ECB Monetary policy instruments)
• ECB continues to talk exit strategy
• Year-end Funding...

In other words keep keen eye on FX fwds - banking going into the FX FWDS to create US funding is serious risk indicator...

Excellent paper on funding crisis and fx fwds: Financial crisis, global conditions, and regime changes

What good is Wall Street? The New Yorker..& FOMC Minutes (another PR disaster by FED)

Say and mean what you like but this is an issue for the politics of banking and regulation. These types of stories are growing and growing - part of reason irrational but a lot of it is true - there is only one God in Wall Street and its green! (sorry if offending anyone of any religion) ----- 

http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy

Also Fed Minutes - which an exercise in show-casing how lost FOMC is internally, externally and how they managed their communication. I offer my service for almost free to help them out:  Hint: Shut up for the next 3 years, and start abolishing yourself: FOMC Minutes

Annals of Economics

What Good Is Wall Street?

Much of what investment bankers do is socially worthless.

by John Cassidy November 29, 2010

For years, the most profitable industry in America has been one that doesn't design, build, or sell a single tangible thing.

A few months ago, I came across an announcement that Citigroup, the parent company of Citibank, was to be honored, along with its chief executive, Vikram Pandit, for "Advancing the Field of Asset Building in America." This seemed akin to, say, saluting BP for services to the environment or praising Facebook for its commitment to privacy. During the past decade, Citi has become synonymous with financial misjudgment, reckless lending, and gargantuan losses: what might be termed asset denuding rather than asset building. In late 2008, the sprawling firm might well have collapsed but for a government bailout. Even today the U.S. taxpayer is Citigroup's largest shareholder.

The award ceremony took place on September 23rd in Washington, D.C., where the Corporation for Enterprise Development, a not-for-profit organization dedicated to expanding economic opportunities for low-income families and communities, was holding its biennial conference. A ballroom at the Marriott Wardman Park was full of government officials, lawyers, tax experts, and community workers, two of whom were busy at my table lamenting the impact of budget cuts on financial-education programs in Vermont.

Read more http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy#ixzz168hD8isQ

BOK's Kim Calls for Moves to Counter U.S. Quantitative Easing

Read my lips: there are NO currency war.......   :-)

BOK's Kim Calls for Moves to Counter U.S. Quantitative Easing

By Eunkyung Seo

   Nov. 22 (Bloomberg) -- Bank of Korea Governor Kim Choong Soo will
tomorrow call on central banks to act to counter the impact of the
U.S.'s expanded monetary stimulus.

   "The changes in global macroeconomic conditions after the U.S.
Federal Reserve's recent additional quantitative easing are looming as
new challenges for central banks' monetary policy,"

Kim will tell central bank officials from Asia and Europe in a speech in
Seoul, according to prepared remarks. "We will need to devise necessary
countermeasures to deal with the possible changes in the monetary policy
transmission channels and the limitations on policy effectiveness."

   South Korea raised interest rates last week and plans to revive a
bond tax on foreign investors to curb fund inflows driving up its
currency. The finance ministry said it will back legislation reinstating
a 14 percent tax on interest income from treasury and central bank bonds
and a 20 percent capital gains levy on their sale.

   The leaders of the Group of 20 on Nov. 12 gave emerging- market
economies more room to counter funds surging into their higher-yielding
markets due to weaker growth in developed countries and the U.S. Federal
Reserve's plan to buy $600 billion of Treasuries. Countries from Latin
America to Asia have already taken steps to slow inflows and restrain
their currencies to protect exporters and prevent asset bubbles.

   Kim will also urge governments and central banks around the world
to enhance "policy coordination" to prevent another crisis or deal with
its aftermath, according to comments from his speech released by the
central bank today.

   The Bank of Korea raised the seven-day repurchase rate by

0.25 percentage point to 2.5 percent on Nov. 16 after inflation surged
past the bank's ceiling. The won, which has appreciated 3 percent this
year, was up 0.6 percent at 1,126.80 per dollar as of 11:26 a.m. local
time.

   The Bank of Korea is hosting a four-day seminar starting tomorrow
to discuss the role and policies of central banks in maintaining
financial stability. Central bank officials are attending from Japan,
China, Indonesia, Malaysia, India, Thailand, Australia, Belgium, Russia,
Poland, Denmark, Finland, Spain, Saudi Arabia, Israel, and South Africa.