Yesterday Reuters reported:
A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say.
While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland.
On this news the European banking sector popped higher, the biggest jump in 5 months, sovereign 10 year benchmark debt in Italy and Spain saw the yields come down notably and all seemed well.
As one website put it, the market (ES) went from the worst day (Friday) to the best gain in 8 months. I ask you after the size of the divergence and the head fake moves around the pennant which we had predicted before they began, do you think this is simply coincidence? Is this simply Wall Street reacting to news or perhaps is this Wall Street being proactive and using news to tactical advantage? You've seen the evidence of what the market looked like the last several weeks and especially in to Friday's bottom?
Overnight there were press articles coming out left and right about how Spanish banks may be re-capitalized with Germany coming around and supporting the general idea despite a growing political backlash among the German population against more bailouts in which Germany is stuck with the contingent liabilities. However if Merkel wants to preserve the union that is truly set up to benefit German manufacturing, this i the time to act. For those of us who have been following the European attempts and plans to rescue countries in distress, we all know that virtually nothing they have done has been credible or effective, I suppose the US isn't much different, we just have a Centralbank that is more willing to keep the game up and kick the can further down the road, despite the consequences (stacking the house of cards even higher).
As a gauge of European optimism, French and particularly Spanish bond auctions went through without any notable hitches with decent bid to cover ratios, the safe haven German bunds are falling as risk appetite grows in Europe.
Further adding to sentiment, the UK released their services PMI today, you may recall last week their manufacturing PMI was the weakest since May of 2009 last week, the Services PMI actually beat estimates.
Furthermore the F_E_D's #2, Janet Yellen made some very dovish (biased towards easing) comments overnight as the F_O_M_C meeting is only about two weeks away. Also Bernie will be testifying on the Hill today which will certainly be watched for any hints.
Around 7 a.m. ES futures spiked...
After the Bank of England put off further easing, just after the PBoC (People's Bank of China) announced the first Chinese rate cut in deposit and lending rates since 2008, 25 basis points. You may recall in November there was a globally coordinated CB easing action led by the Chinese with their first 50 basis point RRR rate cut since 2008, followed by the F_E_D (swap lines) and the ECB shortly after, I think there's some disappointment in the market since the open that the November scenario didn't play out again.
At 8:30 Initial Claims were released for the US
| Prior | Consensus | Consensus Range | Actual | |
| New Claims - Level | 383 K | 379 K | 365 K to 385 K | 377 K |
| 4-week Moving Average - Level | 374.50 K | 377.75 K | ||
| New Claims - Change | 10 K | -12 K |
IC just eeked out a beat vs consensus, this is the first beat in 5 weeks now. Last week's 383k was revised higher (as usual) to 389k, making this week look even better as the media ignores consensus and looks only at this week vs the ALWAYS revised higher prior week. Continuing Claims missed printing at 3293k vs consensus of 3250k with prior revised to 3259k. As for those dropping off the 99 week cliff, 58,829 which is the highest print since Dec. 2011.
From Bloomberg this morning near the open, Merkel says,
MERKEL SAYS GERMANY READY TO BACK USE OF EURO-AREA INSTRUMENTS (it's not clear which instruments, perhaps a magical flute?)
- MERKEL SAYS NO SINGLE RESPONSE WILL SOLVE THE CRISIS IN EURO
- MERKEL SAYS WILL TAKE `FEW YEARS' TO RESOLVE EURO CRISIS
- MERKEL SAYS PEOPLE `MUST BE PATIENT' ON EURO CRISIS
This was followed by additional commentary...
Merkel willing to back use of EXISTING Euro-area instruments.
Existing instruments means Germany is still sending a clear message they are not backing Euro-Bonds and the North - South divide is once again ripped open just as a cooperative tone emerged.
Meanwhile as Bernanke testifies, this from Reuters and Bloomberg...
- *FITCH SAYS WOULD CUT US AAA RATING IF THERE IS NO CREDIBLE FISCAL CONSOLIDATION PLAN IN 2013
- *UK, FRANCE ,GERMANY, OTHER AAA NATIONS HAVE CREDIBLE PLANS:FITCH
As for moving the market this a.m., the market is glued to every word from Bernake's testimony, here's the statement.
Thus far the headlines include:
- BERNANKE SAYS FED READY TO ACT, REFRAINS FROM DETAILING STEPS
- BERNANKE: `FISCAL CLIFF' IN 2013 POSES A `SIGNIFICANT THREAT'
- BERNANKE SAYS U.S. BUDGET TREND `IS CLEARLY UNSUSTAINABLE'
- BERNANKE: EUROPE CRISIS IMPAIRING EXPORTS, CONSUMER CONFIDENCE
- BERNANKE SAYS EUROPE CRISIS POSES `SIGNIFICANT RISKS' TO U.S. (sounds exactly like Yellen last night)
Bernie's Speech
Market Update coming...
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