And surprise: German 1 year yield turns negative

Prost! or Cheers! from Germany as it becomes the European liquidity sponge. After the Chinese have lowered the reserve ratio requirements and the FED lowered the swap interest rates, thereby setting loose more easy money, German 1 year yields have reached the all-time, mind puzzling value of -0.068%. Yes that is a negative yield and it means that investors are preferring to store their money in the relative safety (and probably tax advantaged) German Treasuries even if it means that they have to pay for such a right. Although a temporary situation, it still comes to show that large institutional investors are bidding the German bund into negative territory.

China opened the flood doors by cutting reserve requirements

When the world screams for liquidity (shown by the increasing inter-banking swap rates), China comes to the rescue by lowering the reserve requirements and therefore unleashing a new wave of cheap money into the system. The markets responded very quick to this Chinese monetary stimulus, with equity and commodities spiking up, in a risk-on trade. Furthermore, in a following move, most of the leading Central Banks are now receiving USD swaps by 50 basis points less. Result: cheaper money.

Santa Claus rally in the S&P500 and FTSE100 ?

Now that the year is drawing to a close and the liquidity is thinner and thinner fund managers are preparing for their Christmas gift: a traditional year-end equity rally, to massage the bottom line. The S&P has seen December rallies in 4 out of the last 5 years and 2011 is most likely not going to be an exception.

I wouldn't bet the farm on a sustainable growth though, because after the punch bowl empties out, there will most likely be a hangover on the stock market.

Meanwhile in Eastern Europe: Step aside Italy! Hungary downgraded to junk

The financial ratings agency Moody's has proceeded today to downgrade the sovereign debt of Hungary to junk status (Ba1 with an negative outlook) down one notch. Competing rating agency S&P held its bazooka and kept the rating of Hungarian debt constant. The pressure on Hungary to seek a joint IMF/EU deal is mounting on the shoulders of Viktor Orban.

Like a boss: about the upcomming Euro-bonds

When mentioning the possibility of a joint euro-bond a few years ago the audience would have almost instantly burst into laughter and the one bringing it into discussion would probably have realised what a fool he suddenly looked like. Not anymore, peeps, as the French President Sarkozy is pressing for allowing the European Central Bank to issue joint bonds in order to stop the "stampede against European debt". This move comes after yesterday, Germany has failed to auction 10 year Bunds (considered the most safest debt instruments in the entire Eurozone) with a bid/cover rate of only 1.07 and an actual bid of 65% of the 6 billion asked. The rest of 35% had to be covered by the German Bundesbank. As Germany is finding it harder and harder to borrow at such low yields, the only way to stop the bloodbath will definitely be to monetize through the European Central Bank.

German Banks showing signs of weakness

The German financial sectors has been hit hard by the European debt crisis and rumors are now emerging of more and more financial institutions that lack the capital to withstand more pain. Even if they are not in the top 4 banks by Italian and Greek debt holdings (the bonds that were hit by far by the recent debacle), Deutsche Bank, through its North American Taunus Group and Commerzbank are maintaining toxic Euro-debt at a very thin capitalization. I am talking here about contagion at the very core of the European Union.

The $1.2 trillion deadline: 23 of November

We are approaching a big day, ladies and gentlemen. It is the 23rd of November when US budget committee will have to agree on budget cuts of at least $1.2 trillion dollars over the next decade. The 12 members of the committee, both Republican and Democrats, will have to decide on measures that would curb spending and increase the fiscal intake. While the US public debt recently crossed the $15 trillion yardstick, and the  $54.5 trillion total government debt which includes unfunded liabilities like Medicare, Medicaid and toxic mortgages still held at Freddie Mac and Fannie May still in full swing, it is business as usual in Washington.

One more sell-off before QE 3

Today was one of those days that raise my blood pressure to extreme levels. The risk instrument markets sold off, with the S&P 500 going down 1.55% to $1216 and with Gold crashing 3.14% to what is now $1716. Long term chart damage has been done in both of the instruments and it can be taken as a sign of trouble to come: the utter failure of the US budget committee or the failure to bail-out the insolvent Italy. At this point FED is waiting for a major sell-off in equities before announcing another QE programme.

