1. Germany More Pessimistic on EU Summit, Not in Favor of Running EFSF and ESM Concurrently
The main news today was Germany trying to douse expectations for the EU Summit, via an anonymous official. That means that divisions remain and that European politicians may not be able to come together to agree on tough decisions in such a short timeframe.
From Wall Street Journal: An official said Germany was more pessimistic about the success of the summit than it was last week and said the European Financial Stability Facility and the permanent European Stability Mechanism, which is due to start in 2013, won't run simultaneously, pouring cold water on earlier press reports. The official added that there were no additional resources planned for the ESM.
The market has therefore started to price in the possibility of a disappointing report preemptively and as a result the EUR came under pressure after rallying most of the overnight session.
The German official said that talks in past days show that some actors not aware of seriousness of situation in euro zone. Not what the market is trying to hear on the eve of the latest make-or-break Summit.
2. Banks Tap ECB 3-Month Lending
In a second development from overnight we see that banks took strong use of the ECB's 3-month dollar loans. This comes after the action by the Fed to lower the costs of those funds. The loans were lent at a fixed rate of 0.59%, down from 1.09% one month ago.
From SFGate: The European Central Bank said demand for three-month dollar loans surged after it almost halved the cost of the funds in a coordinated action last week with five other central banks including the U.S. Federal Reserve.
The Frankfurt-based ECB will lend $50.7 billion to 34 euro- area banks tomorrow for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The ECB also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The ECB doesn't disclose the identity of the banks it lends to.
There's 2 ways to read into this. One, its good for easing the funding pressures for European banks that they are taking advantage of the extra liquidity and this shows that the move by the Fed and other central banks is so-far successful. On the other hand, the fact that so many banks needed to take on these 3-month loans means that the other options for banks in raising funding is limited, a sign of the stress on the system.
3. German's Auction Well Subscribed
A third development was the successful auction of German 5-year debt which helped ease some of the concerns sparked 2 weeks ago when we had an unsuccessful debt auction.
From Wall Street Journal: Germany's latest five-year federal note auction proved to be a significantly smoother sale than feared by many market players, with bids sharply exceeding the amount on offer, indicating that the safety of German debt is still in demand.
The €5 billion ($6.7 billion) auction of the 1.25% October 2016-dated federal note, or bobl, was more closely scrutinized than usual for a German auction, following the country's disappointing 10-year bund sale two weeks ago. That sale saw the weakest demand at a bund auction since the advent of the euro, rattling investors and sparking a sell-off in the German market.
That's a positive sign that things have returned a bit to normal in the core Euro-zone bond markets.
4. German Industrial Production Surprises on Upside
From Bloomberg: German industrial production rose more than economists forecast in October as factories weathered debt turmoil that hurt output in other countries across the region and threatens to push it into a recession.
Production climbed 0.8 percent from September, when it dropped 2.8 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.3 percent increase, according to the median of 33 estimates in a Bloomberg News survey. In Germany, production of investment goods rose 2.2 percent in October from the previous month, when it fell 4.5 percent, today's report showed. Energy output advanced 1.1 percent while construction activity increased 0.4 percent.
After two straight declines, industrial production saw a certain recovery in October, the Economy Ministry said in a statement. In view of the restrained development of industrial and construction orders, output should remain muted in coming months.
The news is a positive for Germany and shows that the country will likely skirt negative growth this quarter despite the conventional wisdom that Euro-zone as a while is already in recession. Therefore while Germany is able to weather the current storm, the outlook for the first half of 2012 means that we should see the macro data started pointing south soon.