Dec 1. Fed and other CB’s coordinate swap line rate cut

–Central banks (the Fed) cut dolllar swap lines in coordinated action sending risk assets higher and boosting the short end of the curve. The curve steepened with red euro$’s up nearly 11 bps while golds were actually down 7.5. Red/gold pack spread up 18 in one day! On the other hand 2/10 rose only 6-7 bps to 181. Implied vol fell in treasuries. Gold jumped over $30. –The question is whether this move will release enough pressure to give time for more structural changes. From BBG yest: “ECB Executive Board member Juergen Stark said the only way for the region to exit its debt crisis is for gov’ts to reduce budget deficits and embrace wage cuts and other structural changes.” In other words, because fx devaluation isn’t available, overt wage cuts are the answer. Doesn’t sit well with the public, which is why govts typically resort to less clear actions (like yesterday’s) when asking the public to subsidize over-levered banks and bloated govt spending. (Forbes reported that a large european bank was close to failing yesterday). –China PMI fell below 50 to 49; analysts expect further easing. Yesterday it was reported that growth in India has also slowed, to below 7%. News in US includes ISM expected 51.5 from 50.8. –Before Gen’ Motors latest reincarnation, it was often referred to as a pension fund with a car company attached. The old model was that when workers retired from the company, they died shortly thereafter, so pensions and benefits weren’t particularly onerous. As people started living longer, with expensive medical care and unions pushing for more of ‘the pie’, structural overhead became too much to bear. The company settled into a pattern of rebates, low financing rates, and price incentives, which trained the buying public to wait for those incentives. Those periods generated a sugar-rush of sales, only to be followed by a lull. The structural problems remained. GM went bankrupt and emerged as a smaller company; the stock is still on a one-way slide lower. Yesterday’s CB coordinated action fits the same pattern. Rather than structural reform, a blue light special to buy stocks.

Posted on December 1, 2011 at 8:42 am by alexmanzara · Permalink
In: Eurodollar Options

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