Who is still holding toxic Italian debt ?

The Italian yields have cooled-off a bit, revolving around the 6.50%-7.00% area, partially due to the ECB rather frequent interventions and on the news that Mario Monti, a former European Commisioner, will lead the Italian government.  Spanish yields on the 10y benchmark are still high up there at 6.31% after recent weak macroeconomic news and French 10 year bonds rose today to 3.72%. The most solid European country, Germany, which reported today a 0.5% quarterly increase in GDP and its 10 year yields stand at 1.81%. Who is taking this loss ?

What does FED's zero interest rate for the foreseable future mean ?

Despite that bond yields in Europe are imploding, and Italy becoming the newest member of the elitist 7% club, among countries like Greece, Portugal, Ireland, all seems to be running well in the US wonderland. The cost of borrowing, as measured by US T-bills, has reached the lowest level since the beginning of the financial crisis. The demand of short term bills, namely 3 weeks, which are yielding 0%, and 13 weeks which are yielding 0.005%, is still extremely high as the bid/cover ratio stood at 3.41 in the most recent Treasury Auction.

Berlusconi is out. European markets applaud.

The Prime Minister of Italy Silvio Berlusconi has resigned today after more than 17 years dominating the political scene. The move comes after losing parliamentary majority and after pushing a new austerity plan designed to shrink the budget deficit from 120% of GDP (only seconded by Greece's budget deficit). Most likely, Mario Monti, a technocrat, will be appointed by President Giorgio Napolitano to lead the new government. Mario Monti, a former European Union Commissioner and pro-euro advocate will start negotiating with the major political parties later this evening. The pattern is becoming more and more obvious: EU is pushing for less national political control in exchange for financial protection. Will this ultimately end up creating the United States or Europe or break it apart ?

What about the other perypheral EU countries: Hungary

With most of the investor focus nowadays on the PIIGS "fallen angels", and  on the forthcoming US presidential campaign, not much has been heard about some of the other EU countries: Hungary, Romania, Slovakia, Bulgaria. Rumors in the market are that banks there are slowly withdrawing capital and scaling out of their less profitable businesses, but is there any cause of concern regarding their financial stability ? How did they surf the crisis wave and do they still require a safeguard ? Are they going to be left out of the core-Europe, in case such plan materializes or not ?

Gold "beware": Better than expected initial jobless claims at 390.000

The number of US citizen filing for unemployment benefits fell last week  to the lowes figure recorded in 7 months. They printed at 390.000 (in seasonally adjusted data), down 10.000 from last week's figure. There were 398.753 initial claimants under state programs, without any adjustments, in the week ending with November 5, an increase of 29,106 from previous week. According to the Bureau of Labor Statistics the official number of unemployed citizen is still at 13.9 million, adding up to an unemployment rate of 9.0%. There is simply not enough job creation and not in the right sectors.

FOREX update: All roads lead to Rome

So much erratic behavior on the FOREX markets today as the European contagion has definitely spread to Italy. Berlusconi has yet to resolve the political crisis which his country is facing as the austerity measures have not been voted by the dwindling majority. As a result, 10 year Italian bond prices have soared past 7%, a level at which Greece was already asking for European bailout and without quick measures Italy will follow the same path.

Weekly FOREX outlook: USD/HUF, USD/JPY and GLD

Provided that Berlusconi does not surprise us in a negative way, this week's investor sentiment should switch from from the European debt crisis to the US structural problems. The day of 23rd of November is closer and closer and by that date the leading American parties will have to decide on $1.2 trillion in spending cuts over the next decade. If the budgetary supercommittee fails to reach an agreement, the US budget crisis circus may repeat itself. So the limelight switches to US.

Where to Olympus ?

For how long can a company hide investment losses ? For 2 years, or  maybe 4 years? How about more than 30 years?  The senior management of Olympus Corp. , a Japanese manufacturer of high-tech machinery and instruments, announced that it covered up investment losses dating back to the 1980s. Apparently the blame had to fall on the former Presindent and chairman Tsuyoshi Kikukawa (who quit on the 26^th of October), on the Vice-President Hisashi Mori and the internal auditor Hideo Yamada, but considering the sheer size of the company it is impossible to say that they were the only people familiarized with the cover-up.

