China Cuts Bank Reserve Ratios by .5 Percentage Points; Central Banks Cut Rates on Dollar Swap Lines; German 1-Year Bond Yield Negative First Time Ever; Futures Soar
by ilene - November 30th, 2011 1:58 pm
Courtesy of Mish
Equity futures sharply reversed an overnight pullback on a pair of central bank actions, one in China, the other an agreement between the US and Europe.
China Cuts Bank Reserve Ratios by .5 Percentage Points
The Wall Street Journal reports China Cuts Reserve-Requirement Ratio
The People’s Bank of China, China’s central bank, said Wednesday it will cut the reserve-requirement ratio for banks by half of a percentage point, the first such cut since December 2008. The cut essentially frees up banks to lend additional money.
The cut late Wednesday in Beijing cheered European markets, with the benchmark Stoxx Europe 600 index up 0.8% midday, while London’s FTSE was up 0.8%.
"The data for the last few weeks has been bad," said Mark Williams, China economist at Capital Economics. "There’s zero growth in property starts, electricity output growth has slowed, the export numbers for November will be awful and they may have had a sneak preview of that. All of these things could have triggered a shift in policy."
Wednesday’s move will take the reserve-requirement rate to 21% for major banks. It will free up around 390 billion yuan (about $61 billion) in funds for the banks to lend, according to calculations by The Wall Street Journal based on data for bank deposits in October.
The cut in reserve ratio "is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation," said Stephen Green, regional head of research in Greater China for Standard Chartered, in a note following the PBOC’s move. Mr. Green predicts that China will reduce the reserve ratio again in January due to a potential liquidity crunch coming up before Chinese New Year.
The PBOC has raised the reserve requirement ratio six times so far this year, and has raised benchmark lending and deposit rates five times since October last year to combat stubbornly high inflation. The previous reserve ratio increase took effect June 20, and the last interest rate hike was effective July 7.
There will likely be more such reserve ratio cuts, with one more cut of 0.5 percentage point coming as soon as the beginning of next year, said Yao Wei, China economist with Société Générale, adding that she doesn’t expect any interest rate cut in the next six months.
Central Banks Cut Rates on Dollar Swap Lines
Bloomberg reports …
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DiggJPM Explains The Novel Feature In Today’s Fed Liquidity Swap Line Expansion
by Zero Hedge - November 30th, 2011 1:53 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
As JPM’s Michael Feroli, he move to cut the Fed’s swap lines rate from OIS+100 to OIS+50 should not come as a surprise: it was already in the works, the only question is when it would be enacted. As it so happens it was decided on Monday, and was announced today after unfounded rumors of a potential bank failure in Europe became apparent. There was however a twist: “The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today’s announcement. The Fed’s official statement is that these are being implemented as a “contingency measure.” There are no plans to make these operational in the near term, but are apparently being set up as a backup plan in the event of a worsening in global financial conditions.” What this means remains unclear but the Fed never changes policy without reason. Which then begs the question: while everyone is focusing on foreign bank lack of USD liquidity, should the real focus be on US bank lack of foreign currency liquidity?
Full note:
The Fed took three actions this morning to support global financial markets: the first and by far most important was lowering the interest rate charged on its dollar liquidity swap lines with the ECB and other central banks from OIS+100bps to OIS+50bps, second it extended the availability of those facilities from August of 2012 to February of 2013, and third it has agreed with other central banks on creating swap lines whereby the Fed can lend foreign currencies to US financial institutions.
Regarding the first of these moves, there had been a fair bit of speculation that the Fed would lower the interest rate charged on these lines, though the timing of such a move was uncertain. Throughout the crises there has been a relatively low hurdle for introducing or making more generous the swap lines, which may be due in part to the fact that such swap lines have historically been considered a normal part of the Fed’s toolbox. In addition, the Fed takes no credit risk with these swap lines, as it faces the ECB, not the private European banks that draw on these lines. So from a purely pecuniary view — which
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Maximum Intervention Moves Into Overdrive; Foreign Banks can Fund themselves Cheaper in US Dollars than US Banks; Discount Rate Cut Coming Up?
by ilene - November 30th, 2011 1:53 pm
Courtesy of Mish
Steen Jakobsen, chief economist for Saxo Bank offers his take on the liquidity moves by global central bankers.
