Markets ‘Artificially’ Rally after FED and ECB Refill Bankers’ Pockets

By Scott Lanman
Bloomberg
November 30, 2011

The Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent’s sovereign-debt crisis.

The interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the program, which was also joined by the Bank of Canada, Bank of England, Bank of Japan (8301), and Swiss National Bank. (SNBN)

The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they’d failed to boost the region’s bailout fund as much as planned.

“When there’s concerted action by central banks, it’s definitely good,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “But are liquidity injections a game changer when the heart of the problem is in European sovereign debt markets?”

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

The dollar swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5.

Stocks Climb

European stocks extended their gains, the euro advanced against the dollar and Treasuries fell after the announcement. The Stoxx Europe 600 Index increased 2.2 percent to 236.66 at 1:19 p.m. in London. The euro rose to $1.3450 from $1.3317 late yesterday. The yield on the 10-year Treasury note climbed to 2.06 percent from 1.99 percent.

Separately, China two hours earlier cut the amount of cash that banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

The Frankfurt-based ECB, which says it is up to governments to stem the two-year-old debt crisis, unexpectedly cut its benchmark interest rate Nov. 3 as the turmoil threatens to drag the euro area into recession.

Refinancing Operation

Yesterday the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros. The ECB offers unlimited funding to euro- area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.

“Markets Like Totalitarian Governments”

Zero Hedge
March 4, 2011

Wall Street’s shadow king, Blackrock’s Larry Fink who manages over $3 trillion, and is the world’s biggest asset manager, appeared on Bloomberg TV in an interview with Erik Schatzker, and the first thing he said is that the “market likes totalitarian governments.

Blackrock's Larry Fink

 

” That one statement explains everything one needs to know about the market performance over the past two years: there has hardly been a time in the past century when all the globalized regimes supporting stock markets and asset prices have been more “totalitarian” by Fink’s, or any other definition, than they are now. And while the plutocracy may welcome the advent of the Communist States of Iosif Vissarionovich Bernankestein, the common folk, as they always do, ultimately revolt violently against any such attempt at supreme government.

Zero Hedge regular Mike Krieger was quick to proclaim his condemnation: “This is how these elites think.  Even if markets did like totalitarian governments HUMANS DON’T.  This guy is pure scum and is exactly what is wrong with America and its policy today. This is also the guy that told us to buy dollars and treasuries yesterday…” But such are the ways of a dying ponzi regime. Everyone knows the end is coming and is inevitable. And while Wall Street’s self-anointed masters of the universe believe they will be able to avoid the ultimate unwind, they are wrong. Just like Gaddafi is finding out first hand right about now.

Larry Fink on the markets today:

“I believe the market has shifted from euphoria, from August through late January and now we are at a moment of reflection. I think this period of reflection will be sustained for some time.”

Larry Fink on whether he is a buyer or seller:

“If you believe that markets are efficient, some of that uncertainty has been priced in already. We’ve had an increase in oil; there has been no increase in demand in oil. It is that risk premium that has been priced into the marketplace. We’ve had a reduction in equity prices worldwide, especially in the emerging world, where everyone was so bullish one year ago and now money is being poured out of it. ”

“If you believe that all this noise, uncertainty will produce a better outcome, it is probably a buying opportunity. If you think the noise will create a more troublesome world, it may cause some developed economies to revert back into a recession, then we will have rough going for the next year.”

“I am more in the camp that this uncertainty will create a great amount of volatility, the marketplace is pricing this in, and if the market has a setback in terms of prices, I would be a long-term buyer.”

On Treasuries:

“I don’t think an 80 basis point increase in interest rates is a bear market. We have a possibility of rising rates. The outer limits could be 4.40%, on the ten-year. The market knows that the Federal Reserve will be completing its QE2 program by June. The markets are efficient. A lot of this is priced in.”

“We believe rates will creep up. We’re not calling that a bear market. The other issue we need to focus on…We all spend time focusing on the Treasury market but in the United States, we’ve had a collapse in the outstanding of debt.  Corporations, individuals have really pared down their debt. The amount of outstanding debt in America has shrunk…You cannot look at just the Treasury market alone. If you encompass all the cash sitting on the side and you look at how much debt reduction we have seen in the credit markets, I believe there will be a ceiling of how high rates can go. What can throw that out is if we start experiencing a persistence in inflation…If you believe we will have creeping, rising inflation over the next two years, of course interest rates will have to go higher.”

“Inflation will be more moderate. Until I see a labor market that is more robust and until I see factory utilization to be larger, I think inflation in this country will be more muted than what we see other countries.”

Larry Fink on whether he is a buyer of Treasuries:

“If rates creep up over 4%, I would be incrementally buying interest rates.”

