Thursday, September 6, 2012

Around the horn in Europe - September 6 , 2012 - Waiting for Draghi !

( Euro still strengthening even as ECB leaves rate unchanged - 8:30 Conference with Godot ( Draghi )   that everyone has been waiting for will tell the tale of the day.... )

ECB Leaves Rate Unchanged At 0.75% Despite Expectations Of A Rate Cut

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Despite consensus for a 25 bps cut by the ECB, Mario Draghi decided to leave rates unchanged. To say that this is ominous for the press conference in 45 minutes is an understatement.
From the ECB:
6 September 2012 - Monetary policy decisions

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.


Previewing Today's Main Event And Overnight Summary

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SocGen previews the main event:
All eyes on the ECB today! After much hope for several weeks and as some information has filtered over the past few days, Mr Draghi will have to deliver concrete measures today to keep from disappointing investors. A 25bp cut in the repo rate is widely anticipated. There will be even greater expectations regarding non-conventional measures, particularly the bond buying programme. These should focus on the short end (up to three years). Yesterday, the talk was about unlimited amounts and sterilisation. What is left to announce? We still need the details on conditionality and when, this will undoubtedly determine the market reaction. Overall, if Mr Draghi simply confirms the information of the past few days, EUR/USD should benefit from an extended honeymoon period. Nonetheless, we will be watching closely as investor expectations are high and Mr Draghi will have to present some fresh elements for EUR/USD to continue to strengthen towards its end-July high of 1.2755. Otherwise, profit-taking could prompt profit taking. We will also be looking at how Spain's 2/10 spread reacts.

For those who missed the key leaks from yesterday here is a summary via Deutsche Bank:

Bloomberg news yesterday suggested that Draghi's bond-buying proposal (apparently dubbed "Monetary Outright Transactions") will involve unlimited purchases of government debt targeting the front end of the curve up to 3 years but subject to ESM/EFSF conditionality. It appears that the ECB will also refrain from publicly setting yield caps and will sterilise the purchases to ensure the actions have a neutral impact on money supply. As DB rates strategist Mohit Kumar pointed out the issue of sterilisation is a bit of a red herring though given the unlimited liquidity operations already in place. Other reports also noted that the ECB is ready to concede its super senior creditor status but rate cuts will not be discussed at today's meeting. For the record the market consensus (and DB economists) is looking for a 25bp cut.

An update on how Draghi is dealing with the ongoing opposition from Bundesbank's Weidmann will probably get some Q&A airtime at the press conference later although German officials yesterday were quick to play down these tensions. German Finance Minister Schauble yesterday dismissed talk of a conflict between the two men. He expressed confidence that the ECB knows its mandate is to protect price stability and not to finance governments. Speaking to lawmakers yesterday, Mrs Merkel said that she backs both Draghi and Weidmann and sees no contradiction in dual support. German MP Norbert Barthle said that Merkel is against unlimited ECB bond-buying but would be willing to accept temporary intervention in the shorter dated bonds. Interestingly CDU deputy leader Fuchs reckons Draghi doesn't have too much support from Merkel but also added that Germany supports ECB bond purchases if there are certain conditionalities. Anyway the ECB's rate decision will be out at 12:45pm (London time) and get your speakers ready for Draghi's press conference at 1:30pm.

Of course, the "conditionality" will be the biggest issue: Spain will not request a bailout as long as its short-term bonds are trading artificially tight on fears of ECB intervention, leading to a Catch 22 outcome. But at least Spain was generous enough to agree to demand money... if there are no new conditions.

Spain is willing to request a full sovereign bailout but without any extra conditions, as the country is unable to finance itself at the high borrowing costs seen recently, especially with debt payments of EUR24 billion due in October, reports El Pais in its Thursday Internet edition, citing government sources.

Spain's Prime Minister, Mariano Rajoy, will try to convince German Chancellor Angela Merkel that Spain is willing to ask for the bailout as long as there aren't any tough conditions attached to it, such as having to cut pensions, adds the newspaper.

Needless to say this will not fly with Germany.

