Continent-Wide Guarantees

In Brussels they have a new plan
Attacking their favorite straw man
The EC, they claim
Is best placed to frame
When bank wind-downs should have began

But Germany still disagrees
Just nations, bank assets, can seize
The Treaties in place
Do not allow space
For continent wide guarantees

In what has been a fairly quiet overnight session, there are two stories of note. First, the European Commission has proposed rules that say they should be in charge of bank resolutions in order to break the link between weak banks and the weak countries in which they reside. However, as Germany has claimed all along, they insist the current treaty framework does not allow for this much transfer of sovereignty and thus there must be Treaty changes before this plan can be enacted. Of course, changing EU treaties would take many years, and essentially, Germany is unwilling to be on the hook for bailing out other nations’ weak banks. It is no surprise that the two sides to this argument are the periphery + France vs. the rest of the core. This simply highlights the inherent weakness in the euro, but does not really add much new information. In fact, the euro has edged a bit higher this morning, trading up from yesterday’s 3-month lows, but this is just short term trading activity and does not represent any substantive change. The euro is still heading lower, and if I were a receivable hedger, I would be taking advantage of this modest rally to implement more hedges.

The other story is the BOJ meeting, which began last night and whose conclusion this evening is anxiously awaited by market participants. The yen rallied nearly 1% overnight as traders seem to believe the BOJ will not make any policy changes ahead of the Upper House elections in less than 2 weeks time and so unwound recent short yen positions. I have maintained for a while that the next leg of the yen weakening move would occur after the election results, but I have a sneaking suspicion that BOJ Governor Kuroda may look at the recent data and decide that goosing the process early is a good idea. In other words, despite no expectations for a policy change, I ascribe a 20%-30% chance that they add to the mix, maybe foreign bond purchases or more equity purchases, something to help boost the equity market and confidence ahead of the election. I remain confident that a weaker yen will be coming to a screen near you soon.

Beyond those two stories, we did see weaker Chinese import and export data, helping to undermine Asian equity markets and we heard from the IMF, who cut their global GDP forecast for 2013 back another 0.2% to 3.1%, and cut 2014 further to 3.8% from 4.0%. Otherwise not much else happened.

While there is no US data of note this morning, we do see the FOMC minutes this afternoon, and they should make for interesting reading. However, given the amount of Fedspeak we have received since the last meeting, I would be surprised if there is any new information that comes from their release. Chairman Bernanke speaks later this afternoon and that should be the most important activity of the session. That said, one can only expect him to continue to try to walk back the taper talk for now. Tapering is going to begin, but there is a great wariness right now in further discussions on the topic.

Good luck