Lessons for the coming market week from the US for traders and investors in stocks, indexes, forex and other global markets, plus idea on profiting from EM crisis.
The following is a partial summary of the conclusions from the fxempire.com  fxempire.com ’ meeting in which we cover the key lessons learned for the coming week and beyond.
EU
More Signs of Tight Liquidity
No One Buying ECB’s Sovereign Bond Inventory
For the second time this year, last week the ECB failed to sterilize a sovereign bond purchase. It holds over €170 Billion in government bonds it holds from its rescue efforts over the past few years.
That is the second time in January, and the fifth time in the past two months that the ECB was unable to find buyers for that growing inventory of sovereign bonds – another in a series of nagging concerns that liquidity troubles are bubbling to the surface once again. As we discussed in greater detail here, this means banks would rather hold cash and earn essentially nothing than hold those higher yielding EU sovereign bonds.
In other words, EU banks are both holding cash and don’t believe the yield offered on these bonds is adequate compensation for the risk of default. Note that for the purposes of bank stress tests those bonds are considered risk free. It’s a European version of the US no longer requiring mark-to-market for bank assets. When reality doesn’t work, they just shift to fantasy.
Bank Troubles Lurking
A study by the OECD suggesting EZ banks face a total capital shortfall of €84 billion. Supposedly there will be serious bank stress tests this year, and as we’ve noted repeatedly, the new single resolution mechanism provides leaves member nations and bank depositors, lenders, and shareholders on their own if a bank is insolvent.
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Also…
Also, while the overnight market rate (EONIA) was reduced 50% from the prior week, but remains elevated. Meanwhile, economic data for the Eurozone remains weak, standoffs with Greece continue and bailed EZ members are casting off support lines.
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The Lessons
Liquidity problems persist
The ECB is buying bonds it can’t resell to banks, which means it is buying bonds with newly created cash, aka debt monetization. No huge thing for now, given that inflation is not a threat.
We still can’t figure out how the EU is going to clean up its banks and where it will get the funds to do so.
As we discussed in depth here, it’s a matter of time before the ECB has no choice but to simply print money and hope the EUR doesn’t collapse. Abenomics, Draghinomics, etc.