Finally, again from DB, these are the events that America slept through:

Overnight markets are trading with a cautious tone ahead of the ECB event. The Hang Seng (-0.2%) and Nikkei (-0.1%) are both lower while the ASX 200 (+0.7%) is outperforming on a mixed August labour market report in Australia. Headline unemployment fell more than expected (-8.8k v +5k) but unemployment rate was lower than expected (5.1% v 5.3%). Korean markets (+0.2%) are probably helped by statements from the Korean finance ministry that it will focus policy efforts on boosting exports and consumption. In China, rate cut expectations have returned with domestic media pointing out that two previous two PBoC rate moves in June and July have coincided with ECB/BoE meetings (a day later in June and the same day in July).

Turning to other European headlines, the WSJ reported that the Bank of Spain has made available EUR400m of loans to Spanish banks through the Emergency Liquidity Assistance program. The news follows earlier reports from the WSJ that Spanish banks are having difficulty getting funding from the ECB due to the shortage of acceptable collateral. Meanwhile, Germany issued EU3.61bn in 10-year bonds yesterday which fell short of its maximum target of EU5bn.

In terms of the day ahead, we also have BoE policy meeting today. The market is expecting no changes to interest rate and its asset purchases program. Prior to that, we will get the preliminary Eurozone Q2 GDP, French unemployment and German factory orders data. Spain's bond auction across 2014, 2015, 2016 maturities ahead of the ECB meeting will also be interesting. Spanish PM Rajoy will also host Merkel in Madrid today with a joint press conference expected at 1.30pm London time. Draghi and Schauble are also scheduled to speak at an award event tonight in Germany where Draghi will receive an annual award. In the US, the ADP employment change report will be a highlight ahead of Friday's payrolls. We also have non-manufacturing ISM and weekly jobless claims but all eyes will be on Draghi when he takes the mic later today.


Why The Market Expects The ECB To Soak Up All Remaining 2012 Issuance

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Just what is priced in? That is the question. Based on the aggregate size of the Fed and ECB balance sheets, it appears the S&P 500 is pricing in an increase of around USD300bn in the short-term. This USD 300bn amounts to EUR 240bn - a very special and rather too coincidental number. Based on expectations of supply, the EMU16 nations have EUR 245bn issuance remaining for the rest of 2012. So, it would appear that the market, in its ever-hopeful ebullient way has priced in the expectation that the ECB will soak up the entire remaining debt issuance of the 16 (remaining) Euro nations for the rest of the year. Anything less will be a disappointment - and remember each nation will have to ask for 'help' before receiving this 'support'. Coincidence, maybe? Over-confidence, perhaps? Reality, not a chance.

Comparing the S&P 500's 'expectations' to the aggregate USD value of the Fed and ECB balance sheets over time shows that LTRO2's impact was well-priced in - as was LTRO1 (though less so). Given current levels, SMP 2.0 implies growth of around USD 300bn (or EUR 240bn)...

which just happens to be...

So the equity market - in all its fundamental-ignoring reality - has priced in a conditional put as implicitly triggered for all European nations...

Perhaps even more remarkably - it would appear Gold has been correctly anticipating Fed/ECB actions since the crash lows in 2009. Somewhat explains the 'stagnation' in Gold and the recent breakout once again...(also providing some insight into Gold's downside risk)

and from Greece....

Greek police block riot police in anti-austerity protest

A Greek police officer shouts slogans outside a riot police facility in Athens September 6, 2012. REUTERS-John Kolesidis

ATHENS | Thu Sep 6, 2012 7:23am EDT

(Reuters) - Greek police protesting against austerity cuts blocked the entrance to the riot police headquarters on Thursday, preventing buses carrying riot police from leaving for the site of major demonstrations this weekend.

Scuffles broke out as riot police tried to clear the entrance of several dozen police union members - many in uniform - chanting anti-austerity slogans and holding banners.

"They would not let riot police buses depart for Thessaloniki," a police official said, referring to the northern city hosting a weekend trade fair where anti-austerity demonstrations are planned.

Some riot police appeared reluctant to tackle uniformed officers. "They make us fight against our own brothers," said one riot policeman who declined to be named.

