EurAnalysis

Speculation on this weeks data. If good it will continue up if bad everyone has much better areas to short.

This...

Libor, ECB, Maine

July 30, 2012

Revelations continue regarding the Libor rate-rigging scandal. Investigations into documents are underway in several countries. News releases reveal the names of banking institutions that may have been involved. Individual’s names are starting to surface.


We expect this news flow to continue for many weeks. Prosecutions may follow, along with the certainty of civil liability claims. Our estimate is that every single basis point of alleged Libor rate-rigging results in a possible claim of, at least, $35 billion for each year it occurred. The estimates of total Libor-related instruments range from $350 trillion low to as much as $800 trillion high.


A guest commentary on Libor written by Joel Naroff now appears in the “Special Reports” section of Cumberland’s website (http://www.cumber.com/content/specia...l%20Naroff.pdf). Joel has developed strong views, and articulates them well.


Meanwhile –and segue – at the end of last week, Libor moved off the front page, replaced by Mario Draghi and his colleagues at the European Central Bank (ECB). Draghi was very clear in making a prefatory comment before he resorted to the words “whatever it takes.” He articulated his statement on the condition that all actions undertaken would have to be within the mandate and authorization of the ECB.


Markets ignored the prefatory comment.

Celebrations in stock prices worldwide and a rally in sovereign debt markets ensued robustly. Many shorts were squeezed.


In the wake of the rally, the yield on Spanish sovereign debt is still at an unsustainably high level. The same is true for the debt yields of others, such as Italy and Portugal.


Cumberland Advisors continues to update eurozone credit spreads and yields weekly. They are on the website,www.cumber.com. Readers can find the slides in the contagion series at the bottom of the home page, or simply click here: http://www.cumber.com/content/misc/EU_Contagion.pdf.


The question for investors is tied to the capability of central banks to unilaterally solve the sovereign debt-related problems of these eurozone countries. We are skeptical. We think there is a difference between liquidity and solvency. Liquidity is already available globally in ample amounts.


The central banks of the world have driven the major interest rates to near zero. In the case of Europe, they could drive them a little lower, but not very much is left. They could provide additional excess reserves, which would quickly flow back into the central banks. They would do that by either buying or financing Europe’s junk sovereign debt.


In the US, the excess reserves already exceed a trillion dollars. If the Fed were to buy additional securities in the form of a QE3, the activity would result in higher excess reserves. If the Fed were to reduce the interest rate on excess reserves, it would not accomplish much. It would force behaviors that might be counterproductive; we don’t know.


What we do know is that worldwide experiences with the zero bound in interest rates are not universally positive. In fact, we can argue that they are decisively negative. For example, Japan has acquired massive sovereign debt and maintained near-zero interest rates for two decades. Have we seen any results in economic growth? The answer is no.


In the US, low interest rates are resulting in “financial repression.” While this has reduced borrowing costs for wannabe borrowers, it has also reduced interest earnings for savers. In our population, a very large cohort has now experienced a reduction in income due to the low interest rates obtainable on their savings. Is this a wise strategy? Only time will tell. Unintended consequences always reveal themselves on their own timetable.

Is it a sound strategy to force the elderly and the working savers to take on additional risk? How long do we sustain this position? Is the Federal Reserve policy of the zero short-term interest rate and a very low long-term interest rate (10-year treasury yield at 1.5%) the wisest of policies?


What if the Fed engaged in an additional Operation Twist? Would an extra quarter-point lowering of the home mortgage interest rate result in more housing activity? Is the mortgage interest rate preventing the purchase of a home by a wannabe buyer? Or is it the credit system that has tightened, so buyers cannot achieve creditworthiness in the eyes of lenders?


Some are not sure that the central bank policy of expanding balance sheets will do much good.

Certainly, it hasn't in Japan. It does not appear to have worked in the past and there is no reason to believe it will work in the future.


These policies seem to be very slow starters in the US. Perhaps more time is necessary to evaluate them. That may be. Or, perhaps, these policies are wrong?


Perhaps, in Europe, more expansion will give relief to profligate sovereign debtors whose unbalanced budgets and debt issuance continue to fund promises to pay social benefits. Or, perhaps, Europe is also headed in the wrong direction.

The solvency question suggests that those social benefits cannot be funded by the various countries’ economies, which are the presumed beneficiaries of ECB policy. When an economy is contracting, imposing more taxes and costs only exacerbates decline.


At the same time, if a country continues borrowing to fund social-payment promises it cannot afford, it only increases the debt-GDP ratio. Then, the ability to maintain the long-term payment streams that are promised to constituents is additionally impaired. I have just described half the members of the euro zone.


In Europe, the fundamental question remains, why should a German, Finnish, Dutch or Austrian worker take on credit risk to fund the retirement of a Greek who is able to retire 10 years earlier than the German?


