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French And German Shares Turn European Shares Lower As Berlusconi’s Remarks Herald The Age Of Communitarian Governance … Industrial and Banking Shares Lead Markets Lower Again As The QE Trade Unwinds … Gold And Treasuries Jump Higher On Fed ZIRP Policy …

Financial Market Report for August 10, 2011

1) … France became the New Italy propelling European shares lower
Wall Street Journal reports Investor jitters move to France. French banks, Societe Generale, GLE.PA, -15%, Credit Agricole, ACA.PA -12% and BNP Paribas, BNP.PA,  -10%, led the European Financials, EUFN, down 7.9%.

EWI -8.4%
EWP -7.9%
EWQ -7.7%
VGK -7.5%
EWG -7.7%
RSX -8.1
EWD -6.2
ENZL -5.0
EWW -4.8
EWL -4.7
EWO -4.2
RZV -5.6
PSP -5.5
IWN -5.4
EEM -5.3
YAO -5.1
SLX -5.1
XLI -5.1
IYJ -5.0
XRT -5.0
XBI -5.0
ACWI -4.8

Between The Hedges reports “The France sovereign cds is making another new record high again today and has risen +83.0 bps in 14 days. The German sovereign cds is hitting another multi-year high and is only 7.0 bps from its Feb. 09 high of 93.0 bps. The Eurozone Financial Sector CDS Index is taking out its March 09 record high. The 3-Month Euribor-OIS spread is jumping another +8 bps to a multi-year high of 70.0 bps.”

Open Europe reports “Berlusconi during private conversations with Italian ministers. According to the paper, Berlusconi said, “They [the ECB, French President Nicolas Sarkozy and German Chancellor Angela Merkel] have decided to intervene in favour of our bonds to save themselves, not Italy.” He went on, “If the green light of individual countries is needed before the ECB can intervene, that means that the ECB is not yet, as it should be, the autonomous, authoritative and independent governor of the euro area. If it must be said, as Trichet did, that in return for an intervention in favour of our bonds a political ‘yes’ was needed, then we have evidence of the fact that we’re far away from a communitarian governance which can scare speculators. And if today it’s our turn, tomorrow it can be Paris’s turn.”

Clearly regional economic governance is coming in Europe, specifically European Economic Governance, that is a Fiscal Union, featuring Fiscal Authority at the core of Europe.This will be more than a United States of Europe, it will be a One Euro Government with leadership coming from Paris, Brussels, and Berlin.    

Open Europe continues “In an interview with Le Monde, Belgian Finance Minister Didier Reynders argues in favour of fiscal union, adding, “I understand the reluctance of my German colleague [Wolfgang Schäuble], whose country will be the lender of last resort. He calls for the reinforcement of budgetary orthodoxy and wants its rules to be observed by everyone, because the inaction of certain countries can affect the entire eurozone. Is this a ‘loss of sovereignty’ then? Yes, but it’s the only solution”. eurozone leaders are divided over whether to hold an emergency summit and what the focus of such a summit would be. Spanish Finance Minister Elena Salgado suggested yesterday that a summit would be held in the “first days of September”, but this was later rejected by Commission officials. The FT reports that German Chancellor Angela Merkel faces increasing calls from within her governing coalition for an emergency party conference or even an emergency parliamentary session to discuss the eurozone crisis. German Vice Chancellor Philip Roesler yesterday called for a eurozone ‘stability council’ to be set up and given the powers to impose sanctions on profligate members. German government officials later denied that this was a government proposal.”
WSJ WSJ 2 CityAM IHT Independent FT FT 2 European Voice Guardian El Pais EurActiv Italian government’s press review FT 3 WSJ 3 El Pais 2 Expresso BBC EUobserver IHT Le Monde: Reynders Le Figaro Les Echos Reuters AFP FTD Le Monde Le Point Le Parisien La Stampa Repubblica Corriere della Sera Telegraph Le Figaro Les Echos Le Monde

2) … The QE Trade continued to unwind with inflation destruction and exhaustion of quantitative easing taking their toll.
Steel SLX, and the Industrial, IYJ, and XLI, led the way down. The Dow, DIA, lost over 500 points Forbes relates Pessimistic Bernanke Fed Admits QE Has Failed In FOMC Statement. And USA Today reports White House's Former 'Car Czar' to Drive Into Sunset. “The man who helped engineer the Obama administration's bailout of the U.S. auto industry is leaving his post at the end of August. Ron Bloom, who later became assistant to the president for manufacturing policy, played a key role in the 2009 bailouts and oversight of General Motors and Chrysler. He also helped to craft the deal between the government and automakers to raise light-duty vehicle fuel economy standards to 54.5 miles per gallon by 2025.”

