Euro Zone Tensions Increase And Situation Is Getting Seriously Serious – Close To Or At Capitulation Levels

Hi there,

Great fiscal austerity by the Greeks – their 2011 budget deficit increased to just over E20bn, as compared with E18.1bn, for the 1st 10 months last year. Remember the Greek Finance Minister stated that Greece would produce budget surplus next year !!!!!!;

Good old Junker, the head of the EU’s EcoFin. He is quoted in a German newspaper as saying German debt levels are a problem. You will recall that he is also the man who stated that people should lie in certain cases;

The Troika, the ECB, EU and the IMF have given Portugal a green card, which will enable the next tranche of bail out funds to be paid. However, they did warn of downside risks in 2012 and, in addition, the problems which Portuguese banks will face in raising capital. More austerity next year = certain (deep) recession, followed by a need for a haircut on Sovereign debt;

France is getting ever more desperate. The French PM (Baroin) has added to the French clamour for the ECB to intervene and for the EFSF to be granted banking license ie to increase its leverage. Just confirms that the EFSF is as dead as a dodo. Hmmmm, this stuff was discussed and the French agreed recently, did they not !!!. A serious French rethink, basically, from a point of desperation. Euro Zone tensions (particularly between France and Germany) are set to rise to fever pitch. France can see its getting in deep doo doo and with the impending 2012 French Presidential elections, together with the threat to their AAA rating…….Finally remember that France needs to maintain its AAA rating for the EFSF to have even the slimmest chance;

The Economist reports that the ECB bought as much as E2bn of Italian bonds today. Given that they buggered it up by only buying E4.5bn of PIIGS (probably mainly Italian, but also Spanish and possibly Portuguese bonds) last week (less than half the previous weeks amount), they are now going to have to ramp up purchases significantly – far more than would have been the case – to keep Italian bond yields from exploding. Another great example of EU/ECB financial management – me thinks not. Italian bond yields closed unchanged from yesterday, in spite of he alleged buying.
Italian banks represented 19% of total borrowings from the ECB, as at the end of October;

Well finally – Mrs Salgado, the Spanish Finance Minister admitted that Spain will not meet its growth target this year – must be trying to salvage some credibility in anticipation of being kicked out of Government this weekend. However she still cant get away from her used car sales persons comments – she adds that the Spanish Central Governments budget deficit is on target (not difficult when you don’t pay your bills), but that she does not have data for the semi autonomous regions – those same regions who were near their 2011 deficit targets at the half year you will recall. Mrs S ruled out the need for bail out – oops, an “official denial” – dangerous. However, there’s not enough money available anyway;

Moody’s downgraded several Landesbanken – Germany would not have the funds necessary if it had to rescue Italy – now this is really getting to be nuts;

The BoE report states that inflation will be below it’s 2.0% target in 2 years, which together with the statement that economic activity will be “broadly flat” for the 1st half of next year (below 1.0%, though the picking up in the 2nd half for a 1.0% GDP growth forecast for 2012) is yet more confirmation of upcoming QE3 – the bank concludes its most recent Sterling 75bn bond buying programme by February 2012 – however, I would not be surprised if the Sterling 75bn programme is increased and/or a new round announced – my target for the final aggregate amount remains at Sterling 500bn, from the current Sterling 275bn;

US industrial production rose by +0.7% in October, with capacity utilisation rising to 77.8%, the highest since July 2008. The US NAHB survey rose to 20, from 17 in October. Mortgage applications/Refi’s? are rising;

Apparently, the rise in WTI today (at one stage around US$103) is because of a pipeline deal which will involve the glut of Oil at Cushing (where WTI is priced) to be redirected to the Houston area. Rising Oil prices is certainly bad news and will increase US headline inflation (and disposable income), though the FED follows core inflation. Whilst I accept that increase in Oil prices are a depressant to economic activity, I don’t know anyone whose day to day living expenses are based on core inflation;

Today’s late afternoon swoon in US markets was apparently due to a Fitch report which stated that US banks faced increased risk to their credit ratings due to the Euro Zone woes – that’s supposed to be news; oh come on now. Just proves this is now getting (sorry has got to) cloud cuckoo land stuff. Any more of this and QE3 will be brought forward from the likely date of end of 1st Q 2012. In addition, watch out for more strident Obama/Geithner d even Bernanke rhetoric. US markets did close at very near their lows of the day today – not good news at all;


Euro Zone tensions are rising – approaching capitulation levels – Euro Zone bonds (ex Germany in the main) took one hell of beating today. If there is no Euro Zone “temporary” QE/Serious ECB bond buying soon, I’m going to have to eat humble pie, buy a container full of baked beans and book my local cave, before others. However, this increased tension just raises the pressure to introduce serious bond buying/QE by the ECB, I have to believe – maybe I should try crossing my fingers
as well, before any of you suggest it. Germany will have to get its way and Euro Zone countries will have to concede to central fiscal oversight – sensible in my view. The French, in particular, may object, but look where they are – 10 year French OAT’s are approaching 200bps over equivalent bunds and rising. Most importantly, Mr Bofinger (a German economic “Wiseman” – does that mean everyone else is stupid !!!!!) and, importantly, Schaeuble (yesterday) contradicted the head of the Bundesbank Weidmann (pretty important, as Germans love consensus and never question the Bundesbank). Mr W reiterated the same old claptrap FYI.

Euro continues to weaken (US$1.35, though off its lows) in spite of European banks liquidating foreign assets and remitting funds back to the homeland – or Dunceland as some would say. Must be a great time to be buying distressed assets on fire sale by Euro Zone banks. Apparently, some Sovereign Wealth Euro buying from the Middle East (why I ask) is taking place as well, according to the experts. Having said that, any positive news from the Euro Zone will result in a savage short covering rally – me thinks I want to be square – just too risky, given that imminent action is necessary.

The 3 month Euro-US$ cross currency basis swap (indication of tension) is moving towards 2008 crisis levels (a post Lehman high) – basically very expensive to swap Euro’s for much needed US$, reports the WSJ. However, the ECB has a swap line with the FED and banks requirements should be met – however, it’s a sign of weakness, if banks have to utilise the ECB facility though. A number have no choice.

Chinese markets were “difficult today – concerns over property companies. Relaxation of monetary policy imminent.

Looks like a tough day for equity markets tomorrow, unless there are some Euro Zone positive developments (quite possible) imminently – further delays are no longer feasible. However, have crossed fingers and toes – the best investment technique in my war chest, as one of my friends would say.



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