Until the politicians level with their constituencies, the economies of Europe cannot grow. The situation, which is spiraling downward, will continue to do so, regardless of the sequential liquidity infusions of the ECB.


Cumberland Advisors is continuing to maintain a cash reserve. We do not think that the recent actions of the ECB are a permanent fix. We think it is a temporary measure, like other temporary measures. It was celebrated, by markets, as a relief rally. Note each sequential relief rally during this crisis has been smaller and shorter than the previous one.


In the coming few days, the annual gathering of finance and economic professionals will take place at Leen’s Lodge in Grand Lake Stream, ME. We are delighted to have Bloomberg TV’s Mike McKee in attendance on Friday. Other media representatives include Dow Jones News Service, theWall Street Journal, and National Public Radio.

We look forward to some robust, vigorous discussion, debate, and dissection of US and worldwide economics and finances. We again look forward to the camaraderie among guests at this annual gathering. Reports from Leen’s Lodge will be plentiful, from journalists, TV personalities and yours truly.


This has been a fascinating week, with Libor and the ECB. The Fed is next. This incredible unfolding of financial history is taking place in the full media spotlight. In our view, we are rewriting the economics textbooks with an entirely new structure and learning along the way.


I'm looking forward to the debates and discussions in Maine this Friday.


David R. Kotok, Chairman and Chief Investment Officer


Resources:
To sign-up forMarket Commentaries from Cumberland Advisors:http://www.cumber.com/signup.aspx

July 30 (Reuters) :

Rising expectations of bolder policy moves to counter the euro zone's debt crisis are set to help Italy sell up to 5.5 billion euros in bonds at an auction on Monday, where benchmark 10-year yields will be closely watched as a barometer of market stress.


The September 2022 bond which Italy will sell on Monday yielded slightly less than 6 percent late on Friday, pointing to a likely easing in funding costs for Rome after it paid a punitive 6.19 percent yield a month earlier to sell 10-year paper amid high uncertainty ahead of a European Union summit.

Italy will also sell a five-year bond due in June 2017 which on Friday was trading at around 5.4 percent - well below a level of 5.84 percent reached at an end-June sale. Up to 750 million euros of a November 2015 bond no longer sold on a regular basis are also on offer.

Italy's 10-year yields hit their highest since January at 6.6 percent on Tuesday as investors fretted about the cost of a potential full bailout for Spain and the impact this could have on Italy.

Annalisa Piazza, a market economist at Newedge Strategy in London, said in a note she anticipated "rather solid" demand for bonds of stressed euro zone countries on sale this week given expectations of action by policymakers in the wake of Draghi's comments.

hi Rekon67 and everyone. I am not supposed to be here but as i have now closed all my trades and can relax. i noticed something CurrencyMan wrote.
Currencyman, the 8 part plan is classic Compounding, i do it all of the time. A few months ago i actually posted some trades in this room as i was showing rekon67 and anyone else how it works. i started with £20 (very modest) and compounded it up to approx £6oo if i remember.and included losses. I cannot work out what percentage it is so i normally just say i make approx 800-1500 pips per week or did. i now use higher pip stakes so i do not need as many pips.Its a very good trading way for me. Take care all

Wolfgang Schäuble, Germany’s finance minister, has dismissed speculation about any Spanish request for eurozone support in buying its sovereign bonds, and ruled out making more concessions to help Greece, on the eve of talks on the eurozone crisis with Tim Geithner, US Treasury secretary.


http://media.cnbc.com/i/CNBC/Section...S-flag-200.jpg

Lawrence Lawry | Photodisc | Getty Images

European Union Flag and US Flag

The tough German resistance to launching any new initiative in the two most embattled member states of the eurozone looks set to clash with Washington’s constant appeal for action to stem contagion in the crisis.
In evidence to the US Congress last week, Mr. Geithner said the
euro zone crisis
was the “greatest danger” for the U.S. economy, urging European leaders once again to act swiftly and credibly in dealing with it.


The Treasury secretary’s trip to Europe, during which he will also hold talks with Mario Draghi, president of the European Central Bank shttp://media.cnbc.com/i/CNBC/Section...ains_icon1.gif , was announced at short notice, late on Friday.

In an interview ahead of his meeting with Mr. Geithner, published in Welt am Sonntag newspaper, Mr. Schäuble gave no hint of impending intervention, despite Mr. Draghi’s announcement last week that the ECB was “ready to do whatever it takes” to protect the single currency.

However, he did say no country had benefited as much from the common currency as Germany, and “that is why it is also right that we should make a contribution to solving the crisis”.









Current DateTime: 10:36:44 29 Jul 2012

 

1. ECB 'Ready to Do Whatever It Takes'
2. EU business Rivals Divided By Rates
3. Europe's Political Union Is Worthy of Satire

Asked about Greek hopes to renegotiate the terms of its 130 billion euro ($159.8 billion) rescue package, he said the program was “already very accommodating. I cannot see that there is any room for further concessions.”