3) … Bank stocks, KRE, fell 8.1%, and closed near the week’s lows.
Bloomberg reports Bank Stocks Plunge Most Since 2009. “Bank of America, the nation’s largest bank by assets, plunged 20 percent and Citigroup slid 16 percent, leading the KBW Bank Index (BKX) down 11 percent. It was the worst showing for the 24-company benchmark since April 20, 2009, when Bank of America told investors it was putting aside more money to cover a growing pool of uncollectible loans. Those costs have continued to erode investor confidence ever since for the lender and some of its biggest rivals. More pressure came last week after S&P downgraded the credit of the U.S. government, which guarantees some of their deposits and debt, to AA+. Bank of America’s shares sold for only a third of their book value today, and Citigroup’s price-to-book ratio fell to less than 50 percent. “Investors are dumping financials because there’s so much confusion about what could be on their books,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in an interview. “You’ve got a perfect storm against Bank of America.”  

4) … Small Cap Shares fell lower on lower currencies and lower financial shares
The Currency Demand Curve, RZV:RZG, fell lower, on a falling Russell 2000, IWM, -5.0% and falling Australian Small Caps, KROO -5.3%,  and on falling major world currencies, DBV, and emerging market currencies, CEW.
BNZ, -3.0
FXM, -2.8
FXS, -1.9
FXA, -1.9
BZF, -1.8
FXC, -1.7
FXE, -1.1
FXB, -1.0
Falling world currency values, DBV, and emerging market currency values evidence the end of the Milton Friedman Free to Choose Floating Currency Regime; in is place Neoauthoritarianism is rising to provide economic and political governance.    

5) … Gold, GLD, and The flattner ETF, FLAT, rose strongly as the 10 30 Yield Curve, $TNX:$TYX, flattened to near historic levels.
The Interest Rate on the 10 Year, $TNX, fell to a record flow 2.14%  on a short squeeze and as The US Treasures, TLT, 6.6% for the week as investors sought safe haven from falling world stocks. Bruce Kasting in Zero Hedge article On Perpetual ZIRP  writes that the rising US Treasury prices are the result of a US Federal Reserve Zero Interest Rate Policy and Mike Mish Shedlock writes Fed opts for Japan strategy of permanently lower rates and MarketWatch reports Fed communicates low rates to stay through at least mid-2013


US Central Bank policies have created a safe haven rally and investment demand for gold which soared parabolically to nearly $1,800, GLD.


6) … Yen blasts higher on Yentervention
Mike Mish Shedlock report More overnight intervention  “Intervention is not calming, it is disruptive. Intervention puts distrust in markets by sending false signals. Intervention may seem to work for a while but when it stops working and all the shorts are pushed out, a vacuum exists below. The buyer of last resort then becomes the buyer of only resort, or as we saw with Fannie Mae and many equities in 2008, after the Fed drove out the shorts, there were essentially no bids at all.” How true, the Yen, FXY, blasted higher, in a dark cloud covering suggesting a rally high.



7) … In today’s news
The Wall Street Journal Reid Names First Debt-Panel Picks. Senate Majority Leader Harry Reid named three Democratic senators who are considered neither ideological purists nor eager compromisers to a "super committee", the “super Congress, charged with finding at least $1.2 trillion in deficit reduction over the next decade. The move on Tuesday came as lobbying has intensified about who will be chosen for the remaining spots on the Joint Select Committee on Deficit Reduction—appointments that will play a large role in the eventual shape of any deal.

The Wall Street Journal reports Rental Options Sought On Foreclosed Homes. The Obama administration will announce plans Wednesday to seek investors' ideas for turning thousands of foreclosed properties owned by government-backed entities into rental homes, according to administration officials.

Bloomberg reports Hng Kong Stocks Tumble Amid Chinese Inflation, Global Selloff. Hong Kong stocks tumbled, with the index sliding more than 20 percent from a November high, as a report showing Chinese inflation accelerated added to concern the global economic slowdown may worsen in the wake of the U.S. credit-rating downgrade. Li & Fung Ltd., a supplier of toys and clothes to retailers including Wal-Mart Stores Inc., tumbled 6.1 percent. HSBC Holdings Plc, the U.K.-based lender that made a fifth of its revenue in North America last year, sank 7.9 percent. The Hang Seng Index tumbled 6.2 percent to 19,212.40 as of 10:50 a.m. local time, falling 23 percent from its closing high on Nov. 8, a level that some investors define as a bear market. None of the stocks in the 46-member gauge rose. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong plunged 6.6 percent to 10,382.86 after Chinese inflation accelerated in July.

