Last night the S&P ratings agency downgraded just about every major American Financial or at least bank and a few others around the world, more downgrades are coming as the S&P is just getting started with their new guidelines. BAC traded under $5.00 briefly in after hours last night, thus far BAC is not responding as well as the market and $5.00 seems to be the magic number, that is why I mentioned it yesterday and commented that I would wait for the break of $5 so you don't have money in the market at risk until the probabilities are the highest, that being said, BAC should be on your radar, despite what the F_E_D may say about liquidity backstops, we all saw in person what happened when much smaller institutions like Bear and Lehman were on the rocks, if BAC gets to that position, the F_E_D will have a lot bigger worries then just BAC.
In any case, that event that happened after hours sent ES much lower, right through yesterday's lows and near Monday's lows in the evening (EDT).
The EU Finance ministers agreed to leverage the EFSF (haven't we been here before?) between 2-3x which falls well short of the 1 trillion originally agreed upon. It is thought that because of the lack of agreement in the EU over the crisis will see the G20 refuse to boost IMF lending power for a EU bailout next weekend when they meet.
German unemployment came in worse then expected and the European session was trading down until....
Early this morning China cut their Reserve Requirement Ratios by 50 basis point which sent EUR/USD as well as ES higher and the European market too.
China recently had an inflation problem just months ago that led to riots, but the collapse of the housing and real estate market seems to be a bigger concern for them right now, thus the 50 bp cut today. The cut is good for commodities,
Reuters has more on the news...
China's central bank cut reserve requirements for commercial lenders on Wednesday for the first time in three years, a policy shift to ease credit strains and shore up an economy running at its weakest pace since 2009.
As recently as the middle of 2011, China was still tightening monetary policy to combat stubbornly high inflation, which rose in July to a three-year high of 6.5 percent.
However, as the economy felt the chill of a slowdown in global activity and inflation eased, Beijing adopted a policy of "fine tuning" that included loosening credit for cash-starved small firms.
"I think the move is partially driven by capital outflows in November. Also, it may indicate that the economy has weakened quite bit and that the official PMI reading does not look very good," said Zhiwei Zhang, China economist at Nomura.
In short, expect global inflation to rise again, this also ties BerCranke's hands a bit as to QE3 options with inflation expectations to rise as China sets out on an easing cycle. This also confirms what we had been seeing in commodities the last few weeks which as was mentioned here numerous times, "This is a sign that China is in more trouble then they are letting on", today's move was confirmation of exactly that. It also highlights the problems in Europe as Europe is China's biggest trading partner-as if we needed additional confirmation! I do however wonder what the S&P will do as they left Chinese banks alone last night?
As for QE3, Business Week ran this article about a divided F_E_D over QE3, something mentioned here yesterday as two F_E_D speakers directly contradicted each other-Yellen and Lockhart.
Then at 8 a.m. today, there was a Global coordinated Central Bank policy action to lower $USD swap rates, again confirming the liquidity crisis in Europe as was clearly evident by Italian banks borrowing from the London Stock Exchange!!!
The Central banks involved included our own F_E_D, ECB, BOJ, and Bank of Canada, the swap rates were lowered by 50 basis points.
The F_E_D also made mention of a promise to bailout BAC, why would they be making these statements in the first place when BAC said months ago, it will accept Warren Buffet's $5 billion investment, but THEY DON'T NEED IT! In any case, the F_E_D said the following with regard to BAC:
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
After seeing what happened with Lehman and more recently, MF Global, the above statement should offer little comfort.
Back to the coordinated policy action, the half life of such measures is shrinking every day. You saw the chart in my last post. The bigger issue here is why they had to take such action in the first place, it is obvious that the situation in the EU is far more dire then we have been led to believe and that's hard to believe, but given the Chinese action and now this, it is pretty well confirmed.
You saw my initial update, since then I have learned that Sovereign Credit Spreads have not responded nearly as positively as one would have thought. Italy is only slightly better, Portugal is actually wider.
In the Iranian/UK conflict, the UK has asked the Hague to expel and close the Iranian diplomats and embassy in London, the Hague ordered the Iranian embassy closed and all diplomats expelled.
As far as the coordinated Central bank action, while being large, the measure of dollar liquidity is to be found in the Euro-$USD cross currency basis swap, the move by the Central banks today inly moved that metric back up to last week's levels (same as 11/23), so how effective this will be is yet to be seen, we are just seeing the knee jerk reaction thus far in equities, it will be highly inflationary, especially taken with the Chinese move. Gold should perform well in the near term as well as commodities.
In the US, Chicago PMI printed better then expectations of 58.5 coming in at 62.6.
Now, the latest on the multi-Central bank move-including China which if you think about it, is a little odd in timing with the other CBs today. Forbes released an article just about an hour ago.
Big European Bank Failure Averted: What Central Banks Did Not Tell Us
It appears that a big European bank got close to failure last night. European banks, especially French banks, rely heavily on funding in the wholesale money markets. It appears that a major bank was having difficulty funding its immediate liquidity needs.
The cavalry was called in and has come to the successful rescue.
The F_E_D, Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in a coordinated action moved to provide liquidity to the global financial system.
In a separate move, the Chinese Central Bank cut bank reserve requirements. The People’s Bank of China cut reserve–requirement ratio by 0.5%, the first cut in nearly three years.
These are the type of actions that were being taken during the financial crisis in 2008. Now most knowledgeable experts agree that not rescuing Lehman Brothers was a mistake. The authorities are not about to make the same mistake again. The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known.
And for now, that about covers it.