The government plans to slash police pay in a new round of spending cuts worth nearly 12 billion euros over the next two years. The savings plan is expected to provoke new street protests in the coming weeks by austerity-weary Greeks fed up with repeated wage and pension cuts.

Police, firefighters and coast guard officers plan to hold a separate protest later on Thursday in central Athens.


14.02 Draghi says it's "not the right time" to cut rates. Disagrees that previous bond programmes have not worked.
14.00 IBEX has dropped sharply on Draghi's speech. Probably because Spain will have to ask for help before ECB will act. Draghi refuses to answer if ECB will help Spanish banks. He adds that "now it's in the hands of Spain".

13.45 OMTs to be conducted within strict and effective conditionality through EFSF/ESM programme, says Draghi. SMP programme "terminated". Bond-buying will be unlimited and ECB will seek involvement of IMF.
So, in summary: Unlimited bond purchases, IMF involvement, strong link to bailout programme.

13.40 Draghi: "Banks need to strenghten balance sheets... Euro is irreversible."
13.35 Euro area will recover only very gradually, says Draghi. Economic growth risks "on the downside".
13.34 Draghi maintains that the ECB is within its mandate. Government must be ready to activate EFSF and ESM and push ahead with reforms. OMT only comes into effect after EFSF/ESM are introduced. Will buy bonds that are three years or fewer.

13.30 Draghi unveils "fully effective backstop". ECB to buy government bonds on secondary markets, Draghi calls them Outright Monetary Transactions (OMTs)
13.29 Draghi has started speaking at the ECB. He has said that inflation will remain above 2pc in 2012, to drop below 2pc in 2013.
13.14 The fire brigade has been called to the ECB for an unknown reason.


Bank of England keeps interest rates on hold at 0.5pc and Asset purchase target at £375bn.

Anna Leach, the CBI's head of economic analysis, said:

QuoteAs the Bank of England is only halfway through its latest round of asset purchases, there was little expectation of any change in policy this month.
But with underlying conditions relatively flat, and more uncertainty around the euro area expected in the autumn, additional QE remains on the agenda. The Bank’s latest Inflation Report suggests we would need only a relatively small deterioration in economic conditions to prompt a further extension of the asset purchase programme later this year.
11.56 Greek Finance Minister Yannis Stournarashas said the country's privatization fund plans to complete the sale of nine assets next year

10.50 France sold nearly €8bn in long-term debt at an auction that saw its borrowing costs for its 10-year bonds fall.

Yields hit an all-time low of of 2.21pc.
10.42 German Chancellor Angela Merkel is visiting Spain to today to meet Mariano Rajoy for talks.
10.08 Greek unemployment soared from 23.1pc to 24.4pc in June. Way above expectations of 23.5pc.
Greek police protesting against planned pay cuts early have blocked riot police headquarters in Athens ahead of an evening demonstration by security forces summoned from around the country.
OECD expects Germany to enter a double-dip recession this year with growth of -0.5p cin Q3 and -0.8pc in Q4.
09.52 Spain has sold €1.43bn of 2015 bonds at an average yield of 2.676pc versus 5.086 at previous auction, €1.39bn of 2016 bonds at 4.603pc versus 5.971pc previously. Ten-year yield down 16 basis points to 6.29pc.
09.10 Meanwhile, the neofascist Golden Dawn party has increased its popularity among Greek voters, an opinion poll has showed.
Nikolaos Michaloliakos, leader of the far-right Golden Dawn
According to a Pulse survey, in the To Podiki newspaper, support forGolden Dawn stood at 10.5pc, placing it at third place behind coalition leader New Democracy (25pc) and the hard-left SYRIZA opposition party (24pc).
The previously dominant PASOK socialists have dropped to fourth place with 8pc of the vote.
08.24 Jose Manuel Barroso, president of the European Commission, has warned that long-term unemployment is rising fast in the EU, and that some parts on the union face a "social emergency crisis".
08.13 Spanish politician Jose Garcia-Margallo has compared the eurozone debt crisis with the sinking of the Titanic.
07.40 French unemployment has hit a 13-year high. It rose from 10pc to 10.2pc in Q2. Youth unemployment now at 23.5pc.

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