Neoliberalism featured the Spirit of The Cat In The Hat. Neoauthoritarianism features The Spirit of Wilding: Josh Halliday of TheAge reports BlackBerry under pressure to hand over riot messages as rioters relied on texting.

8) ... A global economic collapse is coming.  A stroke, that is a mortal wound, is coming to the head of world’s most important institution, that being finance, commerce, trade, investment and banking.
Tyler Durden writes on the failure of Greek Socialism and the farce of the so called Greek Austerity Program relating 2011 Greek State Budget Deficit Widens 24% Through July. “Remember how the Troika said Greece has its "budget situation" under control, and as such is a worthy recipient of the second €120 billion bailout tranche? Then perhaps they can explain to us how the following makes sense: according to Bloomberg, Greece’s state budget deficit widened to €15.5 billion in the January to end-July period from €12.5 billion euros in the year earlier period, according to an e-mailed statement from the Athens-based Finance Ministry today. So after praising the Greek deficit cutting progress, the country comes out and tells everyone it was really only kidding, it kinda sort lied, about its deficit but was more than happy to take European and US capital, and as for collecting taxes, well, they can try it, or at least promise to do so, after bailout #3.”

Bloomberg reports on the result of greed in German banking seeking higher returns stating Commerzbank Profit Drops 93% on Greek Debt and Bloomberg relates Decade of fiscal stimulus yields nothing but debt and Ambrose Evans Pritchard relates Eurogeddon postponed again as ECB gains three weeks “The ECB is acting as a temporary back-stop until the revamped EFSF bail-out fund is ratified by all parliaments over coming months. The EFSF will then take the baton. Yet as we all know, the EFSF has no money. The parliaments have not even ratified the earlier boost to €440bn. As of today, the fund has barely €80bn left after all the commitments to Greece, Ireland, and Portugal. It remains a fiction. markets will turn very nervous once ECB purchases approach the level that corresponds to the EFSF ceiling. They know that the ECB’s Teutons will die in a ditch rather than cross that line, taking the bond risk directly onto the ECB’s own balance sheet. That moment could come within three weeks.

Barry Grey, in WSWS article The US credit downgrade, “The downgrade of United States debt is a turning point in the crisis of American and world capitalism.”

Out of Götterdämmerung, that is an investment meltdown and flame out, a Beast Regime, will rise to rule world-wide in all of mankind’s seven institutions and in ten regions of global governance, as called for the Club of Rome in 1974, constituting a Ten Toed Kingdom of Global Governance.

Tyler Durden reports Moynihan Says His Entire Net Worth Is In BAC Stock … QE 3 is coming, it will feature banks such as Bank of America, BAC, and Citigroup, C, integrating with the government with all excess reserves capitalizing the Bank of Government.

A President of the Eurozone, will rise to rule in Europe. The Sovereign will be accompanied by a European Banker, The Seignior. Seigniorage under Neoauthoritarianism will be more political than economic, with the word, will and way of these two providing both political rule and economic moneyness.

Jeff Black and Jana Randow in Bloomberg in article Trichet Turns ‘President of Europe’ as Debt Crisis Stuns Political Leaders write When Jean-Claude Trichet retires on Oct. 31, the euro area may lose more than just a European Central Bank president.

Trichet has emerged as Europe’s key policy maker during the sovereign debt crisis, holding the 12-year-old monetary union together as heads of state squabble over their response. While ECB officials have sometimes split over the direction, under Trichet the central bank shown itself more willing and able to act than the bloc’s 17 finance ministers and government leaders.

“Trichet has become the de facto president of Europe,” said Marco Valli, chief European economist at UniCredit Global Research in Milan. “He is the only one who’s delivered the leadership necessary during this crisis.”

As German Chancellor Angela Merkel and French President Nicolas Sarkozy struggle to restore investors’ faith in euro- area bond markets, Trichet has taken the ECB further and further into uncharted territory to protect the euro. In his latest attempt to stop the debt crisis from spreading, Trichet convinced a majority of the ECB’s 23-member Governing Council to start purchasing Italian and Spanish government debt, overcoming opposition from Germany’s Bundesbank in a move that economists estimate could cost as much as $1.2 trillion.

