Hello and welcome to the Sunday update. I think the markets have made up their mind: QE3 isn't going to be as fun as QE2. This time last year the mere hint of QE2 made stocks and commodities fly higher. But as growth had continued to dwindle in 2011, the realisation that QE is a redundant tool that can't boost the US economy is starting to set in.
Let's go back to Bernanke's Jackson Hole speech last weekend. Bernanke did not mis-lead markets: he was very clear that central bankers are not the panacea to the slow growth/ high unemployment crisis in the West; politicians have to do their bit.
The bad news is that public confidence in politicians is probably lower than it is for bankers right now. Expectations that governments across US and Europe will deal with problems including paying off existing debts and reforming entitlement programmes, are extremely low. No wonder this environment is a major boost for safe havens and gold.
This leads me on to Friday's payrolls. A reading of zero is extremely rare but what it does tell us is that the employment picture in the US didn't get any worse in August. But that's about all the good news: it also tells us that we are finely balanced between an economy creating weak levels of jobs each month and one that is actually cutting jobs.
The markets are running low on confidence right now. You can't buy stocks or commodities if you think the growth outlook is going to remain in the doldrums, thus the prospect of more policy stimulus hasn't tricked investors into piling into risk. In fact, speculative inflows into commodities have been half the level they were this time last year.
The QE3 -effect may be neutral for stocks and equities, but it is impacting Treasuries and yields remain lower. There is growing expectation of action at the 20/21st Fed meeting. Goldman Sachs' Operation Twist idea has been plastered across the papers this weekend. Essentially, Twist is when the Fed provides a commitment to continue buying long-dated Treasuries probably with maturities of seven years and more, thus extending the length of its balance sheet and keeping monetary conditions lower for longer. We've got more than 2 weeks to refine this idea, but expect Operation Twist to become part of the market lexicon.
GS is good at coming up with catchy names: BRICS then Operation Twist, will Operation Self-Destruct be used in relation to the Eurozone? The second bailout for Greece could be on its knees. Collateral agreements are still ongoing, which significantly reduces the chance of getting the extension to the EFSF ratified by the parliaments of each member state. Added to that Greece is hurtling towards default after the IMF/ECB and EU programme review collapsed on Friday. This could jeopardise the release of Greece's next tranche of bailout funds, and since Greece is living on hand-to-mouth, without these funds default looms.
At least the IMF is realistic; according to reports an unidentified IMF official said that a Greek default is a near possibility, possibly by March 2012 or even at later this year. German politicians spent Friday Greek-bashing after the collapse of the programme review. Patience is running out for the country, maybe Greece should explore its options: a report that Athens had hired a US law firm to handle its exit from the EU might not be that far-fetched after all.
And it's not only Greece. Things in Italy are going from bad to worse. Berlusconi is hanging on to power by a thread after trashing Italy in fairly colourful language, which was then plastered all over the tabloid press. Its bond yields are rising sharply even though the ECB is buying Italian debt in the secondary market. ECB President Trichet said that Italy needs to get its budget under control after a EUR45bn plan was watered down by Rome last week.
All focus will be on Thursday's ECB meeting. The fate of the Eurozone, at least in the near-term, rests in its hands. This may overshadow the fact that it is Trichet's penultimate meeting before he retires at the end of October, and hands over the headship to an Italian...
I am writing this in San Francisco where I have de-camped for the next 2 weeks to travel down the Pacific Coast Highway. The possibility of what could happen in that time is immense. September is gearing up to be the most pivotal months of the year.
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