ECB

Greece Gets Closer To Deal With Creditors

The usual story out of Greece today as the country appears to be a little bit closer to a deal with its creditors. This deal will determine how much of a loss the creditors will accept with their bond holdings.

These talks will continue all weekend long and officials said some kind of announcement will occur this weekend. Talks between the two parties have collapsed twice already as the IMF and European leaders want Greece to push for even more debt reduction. If Greece fails to do this, the latest talks could also collapse.

Sources close to the discussions have said that bondholders have made significant concessions towards the interest rate the new Greek bonds would carry. The creditors could accept rates as low as 3.6%.

Major euro financial institutions such as the ECB are calling for more budget cuts and reforms in Greece if the country wants another 30 billion bailout package. This demand comes as major austerity measures have already hit the country amid widespread protests by Greeks.

If this situation continues, volatility could creep back into the market as investors wonder if Europe will ever fix their debt related problems.

Greek Talks Continue As Time Is Running Out

Negotiations on a debt swap deal with private creditors in Greece resumed today. The ECB is now part of the negotiations after IMF chief Christine Lagarde said public sector holders of Greece’s debt may need to take losses as well.

Greece is looking to get a deal done quickly to avoid a potentially catastrophic default when a bond redemption comes due in March. Greek officials are hoping to finish talks this week. The IMF put pressure on the ECB yesterday saying that public holders of Greek debt may need to accept losses if losses taken by the private sector don’t bring Greece’s debt to a sustainable level.

“We are ready to make an effort if everyone else (including the ECB) makes an effort,” a source close to the talks told Reuters.

The main area of disagreement is interest rate on the new bonds. The IMF and some euro countries are insisting the interest rate must be low enough in order for Greece’s debt to fall to 120% of GDP by 2020, down from the current 160%.

The main danger from Greece right now is that an uncontrolled default could cause a wide spread banking crisis in Europe.

The markets are largely ignoring Greece right now as earnings and news from the Fed have helped keep the bull rally going. Futures are up about 0.5% right now as the Dow is set to open 70 points higher, the Nasdaq will open 9 points higher and the S&P is set to open 6 points higher.

Bond Yields Hit New High In Italy

Funding costs in Italy hit a new record at an auction on Wednesday as pressure continues to mount in Europe following last week’s EU summit. The summit last week failed to provide the markets with the stability it was looking for.

Italy paid 6.47% to sell five year bonds today while Germany sold their 2 year bonds at a yield of 0.29%. Investors will always favor safety over returns in this market climate. The Euro fell below 1.30 also today as markets fear rating downgrades in euro zone countries.

“Uncertainties on the future of the debt crisis remain high and the market seems to be mainly driven by flight-to-quality this morning,” said Annalisa Piazza, market economist at Newedge Strategy.

Italy has a debt equivalent to 120% of its GDP. Because of this, their borrowing costs have spiraled out of control and many wonder if the country can afford these rates in the long term. Italy has decreased the size of its auctions in recent months due to market pressure, but may have to increase them in the coming months if it is to meet a gross funding goal of 440 billion euros next year.

“The cost of funding will become a crucial factor in the first quarter of 2012, when Italy has to issue 62.5 billion euros of bonds,” said Michael Leister, at WestLB. “For now however, the market is happy with supply being digested.”

“ECB buying in the secondary market will help, but, if the crisis worsens, it is difficult to see how Italy will retain independent market access in 2012 and help from the International Monetary Fund may at some stage be needed,” Citi analysts said in a note.

The ECB has been helping prop up the Italian and Spanish governments in recent months through purchases on secondary markets. Many were hoping for even broader assistance from the ECB, but ECB President Mario Draghi said they would not take further action.

European Central Bank Cuts Interest Rates, No Larger Bond Buying Plan

The European Central Bank (ECB) took some steps today to help Europe’s economy and financial system by lowering a key interest rate. The President of the ECB, Mario Draghi, said there is no plan for large-scale government bond purchases, much to the dismay of the markets. The ECB cut the interest rate down to 1%, a quarter point drop.

“The new measures are to ensure enhanced access for the banking sector to liquidity and facilitate the functioning of the euro area money market,” he said.

The ECB will also allow national central banks to accept bank loans as collateral if they meed specific eligibility critera.

“Overall, the ECB tries almost everything it can to prevent a credit crunch in the euro zone,” Carsten Brzeski, an analyst with ING, wrote in a market note.

Other analysts believe the rate cut will have only a small impact. “I thought they’d be more aggressive and cut by 50 basis points because the economy looks like it’s heading for recession and the banking sector is facing big pressures,” said Neil MacKinnon, global macro strategist at VTB Capital.

According to Reuters, a senior euro zone official said euro zone countries will likely agree to lend 150 billion euros to the IMF via bilateral loans from their central banks so the IMF can bail out countries with poor economies.

Draghi is opposed to this as he said it would be against the EU treaty which specifically says member states cannot finance each others’ debt.

“It’s legally complex, but the spirit of the treaty is that one cannot channel money in a way to circumvent the treaty provisions,” Draghi said in a news conference when asked about this proposal.

“If national central banks want to lend to the IMF and then the IMF lends to Indonesia, China, that’s fine. If the IMF were to use this money exclusively to buy bonds in the euro area we think it’s not compatible with the treaty,” he said.

We will see what happens come Friday after the summit ends, but the markets aren’t reacting favorably to news out of Europe so far today with each of the major indices down on the day.

