Euro Squeezed Higher, Takes Others With It, Positive Newstream

Successful Spanish and Greek bill auctions and better than expected German IFO caught the market wrong-footed, if the record net speculative short at the IMM is anything to go by. The euro has shot up to almost $1.3090 and pulled up the other major currencies and emerging market currencies in its wake

Is Finland Really A Closet Member Of The Eurozone Periphery?

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

Europe’s Three No’s in Two Parts: Part II

The ECB is seen to be the key protagonist and the pressure is more acute on it to act. Yet it steadfastly refuses. The other solution that has been advocated is a joint European bond. It is not going to be forthcoming any time soon. Such bonds are not seeds but fruits of a fiscal union. Surveys suggest a little over half the market expects a country to no longer be in the euro zone by the end of 2012. Contrary to what some noted economists have argued, a Greek decision to drop out would be a tremendous policy blunder.

Many economists and investors see a binary outcome of the European debt crisis: either the ECB backstops the sovereign/there is a European bond, or the euro zone breaks up. Instead, we think that the continuation of what can be called “muddling through” is the most likely scenario for the period ahead. It is the absence of a comprehensive solution that will shape the investment climate. It means that the crisis continues. The risks are asymmetrically distributed to the downside, yet the ECB’s massive provision of liquidity would seem to contain the extreme tail risks

Europe’s Three No’s in Two Parts: Part I

Banks can borrow as much as they want from the central for three years at the refi rate. They are limited only by their desire and collateral. The ECB also liberalized further its definition of acceptable collateral. But expectations of large banks borrowing money from the ECB to buy sovereign bonds to use as collateral to borrow more money from the ECB does not appreciate the risks involved. The cost of hedging and insuring sovereign risk has risen. Also, if the collateral is a sovereign paper and the sovereign is downgraded, or if the collateral loses value for another reason, the bank will have to pony up more cash or collateral

Forecasting misconceptions and the likelihood of European financial repression

Market participants, including economists and strategists are prone to confusing what they believe should be the case with what will be the case

Nervous Calm over Currency Market

A good reception to a Spanish bill auction and a some what better than expected German ZEW investor survey helped stabilize the risk sentiment which had been battered yesterday. The major foreign currencies are mostly firmer on the day, but the modest gains have left the short-term momentum indicators a bit over-extended. This would seem to favor early North American participants selling into the currency bounce

A Deep Seated Hostility Towards European Construction?

The British decision to veto the proposed new EU treaty is not surprisingly provoking an avalanche of commentary this weekend. Among journalists, at least, there seems to be a consensus that David Cameron committed some kind of major diplomatic blunder.

Possibly this is so, but given the difficulties presented by having to take this agreement forward outside the formal structure of the EU, it is hard to not reach the conclusion that both Angela Merkel and Nicolas Sarkozy have been guilty if not of a similar blunder, then at least a major error of judgment

The EU’s Camouflaged Bazooka

Many were disappointed that the EU Summit didn’t conclude with a hard number backstop for the ‘zone’s sovereign debt rolling over next year. We believe if you scratch the surface the bazooka is there

The only real solution to the European debt crisis is credit writedowns

Like many, we at the Global Macro Monitor believe the only solution to the European debt crisis is to write down bad debts, but we’re also realistic that it will take time because of the weak and highly levered balance sheets of many of the European banks holding the sovereign debt. Bridge solutions will have to do for now as banks bolster their capital. Germany seems to understand this as the sovereign debt crisis has created systemic problems in their own banking system

Key Disagreements at Late Stage Weighs on Euro

Germany and France are pushing for treaty changes. Under normal conditions treaty changes are a long drawn out process, subject to horse trading and vulnerable to domestic political considerations and the outcome is far from guaranteed. There some voices, including Van Rompuy, who want to “fast-track” treaty changes without requiring parliament approvals or referenda. Others disagree. Recall there have been numerous reports suggesting the European national central banks and the Federal Reserve would make bilateral loans to the IMF for which they could finance enhanced lending to the euro zone countries. Although we have argued that the IMF is the backstop for sovereigns, not the ECB, we think the process is more complicated than can be resolved at this summit. There does seem to be a significant role for the IMF, but the details have not been worked out

The European Troika to Watch

The “troika” – Italian, Spanish, and French bond yields – is acting pretty well even after the S&P downgrade. Italy is under 6 percent and that is what matters. We sense there will be tremendous pressure on the shorts and equity risk off crowd going into the EU Summit and believe the market moves higher even if it’s just a fig leaf to give the ECB cover. After that? All bets off going into 2012. Stay tuned

Wating for Another Shoe to Drop

The major currencies are consolidating in yesterday’s broad trading ranges, but the “real” action is in the European bond markets, with acceptable auctions in Spain and France, helping support of a bond market rally that was already underway, encouraged by yesterday’s step to increase access to dollar funding