China cut rates yesterday potentially as part of a globally co-ordinated central bank plan or co-incidentally because their economy was losing steam or both. I would bet there was communication and that may have impacted timing but with the weak PMI number China did what was necessary for China – as they always do.
Much was made of the globally co-ordinated rate cut on USD swap lines. Any swap requires a minimum of 2 counter parties and since this plan had been globally “re-instated” or “re-affirmed” in September the market may be making too big of a deal of this global coordination. This was largely cutting the cost of an existing series of global swap lines by 50 bps. It did not change the liquidity available to banks, just the cost. Currently it seems that only $2.4 billion is being used. It is not a bad step but no new liquidity is added (through I work under the assumption they will increase availability if needed) and it is impossible to cut unilaterally and would be pointless since as recently as September there was global agreement.
Rumors that a bank was on the verge of failure seems overdone and changing this fee by 50 bps does nothing for that. Sadly, since the Fed is both independent and unaccountable there may be additional activities behind the scenes that we don’t know about that may be supporting strong price action. More people feel forced to follow market moves based on the assumption that some people may actually KNOW something about future policy moves or existing but undisclosed actions. It is a rational reaction but does tend to exaggerate the moves and lead to quick reversals when no one actually KNEW anything.
I think the actions do telegraph further rate cuts and may even cause some new liquidity programs to be implemented. I do not expect an imminent wave of QE programs. Most notably today the ECB said they have to limit purchases. It was an ideal time for the ECB to step up the purchase rhetoric but Draghi chose not to. That supports the idea that yesterday’s announcement is more about putting firewalls in place than turning the printing presses to a higher setting.
Auctions today went well but that is not surprising given the strong US close and possibility of real central bank action but without IMF or ECB announcements concerns of downgrades and lack of follow through after a big rally may take some of the excitement out of the market. The high bid to cover, while encouraging could also be a function of flippers trying to get involved in a hot deal.
It looks like Europe won’t push banks to get better capital ratios. It is a credit crisis and more capital would give lenders confidence but this is another sign that Europe just doesn’t get it and is serving too many masters. Bank share prices should be the least of their concern and yet appear to be a high priority. Stepping back now is not helpful longer term as credit investors will remain skeptical of how much cushion they have.
ECB independence. Germany again said ECB independence is important. I can’t tell if this is a nod of tacit approval to print or a way for ECB to say no to printing and make Germany look like less of a roadblock. I lean towards the former but then why wasn’t Draghi more aggressive? Guess waiting for the treaty?
Greece. What happened to their debt restructuring? It is either off the table or becoming impossible to negotiate in a hope filled environment. In any case it is interesting how quickly this fell off radar screen and yet is critical.