The Market's Short Attention Span

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Includes: ERO, EU, EUFN, IPF
by: Claus Vistesen

Life can be incredibly cruel sometimes. Only a week after Bernanke gave markets an early Christmas present with another helicopter drop the SP500 is stuttering and it seems, much as many astute observers have argued, that the real effect from QE lies in the announcement itself. Further, and to add insult to injury a recent survey conducted by Bloomberg suggests that the Fed's reenactment of QE is not particularly popular among investors as they don't think it will help the economy or the unemployment rate but rather that it is a deliberate policy to drive down the USD.

Ok, this is the trivial point then and I don't give much for the investors' opinion here since one presumes these are the same investors that recently scurried around the QE2 announcement as, well, pigs around the trough. The real irony here is that just as Bernanke thinks he can settle down to watch the USD drift down to help exports the crisis in the eurozone flares up again, pushing a correction in the Euro and a general sentiment towards risk-off which would be positive for the USD. So, if QE does not help the economy or the unemployment rate and can't even push the USD down and/or secure a decent melt-up in risky assets, what is a poor central banker left to do?

Now, my screen was a sea of red on Friday which may provide the first hint of an answer to that question and the reason is essentially that the great eye of the market has turned from Bernanke's helicoptor drop to the eurozone where the problems, of course, never went away (oh and of course tightening in China). To add further context, provisional GDP estimates suggest that growth has slowed down notably in the eurozone with especially the peripheral economies such as Spain, Italy, Ireland posting anemic growth rates.

In itself, it is not surprising that the effect from QE2 has gone astray, but the ultimate cynic would no doubt point to the fact that the real catalyst of the resurgence of the market's focus on problems in the eurozone coincided pretty well comments from first Angela Merkel and second the French finance minister Lagarde that bondholders should ultimately prepare for taking a loss on peripheral bonds.

Effectively, this seems to have broken Ireland's back and now it is only a matter of time before Ireland enters into some form of quasi IMF/EU custody and most likely we will see just what kind of beast the stability fund is. Of course, the actual degree to which bondholders are supposed to take part in a restructuring was greatly watered down by comments hitting the wire that outstanding debt would not be affected.

(quote Bloomberg)

European finance ministers said plans to establish a new crisis resolution mechanism, including the potential for bondholders to be held accountable, will not apply to outstanding debt. “Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements,” the finance ministers of Germany, France, Italy, Spain and the U.K. said in a statement distributed to reporters in Seoul today.

This sounds to me to be the ultimate rubber paragraph and won’t do anything but to kick the proverbial can down the road, but in terms of calming markets in the here and now. Perhaps. On Ireland in general, I have already covered the situation in some detail, but going back to the cynical take on this situation, it seems that Ireland might have been thrown to the wolves exactly in order to bring a little attention back on Europe and thus in an attempt to avoid that the EURUSD moved too much above 1.40. It certainly seem to have worked.

Click to enlarge

Perhaps this is me being too cynical however and surely the toolbox contains other tools than merely pulling the restructuring and pissing off everyone. One alternative is that the ECB joins the ranks of its QE wielding colleagues in Japan and the US and start buying them bonds, big time and with no reservations and questions asked. Indeed, Bloomberg’s Simon Kennedy and James Hertling said it well when they recently denoted the ECB not only as the buyer of last resort, but of only resort;

(quote Bloomberg)

European Central Bank President Jean-Claude Trichet is the buyer of only resort as the euro area’s bond market melts down (…) ”The ECB’s lack of action is puzzling to say the least and begs the question as to whether it’s fulfilling its financial- stability mandate,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The more the ECB waits, the bigger the purchase program will have to be.”

Note in particular monsieur Cailloux’s comments here. Basically, he is saying. What the heck are they waiting for?

A likely question can be directed at the G20 who concluded their meeting this week in Seoul and while I certainly recognise the inherent difficulties in agreeing on difficult issues, it is a bit disappointing still. Macro Man provides a cynical view of the consequences of s strong global consensus of doing nothing. Perhaps, this is part of the effect from markets seemingly being able to keep an eye only on one thing at a time?