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.