Bernanke expands ZIRP till mid 2014

During the yesterday's Federal Open Market Committee meeting, FED's chairman Ben Bernanke adjusted downwards the US growth outlook and extended the Zero Interest Rate Policy until mid 2014. He didn't mention any further large scale asset purchases except  "Operation Twist" and rolling over of the current portfolio and he didn't mention any unemployment targeting (a widely expected figure).

What about the $15.100.000.000.000 US public debt ?

It has been less than a month since the US public exceeded $15 trillion (a scale pretty hard to imagine without the help of an explanatory diagram). In only 2 short weeks, the figure has been boosted with an additional 100 billion and is not hovering around $15.18 trillion. This amounts to almost 99.5% of the 2010 US Gross Domestic Product and I`m expecting it to reach triple digits by the end of the year. What do you expect: the difference is a measly $70 billion.

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.

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.

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.

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.

Next week's FOREX trading outlook

This week has been a hectic trading week, with most of the FOREX currency pairs behaving like in a bee hive. The global turmoil was enhanced by the two major news: first is the agreed haircut of 50% of the Greek debt and the subsequent leverage of the EFSF and the second one is the systematic dump of US Treasuries by the foreign investors (the latest to join the party is the Norwegian sovereign wealth fund which dumped all US Treasuries and all US mortgage backed securities). What is in store for us next week?