Darshan's Blog

Darshan's Daily Ma rket Ponderings

Day 3: ECB vs The Market

Thursday February 11th, 2010

Welcome to Day 3 of ECB vs the Market. Yesterday, the ECB bought themselves another day by making everyone wait for a statement at 5.30pm (GMT)...only for them to tell us to wait until today for another statement with the actual details of how they will help Greece. Clever boys and girls.

If you are lost and need a recap on Day 1 and 2 read my blog from Tuesday and Wednesday -

Day 1 http://ow.ly/1olc6i

Day 2 http://bit.ly/bWhobG

In the last four hours we have had four rumours there is no bailout, there is a bailout, there is bailout but it won't be announced until Tuesday to finally an announcement from a top European official confirming that a deal to help Greece, has been reached. The market is being held hostage it doesn't know what to do as it's kept guessing. So its decided to line up to the north side of the guess. If this bailout does not please, we're going to see a savage reversal to the south. The closest thing I can remember to this sort of anticipation is October two years ago. The vote for the TARP stimulus package in 2008, had everyone buying the market just before hand the vote fell on the negative side, the market tanked and tanked, until a new vote was taken a few days later and then it shot up just as quick.

I guess what I'm trying to say is you'd be mad to have a large position open either way right now. The market is being played like a fiddle and it's trying to fight back. All this means is crazy swings.

So far everything is a rumour and hopes pinned on rumour, are often torn to shreds. We've heard nothing much about how this bailout will work. One solution that is being explored by Germany, is for Germany and France to either buy the sovereign debt from Greece or for them to lend to Greece directly. Remember, as I keep saying the Maastricht Treaty has a 'no-bailout' clause. (The media only seem to be reporting that today clear case of media being used to play the game me thinks). The only exception is if a country is in danger or in serious trouble due to unforeseen circumstances or a natural disaster. I suppose 'unforeseen' could be left wide open to interpretation here , if need be. Either way, this sort of aid to Greece, will have Spain and Portugal asking for food too.

The reality of it is that the above means nothing. Unnamed officials have stated it. When you look at the reverse...it's even more interesting. Who has denied support openly? Gordon Brown made it clear that the UK would not help (well it can't it needs all the money it can get itself) and has said that it's for the Euro-zone countries to deal with. Where is the ECB going to go to? That only really leaves Germany and France.

I'll keep repeating this but this entire path is leading to the IMF. I just can't see a credible solution that won't signal that cheating is okay to other EU countries. Greece has lied about it's deficit as have others. It's now been caught out but it still wants help. Nobody expected that, when Greece was brought into the circle but they should have.

The other thing I'll keep repeating is that this sovereign debt crisis is NOTHING NEW! It's old news. Real old. I talked about it last year on here. The real situation here is that the Fed announced that it would unwind their currency swaps with Europe, in it's last FOMC minutes and this has caused a sharp unwind in the Euro. Simple the gravy train got called back. It would also explain, why the ECB is not aiding the Greek Central Bank's reserves with swap lines. It perhaps is just not in a position to do so at the moment.

They are waiting for the exact time to use all their limited ammo. In the meantime, they are just faffing about with controlled releases of rumour and intrigue. I mean just this morning, the meeting between key figures was postponed due to snowfall. Are you kidding me? Talk about clutching at straws.

Talking about clutching at straws. It seems Bernanke laid out his plan for unwinding the stimulus. In a strange twist, he cited inflation risks and decided that the best way of unwinding the liquidity pumped into the system (read - used to pump up asset prices, recapitalise the banks and most definitely not used to lend out to businesses, as intended) was to target the Federal funds rate. Currently it stands at 0.25% but by increasing it, it would make it more appealing for the banks to deposit greater cash reserves with the Fed and therefore, less likely to lend to consumers. Of course, this in turn would mean that the knock-on effects causes lending rates to move up and ultimately it would hurt consumers.

Remind me, how does this make any sense whatsoever? Well it does, if you realise that Bernanke knows there are more shocks to come and needs to find a way of (cite inflationary risks, despite there being more deflationary risks than inflationary) of allowing the banks to keep those reserves so that they can weather a storm. When does he planning on unleashing this tool of madness? Well, not anytime soon. He simply left it wide open to interpretation as he said it would only happen when the economy is at a stage to allow it to happen.

The other tools Bernanke mentioned, were reverse repos to drain liquidity from the the market, term deposit offers to banks and reducing the Fed's own reserves by selling securities in the open market. All in all, it is clear that the smart money is going to be exiting the market in anticipation of all this. To get out, they will need to distribute higher up. From that we get my theory, that this entire move down is a bear trap. When there is a resolution from the ECB, Options Expiry is out of the way and we are just above support at levels stated throughout last week we will see a short-covering rally to a new high. From there, we will sell-off hard and fast to lows below those of March 2009.

For today, we await the next move. The fact that next week is Options Expiry only complicates matters further.

I'll keep you updated throughout the day. Gold has just pumped north so I guess some more rumours must be doing the rounds.

Stay safe today and happy trading,

Darshan

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