Please consider Steen’s Chronicle, Maximum Intervention Moves Into Overdrive
Our theme for Q4 was ‘Maximum Intervention’ and today was a new high for this exact concept. The day after the European Union Finance Ministers (ECO-FIN) meeting (which once again failed to produce any progress on the EU debt crisis) the Chinese cut the RRR-ratio – the minimum reserves each commercial bank must hold of customer deposits and notes – from 21.5 percent to 21.0 percent. (The RRR started the year in 18.5 percent and this is the first cut since 2008. Back in 2006 the RRR ratio was just below 8.0 percent for a number of years.) This is an indication that China’s help to the growing outlook of a ‘Perfect Storm’ will be monetary easing despite relatively stubborn inflation numbers.
Coup-de-grace
Then in coup-de-grace style the Federal Reserve and five other major central banks cut the dollar funding rate for overnight swaps by 50 basis points, down from 100 basis points, and at the same time made this programme run through to February 2013.This immediately raises the hope for further cuts in policy rates in the US and Europe. Right now, foreign banks can fund themselves cheaper in US Dollars than US banks. This will almost certainly mean the discount rate will be cut by 25 bps and before the weekend.Mounting pressure on Monti
The market loves liquidity and this action shows the true determination of policymakers to address the growing funding crisis, but its ultimate success will depend on progress in the EU debt crisis, and whether this will again merely be a stand-alone action of throwing liquidity at a problem which remains one of solvency. In other words, the lack of structural changes in Europe – are the same both before and after this coordinated intervention. Alas, technocrat Monti remains more important to the future of this risk-on move than the move itself.However, it should not be ignored that the market is looking for excuses to take the S&P 500 index higher, and there is no denial that the underlying economic data from the US has continuously surprised to the upside over the past month. Fundamentals are improving in the US, and the ADM report
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Markets Surge As World Engages In Global Bailout
by Chart School - November 30th, 2011 1:35 pm
Courtesy of Doug Short.
There was a time in recent history where Ben Bernanke once said that he would “…drop dollars from a helicopter” if necessary to keep the economy from going into a depression. Well, today, the remaining survivors of the global financial rout have coordinated an “all in” gamble to save the world from the next impending crisis.
We had discussed in the past that our recessionary call on the economy in the first half of 2012 was contingent upon whether or not further rounds of government stimulus were injected into the system. We also stated that we expected those to occur by the end of this year. Alas, we are not disappointed. This morning’s announcement that the U.S. Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Swiss National Bank and Bank of Canada will lower the rates on currency swaps as well as lower pricing on existing US Dollar swaps provides a massive liquidity canon for the global financial system.
From the announcement:
“[The Banks] are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”
The Federal Reserve also made the following comments with regard to the U.S.
“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.“
A Dire Situation
While the markets are surging from the direct injections into the financial system, more on that in a moment, the important take away here is that the world is in FAR WORSE shape than has previously been discussed. These are emergency funding measures and are done in order to hopefully prevent the next liquidity crisis. With the banks in Europe already on the edge of failure, a suspicion that a major bank on the brink of collapse spurred this action may not be too far from the truth. The fact that…
On FX intervention and the ECB/SMP
by ilene - November 30th, 2011 1:31 pm
Looks like the ECB was reading Bruce’s mind, probably over the weekend, as it is quickly scrambled to make friends with the other CBs. (The friendfest seemed to be traded on two days ago.) ~ Ilene
On FX intervention and the ECB/SMP
Courtesy of Bruce Krasting
Yikes!! I posted this and a few minutes later the Fed/other CBs announces a round of coordinated measures to assist the ECB. My point in this article was that the ECB has no friends, and that was the weakest link in their defense of the EU bond market. It seems they now have friends. We shall see how good these "friends" are.