While fraught with risks, the decision highlighted that “the ECB is the only institution in a position to contain the crisis,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt.

For now, the gamble is paying off. The yields on Italian and Spanish 10-year bonds, which rose to euro-era records last week, have plunged about 100 basis points since the ECB started buying the nations’ debt yesterday. They were at 5.08 percent and 4.96 percent, respectively, as of 11:16 a.m. in Frankfurt.

A lack of political cohesion in Europe has forced Trichet to take the lead role in tackling a crisis that began with Greece’s fiscal meltdown more than 18 months ago.

As heads of state disagreed first over whether to bail out Athens, then over the establishment of a rescue fund for the region, then over private-sector involvement in a second bailout for Greece, they increasingly turned to Trichet for guidance, and to win them time.

While leaders have agreed to allow the European Financial Stability Facility to buy bonds on the secondary market, as requested by the ECB, individual parliaments must still ratify the change, leaving the central bank to deal with the situation in the interim. Sarkozy and Merkel want this done by October. “Trichet has found himself between a rock and a hard place,” said Julian Callow, chief European economist at Barclays Capital in London. “By nature conservative yet pragmatic, he’s often had to step up because he saw the politicians were not capable of acting.”

In the process, Trichet has torn up the ECB’s German- inspired rulebook. He loosened collateral rules to accommodate the deteriorating creditworthiness of Greece, Ireland and Portugal, and three times reversed the ECB’s exit from emergency liquidity measures for banks. Now he is buying the bonds of the region’s third and fourth-largest economies, potentially putting the ECB on the hook for hundreds of billions of euros and opening it to criticism that it is financing profligate nations.

Royal Bank of Scotland Group Plc estimates it could cost the ECB and the EFSF 850 billion euros ($1.2 trillion) to get on top of the Italian and Spanish debt markets. “This huge risk- pooling exercise will not come easily and the risk of political fallout will be large,” RBS economist Jacques Cailloux said.

‘Trichet, 68, helped design the 1992 Maastricht Treaty that established the foundations for the euro, launched in 1999. In contrast to politicians concerned about their re-election prospects, Trichet, a Frenchman, has said his life motivation is to achieve a “deepening of European unity.”

On Nov. 1, the ECB baton will pass to Italian Mario Draghi, 63, who has echoed Trichet’s criticism of politicians for failing to deal decisively with the debt crisis. Draghi said last month that politicians must “define with clarity the political objectives, the scope of the instruments and the amount of resources available” to stop the crisis.

Trichet’s drive to do what it takes has provoked the most public splits in the ECB’s history as the Bundesbank, once Europe’s most powerful central bank, objected to the scale of his interventions.
When the ECB started its bond-buying program in May 2010, then-Bundesbank President Axel Weber openly dissented, saying the move posed stability risks. Little more than a year later, Weber’s successor Jens Weidmann warned that the Eurosystem must not take any further risks onto its balance sheet. In his effort to calm investors, Trichet overruled them both. By embarking on purchases of Italian and Spanish bonds, Trichet may be setting the ECB on a collision course with its primary mandate -- ensuring price stability. He has raised borrowing costs twice this year to curb price pressures.

“If Italy doesn’t find enough buyers for its bonds at the next auction, the ECB would be forced to step into the market massively,” said Commerzbank’s Kraemer. “In such a scenario, the bank wouldn’t raise rates anymore. Monetary policy is under the diktat of the debt crisis.”

The longer the ECB has to wait for governments to approve the EFSF as a bond-buying entity, the more assets it may have to accumulate. That may hamper the ECB’s ability to “sterilize” the purchases by taking the same amount of money from the system in the form of deposits from banks. If it fails to do so, the purchases could swell the money supply and fuel inflation.

“We always withdraw the liquidity we injected so that we don’t embark on any concept of quantitative easing,” Trichet said on Aug. 4. Trichet is nevertheless likely to leave office with inflation in breach of the ECB’s 2 percent limit. The rate is currently 2.5 percent. The strains the debt crisis have placed on the ECB’s inflation-fighting mandate have prompted Trichet to call for greater budget coordination in the euro area.

Trichet, one of last architects of the euro still in public office, has suggested that one day the region should have a common finance ministry to bolster the single currency through more fiscal cohesion. “That day may be a long time coming,” said Christian Schulz, a former ECB economist now working for Joh. Berenberg Gossler & Co. in London. “And until it does, Trichet and the ECB will be the ones fighting for the euro’s survival.”