European Debt Crisis and Lower GDP Rules the Stock Market Today

The euro zone debt crisis continues to weigh heavily on investors today and has sent the markets down again. Each of the major indexes are off about 0.5% in midday trading. Another thing weighing on the markets, is the revised GDP numbers for the third quarter. It had been previously estimated GDP would see growth of 2.5%, but it has now been revised down to 2%. This is the Commerce Department’s second estimate, let’s hope they don’t revise it again later. If this growth holds true, it will be a step-up from last quarter’s growth of 1.3%.

The debt crisis in Europe is a huge problem that needs to be fixed and fixed sooner rather than later. Every day this crisis goes on is just more uncertainty in the markets and more risk of the crisis spreading even more. Many investors believe the ECB needs to take more action and try things until they find something that works.

Short term yields in Spain jumped this morning to over 5%. These same yields were at 2.3% last month. The markets were hoping to get some details on the new prime minister’s austerity plans, but Mariano Rajoy will not give details until he is sworn in right before Christmas. These levels on the yields are worrisome as Greece and Portugal were at these same levels before being bailed out by the rest of the eurozone. The problem here, is that Spain maybe to big to save.

Euro zone banks’ demand for funding surged to a two-year high today as U.S. funds cut their lending. The sovereign debt crisis has left credit markets frozen and the ECB as the only available funding for most banks.

The equities and financial markets are going to remain very volatile in the near future as the euro zone debt crisis adds a lot of uncertainty to the markets. The question is, can they fix it? They’ve been trying for a while now, and if any more countries need bailouts investors will start wondering if the entire euro zone is on the brink of collapse.

Forex Trading Roundup: EUR/USD Up, USD/JPY Down

In today’s forex trading roundup, the EUR/USD pair traded in the euro’s favor while the dollar slid against the Yen. The Euro rose today as traders speculated that the IMF would help with Europe’s debt crisis. Rumor has it, the ECB will loan money to the IMF to help bail out debt-ridden nations. Germany has expressly denied this rumor, but that hasn’t stopped it from gaining traction. The EUR/USD pair is currently trading at $1.3521, an increase of $0.0056.

The USD/JPY pair fell to 76.7935 Yen per $1 dollar. The dollar showed weakness across the board in the forex markets today after the New York Fed President, William Dudley, said they will do ‘everything’ they can to stimulate the economy. He also said the economy faces ‘significant downside risk.’

Here’s what traders should keep an eye on next week. As always Europe will take center stage as traders hope for good news on the handling of the debt crisis. In particular, PMI indices for November will be something to look too as an indication of how the overall EU economy is doing. The elections in Spain this weekend will also be something to watch. And finally, the upcoming deadline for the ‘supercommittee’ to get something done could add a lot of uncertainty in the markets should they not decide on how to deal with the U.S. debt.

Stocks Trading Flat on the Stock Market Today, ECB Buys Italian and Spanish Debt

Stocks are trading flat today with the major indexes moving only slightly. The Dow is up 28 points right now, the Nasdaq is down 11 and the S&P is unchanged. Friday’s are notorious for being slow days as investors take a break for the weekend. Not a lot going on news wise today as Europe continues to be on investors’ minds. The ECB purchased Italian and Spanish debt today which gave the markets some comfort.

People in Spain are heading to the polls this weekend as they vote for their government leaders. Spain is becoming the new focal point for the European debt crisis and if they don’t get their debt under control they may need a bailout as well. The center-right opposition party is favored to win Sunday’s election, but will have little time to bask in their victory as they will need to begin implementing austerity measures immediately.

News closer to home is good today as data is suggesting the risk of recession is low. An index of leading economic indicators grew by 0.9% in October the largest such growth since February. Across the 10 indicators that make up leading economic indicators, 9 of them were positive. These include building permits, the interest-rate spread, average weekly manufacturing hours, stock prices, the real money supply, average weekly claims for unemployment-insurance benefits, consumer expectations, manufacturers’ new orders for consumer goods and materials, and manufacturers’ new orders for nondefense capital goods.

Overall, expect the rest of the day to be slow unless there is breaking news. Next week should also be slow with Thanksgiving holidays later in the week.

European Banks Reaching Boiling Point

In Europe, the European Central Bank’s (ECB) overnight lending window hit an eight month high on Tuesday making investors in anything European very jittery. Banks borrowed EUR7.735 billion from the marginal lending facility, which charges a punitive rate of 2.0%, up from EUR1.246 billion Monday, ECB data showed Wednesday. This was the highest level since March 1, 2011 when banks borrowed EUR15.104 billion.

When financial markets are functioning properly, banks use the facility to borrow a few hundred million euros. The rise in marginal lending shows an increased strain in the euro-zone banking system.

The level of deposits had remained high, around the EUR200 billion, since late October, as banks favored parking their money with the ECB over lending it to one another. Banks are afraid of lending because they don’t know the extent of exposure other banks have in the euro-zone sovereign debt. According to Marketwatch, overnight deposits with the ECB rose to EUR298.591 billion Monday, the highest level since June 30, 2010, and above the peak of EUR297.424 billion hit Nov. 6, 2008 in the wake of Lehman Brothers’ collapse.

Investors are increasingly worried that the level of use of the European Central Bank’s liquidity facility shows banks are wary of the effect European leaders will have in managing the sovereign debt crisis.

A group of German economists have warned that the European Central Bank is risking losing its credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred. Germany strongly objects to the bond-buying strategy of the ECB.

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