The ECB has been a big player on the buy side of EU bonds. Its intervention topped E200b recently. Of course that’s just a fraction of the supply that is out there. At this point, the ECBs efforts have been a miserable failure. Rather than put a ring fence around critical countries such as Italy, the ECBs tactics have added to the fire.
The ECB is in a bad position. The news flow and large supply have put them on the defensive. Defense is no way to run an intervention policy. At best, it’s slow grind to a loss.
I sat on FX interbank desks in the 70’s and 80’s when the NY Fed came into the FX markets on a regular basis in an effort to stabilize and steer the dollar. The “Stick” (what the Fed was called) was on both the sell and buy side at different times over those years. This was low-tech time. There was a direct telephone wire to the Fed desk. It would light up and they would ask for a price on $100mm USDDM (no Euros then). Dealers are obligated to make prices. You knew you were going to get slammed as soon as they said:
All hell would break out in the FX markets when the Fed intervened. I would get little sleep for a few days. After about a dozen of these sphincter event I formed my own opinions on how intervention should be conducted. There’s plenty of academic stuff on this too. The following are considerations when evaluating the efficacy of FX intervention. Some of…
MBIA Soars Following BTIG Initiation With $22.50 Target
by Zero Hedge - November 30th, 2011 1:25 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
It is no secret that MBIA has long been one of our favorite longs (and by longs it is really a contrarian bet on various bad things happening – our latest piece can be found here). Today, we are happy to see that BTIG has come out with an initiating coverage report on the name following virtually all the same logic we presented two months ago, only with a price target that makes even us blush: $22.50. To wit: “We are initiating coverage of MBIA with a BUY rating and a $22.50 price target which equates to a 1.0x multiple of 2012E year-end stand-alone adjusted per share book value of National ($26.26) less the holding company net debt per share ($3.73). Our valuation is based on our view that if MBIA is able to resolve the fraudulent conveyance and Article 78 cases challenging its transformation either through a settlement or a court judgment, the value of National will flow up to the holding company and to shareholders…. Given our view that the challenges to MBIA?s transformation will be resolved through a settlement and that its shares could nearly triple in a post-announcement short squeeze, we believe MBIA offers one of the market’s most compelling risk-reward propositions. Following almost four years of uncertainty during which its status as a viable entity has been in question, MBIA appears closer to resolving the various challenges it faces, unlocking the value of National Public Finance Guaranty Corporation – the company?s public finance unit – to the benefit of shareholders, and resuming its role as one of the last remaining players within that industry.” and the kicker: “We would note that the large short interest in the stock relative to its float – 28.5 mm shares short versus a float of 140.4mm shares – combined with highly concentrated institutional ownership could set the stage for a dramatic short squeeze as short sellers might have to scramble to find shares to cover.” Remember: “Is MBIA A Volkswagen-Like Short Squeeze Candidate?” Mmhmm.
Intel Bulls Eye Fresh Highs In Chip Maker’s Shares Come Springtime
by Option Review - November 30th, 2011 1:24 pm
Today’s tickers: INTC, S & ACN
INTC - Intel Corp. – A spate of buying activity in Intel Corp. call options this morning suggests some options strategists are positioning for substantial bullish movement in the price of the underlying over the next four to five months. Shares in Intel are certainly heading higher today, with the stock currently up 5.5% to stand at $24.86 as of 12:10 PM in New York. Fresh prints in March 2012 contract calls indicate investors may profit if Intel’s shares rally to their highest level in at least five years. Traders taking a bullish stance on the chip maker picked up more than 4,200 calls at the Mar. 2012 $28 strike for an average premium of $0.43 each. Like-minded optimists paid an average premium of $0.28 per contract to purchase roughly 9,100 calls at the higher Mar. 2012 $29 strike, as well. Investors long the call options may profit at March expiration in the event that Intel’s shares surge 14.4% and 17.8% to surpass the average breakeven prices of $28.43 and $29.28, respectively. Looking out to options expiring in April 2012, it appears some 8,800 calls changed hands at the $29 strike against open interest of 2,037 contracts. Investors purchased most of these contracts for an average premium of $0.45 a-pop. Finally, short-term bulls are dabbling in Intel Corp. weekly calls. It looks like investors that got in ahead of the week’s rally are taking profits off the table today. Open interest patterns in the Dec. ’02 $24 strike suggest traders purchased around 3,500 of the calls for an average premium of $0.10 each one day prior to Thanksgiving. This morning these calls were sold roughly 3,500 times for an average premium of $0.64 each, or approximate one-week gains of 540%.
