The financial news cycle seems to be moving forever faster these days. Choosing which developments to focus on in today’s post was admittedly difficult. However, I feel the following four issues are exerting the most influence at the moment:
Evidence of credit markets trouble e.g. seizing up of credit
China’s tightening of credit / economic slowdown
Sovereign debt crisis
Goldman Sachs troubles = Financial group troubles = Equity market troubles
The following story illustrates the desire of European banks to horde cash. These banks are refusing to lend to each other forcing borrowers to the lender of last resort the ECB. This type of behavior was rampant in the U.S. during the 2008 crisis….
ECB Overnight Deposit Facility Usage Climbs To All Time Record As European Banks Scramble For Cover
Friday’s usage of the ECB’s overnight deposit facility hit an all time high of €350.9 billion, an increase of €50 billion from the day before, as the panic among Europe’s banks exploded on Hungary statement it was about to fail. And even with Hungary now rapidly backtracking, apparently all new to this currency confidence manipulation thing, the rating agencies have now woken up, and as we all know, hell hath no fury like a rating agency scorned that it is a few decades behind the curve (speaking of which, when will Moody’s finally hire a replacement to its recently departed global head of sovereign research?). As Reuters reports, Moody’s analyst Dietmar Hornung said Monday: “The statements are a credit negative because they bring renewed attention to Hungary’s high public and external debts, which, by threatening to drive up interest rates and push down the exchange rate, endanger Hungary’s economic recovery.” Fitch and S&P followed suit: “David Heslam, director of Fitch Ratings’ emerging Europe sovereigns, said the comments would not affect Hungary’s funding options but ultimately played into a “key ratings driver” — its fiscal path. “We are concerned about the fiscal outlook post-elections… Given the high level of debt, there is little room for policy slippage.” Standard & Poor’s, which has Hungary’s ratings at BBB- with a stable outlook, said in a statement: “We will review the government’s report on public finances and the government’s action plan before we would comment further.”
…China has represented the ‘engine of growth’ driving world economies. A bear market in China was signaled earlier this year as equities tumbled more than 20%. Now, signs of Chinese liquidity problems are popping up. If credit markets begin to seize up in China the proverbial ‘nail in the coffin’ would be hammered regarding world economies….
On The Stealthy Doubling In Chinese 7-Day Repo Rates
Even as most investors are focusing on Europe, Libor, Euribor, Ted Spreads, the ECB, etc, many have noticed that over the past 10 days China’s seven-day interbank rates have doubled from 1.8% to 3.2%. Is this latest episode of liquidity turmoil indicative that the PBoC is becoming less successful at communicating an “all clear” to the domestic (and international) markets? Or are there more troubling undercurrents in the sea of (previously) excess Chinese liquidity?
The primary driving force behind the BRIC (re)growth story of the past year has been the mirroring by China of the US excess liquidity policy, coupled with an extremely loose fiscal policy. Which is why every minor blip in any of the liquidity metrics in China tends to be analyzed under a microscope, due to huge implications on the commodity (and thus every other) trade. As the chart below highlights, in the last week, there has been a very disturbing move in the Chinese seven-day repo rate.
…The next story needs no introduction….
…Financial group woes weigh on the overall market. I highlighted this issue in my May 13th post titled, “Understanding Recent Equity Market Mayhem: A Tidal Wave of Liquidity Creation Meets a Cavernous Trench of Debt“. Problems emanating from this space will continue to cause consternation….
FCIC Issues Subpoena to Goldman Sachs, Spokesman Says
June 7 (Bloomberg) — The Financial Crisis Inquiry Commission has submitted a subpoena to Goldman Sachs Group Inc., according to a spokesman for the panel.
The subpoena requests documents and e-mails from Goldman Sachs, FCIC spokesman Tucker Warren said today in an interview. The subpoena was sent because Goldman Sachs hasn’t complied with requests for documents, Warren said.
Disclosure: Short GS Long FAZ,SEF,FXP