Precious metals leap forward as contagion spreads to Italy

  

Now that the waters have cleared for a bit in Greece, where Prime-minister Papandreou is going to form an unprecedented national unity government to push further budget cuts, the European bond vigilantes apparently have started to target the next weakest chain: Italy. The yields on 10 year Italian sovereign debt surged to 6.56% after reaching a record 6.68%. The Italian Prime Minister Silvio Berlusconi will be under-fire tomorrow as the parliament will vote on a state financing bill. His majority within the parliament is weaker by the day and rumors that he would resign hit today's news, only to cause a prompt dismissal.Who is going to bail-out Italy in case it fails? EFSF which receives 140 billion euro in guarantees from Italy ?

Berskshire's Q3 income brought down by derivative losses

The holding company managed by billionaire investor Warren Buffet, Berkshire Hathaway Inc. (BRK/A) announced that Q3 profits declined by 24% due to the index derivative bets. Warren Buffet speculated on the long term recovery of the stock market (through several global indexes such as the S&P500 and the FTSE100) by selling puts on the indexes. Needless to say this derivative position is in the red for about $2 billion according to Warren Buffet out of  $4.9 billion position.

Nice old algo-trading in USD/HUF

A time will come when human trading will become obsolete, with algorithmic, or robo, or the so-called black box trading tacking its place. Why take the time and analyze the market direction when you can have a high frequency robo-trader which takes advantage of pockets of liquidity and scalps a few pips out of the market ? Some recent examples include the May 2010 Flash crash when the DOW slumped for more than 1000 points as what seems to be the result of high frequency trading and algorithmic trading. What happens if there will be an error in the Matrix again ?

Gold soars, as the European bailout is back on track

Investors were reminded once again today that there are no golden pennies lying on the sidewalk, as gold shed all concerns and manged to pull itself up to the 1763 level. Not very nice for me since I exited all my gold positions at 1755. Silver went pretty much through the same lines as the other precious metals, rising today from $34.02 to $34.50, in what seems to be a rather anemic movement. The main drivers today was ECB's rate cut and (again) turmoil on the Greek political scene as Papandreou succesfully bluffed most of media with his resignation story.

European circus continues as Papandreou is rumored to resign

The farce is underway as the newest juicy rumor that hit the press is that the Greek Prime Minister will offer to resign in the next 30 minutes. According to BBC, Pap "will meet the Greek President Karolos Papoulios after the emergency cabinet meting finishes". The new coalition government will supposedly have "former Greek central banker Lucas Papademos at the helm". This comes after the surprising decision of Papandreou to call a referendum on the European Bailout Plan.

FED's Chairman Bernanke sees trouble ahead

It's time to sober up and say a little prayer for the wellbeing of the United States of America. The recent Federal Open Market Committee decided today to keep the benchmark interest rate at the 0% - 0.25% interval, effectively prolonging the Zero Interest Rate Policy, through at least mid- 2013. FED's policy makers agreed that the economy picked up some steam while "signficant downsize risk" still remains. The US Federal Reserve will still conduct the so called "Operation Twist" which aims to swap short term Treasuries with longer term maturities in order to flatten the yield curve and lower the costs of capital investments. 

The inflation rate, measured by the CPI rose to 2.9% in September, the highest since 2008, while the core-CPI (excluding housing and energy costs) rose to 1.6%.

Greece, wadup? Problems ?

It took a while for the financial markets to cool of from the Greek debt concerns (especially as the credibility of the European Rescue Fund is close to zero without IMF, Chinese, Russian and Brasilian support). I hope you enjoyed the brief silence, cause last night George Papandrou decided on the 31st of October (coincidentally on Halloween) to stirr things up a bit one more time and call for a referendum on the Greek debt deal and restructure the defence ministry.  As his power over the parliament is schrinking, the confidence vote may turn into a desaster if he doesn't manage to shore up enough support. Meenwhile stock markets around the world take a hit, with the S&P down to $1230 and the FTSE down to 5410.