S - Sprint Nextel Corp. – Shares in the wireless carrier joined in on the broad market rally today, rising 3.6% to $2.59 in early-afternoon trade. However, a large transaction in weekly puts on the stock indicates one strategist is prepared should the music stop. It looks like the investor purchased around 27,000 puts at the Dec. ’02 $2.5 strike for a premium of $0.07 apiece. The trader may profit at expiration this week if shares in Sprint Nextel Corp. drop 6.2% from the current price of $2.59 to breach the effective breakeven point at $2.43. Immediate-term bearish options activity in the weekly puts contrasts with a much…
Iran To Take ‘Necessary Measures’ In Reaction To UK Embassy
by Zero Hedge - November 30th, 2011 1:19 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
Just headlines via Bloomberg from the Iran Foreign Minster Mehr:
*IRAN SAYS U.K. DECISION TO CLOSE EMBASSY IS `HASTY’
*IRAN WILL TAKE `NECESSARY MEASURES’ IN REACTION, MEHR SAYS
This as Germany, Italy, and now France also call back their Ambassador from Iran.
Euro Basis Swap Perspectives
by Zero Hedge - November 30th, 2011 1:13 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
We noted early the lackluster improvement in the EUR-USD cross-currency basis swap, especialy compared to its trend and previous crisis scenarios. Peter Tchir, of TF Market Advisors, puts today’s central bank actions into context relative to the underlying problems being faced in Europe and covers the implications of some of the headlines that may have slipped past in the middle of the rally-fest. We were down over 1% on futures overnight specifically because
the EFSF was a failure and banks were downgraded (belatedly) by S&P. No one is talking about EFSF right now. The IMF denial and now the Italian ‘deal’ is also off the table. Back on the table is “treaty changes”.The swap line announcement seems largely symbolic in that changing the rate to 50 bps instead of 100 bps is not a game changer.
So the Euro Basis Swap is once again a topic of conversation.
It was certainly on the radar screen of the bears as one of the rates that was not responding to the “Grand Plan” or other policy actions.
On September 15th (green oval above), the first attempt at global co-ordination to bring the rate down was done. They put in place swap lines at OIS + 100 bps back then. The basis swap reversed that gain and got worse with the market into the end of September and early October. It participated in the October rally, but never got back to levels of September 15th, and started fading with the Grand Plan.
Many investors view this swap as an indicator of how difficult it is for European banks to fund in dollars. The basis swap can move around for many reasons, but there is good reason to believe it is an indicator of how difficult it is for European banks to fund their US businesses.
In normal times, European banks borrow in dollars to fund their US positions. That makes sense. As the banks face pressure on their USD funding rates, they have two choices, they can either pay up to get $’s directly, or they can borrow at home in euro’s and “swap” it into dollars. The basic premise is that foreign banks have more ability to raise money in their home countries
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Ron Paul Statement On The Fed’s Bailout Of Europe
by Zero Hedge - November 30th, 2011 1:04 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
From Ron Paul
Statement on the Fed’s Continued Euro Bailout
The Fed’s latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed’s independence should reevaluate the Fed’s supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.
Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing.
The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending. Citizens the world over deserve better than this. They deserve sound money that cannot be manipulated and created out of thin air by central planners who promise printed prosperity. Fiat money caused this European crisis and the financial crisis before it. More fiat money is not the cure. The global fiat currency system has proven itself a failure, we need real monetary reform. We need sound money.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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