But he criticized speculation among German politicians and economists about a possible Greek exit from the euro [EUR=X 1.2291 http://media.cnbc.com/i/CNBC/CNBC_Im...hlist_down.gif -0.0042 (-0.34%) http://media.cnbc.com/i/CNBC/CNBC_Im...ltime_icon.gif] . “That achieves nothing,” he said. “It simply stirs up insecurity and provokes a corresponding market reaction. For the financial markets are everything – except rational.”

On Spain, he rejected a suggestion that the Spanish government was “desperate” because of the rising cost of borrowing. Madrid deserved respect, he said, for taking “all the necessary decisions” including raising value added tax and cutting civil servants’ pensions.

“The financial markets are not acknowledging these reforms yet, but that will come,” he added. “Trust can be lost quickly, but it can only be won back slowly.”

On speculation about a Spanish request to the European Financial Stability Facility to intervene in its bond markets, he said: “There’s nothing in it.”

A US Treasury official noted that US and Germany share the same goals of restoring market confidence and keeping the currency union intact.

 

1. Geithner Warns Congress of Risks to US Economy
2. Euro Zone Leaders, ECB to Act on Euro: Juncker
3. Second Greek Debt Restructuring: ECB May Take Losses

Link:

http://www.cnbc.com/id/48390945

Today’s orderboard

Written by Pete Jackson
July 30, 2012 at 06:06 GMT

EUR/USD: Sell stops through 1.2270 ahead of bids 1.2250/60. More sells stops through 1.2240. Offers 1.2300/10 and stronger up at 1.2380/00 ahead of barrier at 1.2400.

GBP/USD: Bids 1.5700/10 and 1.5665/75, sell stops suggested through 1.5660. Offers 1.5755/65 larger up at 1.5780/00 (tech res 100 day MA 1.5781) likely buy stops through 1.5800

EUR/GBP: Tech support 0.7800/05 and 0.7780/85. Offers 0.7830/35 and larger at 0.7865/70

USD/JPY: Bids 78.20/30 and 78.00/10. Offers start from 78.55 (ichimoku tenkan line) up to 79.00, buy stops above ahead of tech res 79.10/30 (79.12 /79.26 200/55 day MA’s)

EUR/JPY: Bids 96.00/10 sell stops below. Offers 96.60/70, 96.90/00 and 97.25/35 likely buy stops above

AUD/JPY: Bids 81.90/00, likely sell stops through 81.80 and 81.50, tech support 81.30/35. Offers 82.30/40

EUR/CHF: Bids 1.2000/10(SNB), Offers 1.2025/30 buy stops through 1.2035 and through 1.2055

AUD/USD: Bids/tech supp 1.0445/55 (exporters), ahead of further tech support 1.0385/90, 0ffers 1.0480/00 (Asian/option names) ahead of a 1.0500 barrier

EUR/AUD: Tech supp 1.1720/25 and 1.1680/85. Res 1.1765/70 and stronger up at 1.1850/55

NZD/USD: Offers 0.8100/10, and 0.8150/60, tech support 0.8050/55 and 0.8000/10

AUD/NZD: tech support 1.2900/10 (200 day MA 1.2905), sell stops below.

Today's Euro FX option expiries at 14:00 GMT

1.2000
1.2050 - (Large)
1.2090
1.2100
1.2150
1.2190

No expiries in the current price area so the magnets are far away. Are they close enough to attract price? That all depends on how the Italian 10 year bond auction goes today.

My view for today or until we touch the 100 regression channel lower.

I agree.

However, it's not going to come easy because the theme right now is "Buy on dips". I call it "buying by the dipsticks".

From Urban Dictionary:
Dipstick:
One who has the intelligence of an oil dipstick in a car. Usually the oil is dirty and "not too bright" much like the person being described here.
ex: I see that the sun doesn't shine on your field you dipstick!

hillarious


feeling some resistance at 1.227, would like to see a breach of 1.227 and 1.224 but who knows what the dipsticks will do

Hmm .. seems you've well explained my "OR" condition

...and the soap opera continues...

6 minutes to Italian bond auction results.

5 year and 10 year are up for grabs today.

Any takers?

nice, i was concerned about the down trend in the bond yield earlier today but looks like things are heading back up


lets see 6%+

Good morning everybody. Hope everyone had a nice weekend.

Maxwell says hello!

Auction results delayed until 09:05 GMT
Why? Beats me.

Morning buddy. Hope u had a great weekend. I prefer this street luge to the zip line

might be battling the dipsticks but i'm adding shorts, italy 10 year currently 6.024%

I'm already in heavily. 1.2360 is my highest recent (not including 1.4647 and 1.3410) short plus I also have shorts at 1.2314 and 1.2300
I also have a couple small ones underwater at 1.2236 and 1.2140