“I would definitely be lengthening [duration]. I believe inflation may be a problem in the short run but in the long run, not. You would want to buy if the yield curve shifts upward on the longer end and take advantage of that. If your views of inflation is short, the long end will do the best.”

On European sovereign debt crisis:

“I don’t think [the European debt crisis is over].  I think we will have more volatility there. We still have not addressed the Greek problem. We are in the midst of reviewing what is happening in Ireland. We still have the banking system in Europe which is undercapitalized. You had the governor in Italy saying his banks need more capital. Spain and other countries are saying their banks may need more capital. You put this idea in, the need for more capital to the financial system plus the sovereign credit difficulties, which would probably cause a reduction in capital. We will still have more volatility out of Europe. It will probably be a negative trend.”

“I’m a big buyer of the U.S. dollar here.”

On reports that BlackRock is teaming up with KKR, Warburg Pincus, and others to buy Citi Financial from Citigroup:

“I don’t comment about market rumors…I will say, we do a lot of things for clients….Yes, we are not getting into the consumer-lending business. One should assume that if we are involved in this, it would be on behalf of clients, not for our balance sheet.”

On BlackRock making deals:

“It is not our intention to do another large deal. I don’t see a need for it. Whether regulators are inhibiting us or not, we have said publicly we are happy with our business model as it is today. We made to fill-in acquisitions in different countries or may do an acquisition for the BlackRock technology business, BlackRock Solutions. But it is not my intention to be doing anything large-scale.”

“I remind people and regulators that 100% of our business is a client-serviing business. We are in agent in all our businesses. This is not our capital. This is not our balance sheet. We don’t have leverage. What caused the credit crisis was leverage. We are a different animal. We are only an agent.”

On the Middle East:

“Saudi Arabia is probably the most troublesome country to answer. I think the government will manage the situation properly. They have offered a big infusion into the economy. It is a very wealthy economy with huge oil reserves and huge reserves. It is a very large population in the Gulf region. It is the largest population in the entire Gulf region. That is what produces the uncertainty. The world is dependent on their 8-9 billion barrels per day.”

“That is an uncertainty we have to factor in. If there is uncertainty around Saudi Arabia that produces a slowdown of oil production, then we will have severe issues in this world. That is probably one of the most difficult issues that we are facing today.

“In the short run, you could see oil prices going north of $150 if you had that type of oil shock. It could be $200 at any one moment. My view would be that this would be managed over a course of a period of time.”

On China:

“They are more uncertain. They are the biggest producer of products in the world today. We’re very much dependent on China. It is a similar way we are dependent on Saudi Arabia for oil.”

“I am very concerned about China. China has done a magnificent job about engineering its economy…They have 300-400 million people living at substandard levels. They are in the outer regions outside the river delta valley. They are in many ways minorities and Muslims. They want change…China, because of the size of its population and because the imbalances of standard of living in the country, is an issue. They have done a good job of navigating this but we should put that in as a factor of risk going forward.

“I am more worried about equities today because of this uncertainty. Five-six months ago, I said our economy is better than we thought it would be. I would argue today that we think the economy is better today than it actually is. The enthusiasm has increased dramatically. I think the market is pausing. We need to see how this all plays out. I am quite constructive on Northern Africa, that this will be played out in a positive way. In the short run, democracies are dirty and messy and we could see moments of time in which that uncertainty is a negative uncertainty.”

U.S. to Bailout European Union

Reuters

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday.

“There are a lot of people talking about that. I think the European Commission has talked about that,” said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. “It is up to the Europeans. We will certainly support using the IMF in these circumstances.”

“There are obviously some severe market problems,” said the official, speaking on condition of anonymity. “In May, it was Greece. This is Ireland and Portugal. If there is contagion that’s a huge problem for the global economy.”

The remarks foreshadow a visit to Europe this week by a U.S. Treasury envoy who is expected to visit Berlin, Madrid and Paris to hold talks on the ramifications of the debt crisis.

(Another news report, however, raised questions about the true extent of the US commitment. Read more here).

The developments have echoes of the pressure applied by Washington on European capitals last May to create the near $1 trillion EFSF safety net that was last week used to rescue Ireland after its banking crisis spiraled out of control.

The IMF, whose biggest single shareholder is the United States, has committed 250 billion euros to the EFSF.

While reluctant to dictate to Europe how it should address the unfolding debt crisis, the U.S. government is growing concerned about the global fallout of Europe’s predicament.

U.S. Treasurys’ prices fell and the euro strengthened against the dollar on Wednesday after the news that the United States would be prepared to support an enlarged EFSF.

Germany, whose leaders have expressed frustration at the market backlash against their plans to solve the euro zone’s debt problems, does not want to make the stability fund larger.