ECB President's Statement on Securities Markets Programme (Bond Buys), EUR/USD Reaction

EUR/USD is trying to digest the U.S. downgrade, ECB bond buying program and slower economic growth.

7 August 2011 - Statement by the President of the ECB

1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.

2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.

3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.

4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.

6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.

European Central Bank
Directorate Communications
Press and Information Division
Kaiserstrasse 29, D-60311 Frankfurt am Main
Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404
Internet: http://www.ecb.europa.eu"

Source: http://www.ecb.int/press/pr/date/2011/html/pr110807.en.html
Article at Reuters: ECB to buy Italian, Spanish bonds to stop contagion

Tel Aviv 100 Index Down 7% After Growth Warning, US Downgrade and Inflation Protests

The Tel Aviv 100 Index lost 7.19% today and broke through major support levels after S&P downgraded the U.S.'s credit rating. According to Bloomberg, the Bank of Israel on August 2 lowered its 2011 and 2012 economic growth forecasts and "Finance Minister Yuval Steinitz called the downgrade a “warning sign” for Israel’s economy". You can't see it on the chart, but 1,000 was an important support level to hold (the 6/30/2010 low). TA100 closed at 972 and the trend looks down for now. Also, over the weekend 250,000 Israelis protested the high cost of living. Watch the CNN video after the jump.
Tel-Aviv Index Courtesy of Bloomberg.com

More markets fell in the Middle East:
Israeli Stock Index Tumbles Most Since 2000 (Bloomberg)
Dubai Shares Drop Most Since February (Bloomberg)
Saudi Shares Plunge as U.S. Downgrade Fuels Concern Over Global Economy (Bloomberg)

S&P Downgrades U.S. to AA+ On Political Risks, Rising Debt Burden; Outlook Negative

Treasury Secretary Tim Geithner Watches
Senate Vote on Debt Ceiling Bill (Flickr)
Standard and Poor's downgraded U.S.'s credit rating to 'AA+' from 'AAA' on Friday after warning on July 14 there was a "50% chance of a downgrade in the next 90 days". The Budget Control Act, or debt ceiling bill, failed to hit S&P's deficit reduction target of $4 trillion, which would have prevented a downgrade. The Treasury Department in a blog post on Saturday said S&P made a $2 trillion mistake (hat tip Bloomberg).

"In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one." (read more at Treasury.gov)

This credit downgrade will go down in the history books, but will the "risk free rate" (Treasury yields) move even lower from here? Futures and currencies will be interesting to watch tonight.

Interesting articles:

  • U.S. Downgrade Will Have Impact on Munis (Bond Buyer)
  • China Tells U.S. It Must ‘Cure Its Addiction to Debt’ (NYT)
  • China state paper says U.S. debt downgrade a "warning bell" (Reuters)
  • Instant view from Analysts: U.S. loses AAA credit rating from S&P (Reuters)
  • U.S. Downgrade Heralds a New Financial Era by El-Erian (PIMCO.com)
  • El-Erian Says U.S. Downgrade Casts Doubt on Other AAA Countries (BusinessWeek)
  • From 8/3/2011: China's Dagong downgrades US credit rating (China.com.cn)

Full text of S&P's downgrade:

"United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative

Overview

• We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

• We have also removed both the short- and long-term ratings from CreditWatch negative.

• The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

• More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

• The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.


Links: Unemployment Rate at 9.1%, 117k Jobs Added In July, ECB Buys Bonds, USPS Default Warning

From the U.S. Department of Labor:

"Total nonfarm payroll employment rose by 117,000 in July, and the unemployment rate was little changed at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, retail trade, manufacturing, and mining. Government employment continued to trend down."

1-Month Net Change in Nonfarm Payrolls Since 2001 (BLS)

In other news, "USPS posts $3.1 billion loss in Q3, warns of default"!:

"We are experiencing a severe cash crisis and are unable to continue to maintain the aggressive prepayment schedule," Joseph Corbett, the agency's chief financial officer, said in a statement. 
"Without changes in the law, the Postal Service will be unable to make the $5.5 billion mandated prepayment due in September."

And European news (EUR/USD is up 1.28% at 1.42751):

"The big news today is that the ECB will buy Spanish and Italian bonds. Italy is also announcing a balanced budget amendment. The comedy of errors continues." (Pragmatic Capitalism) 

"Explaining How The Just Announced ECB Market Rescue Pledged 133% Of German GDP To Cover All Of Europe's Bad Debt" (Zero Hedge)

S&P Priced In Gold At March 2009 Low (Chart), Apple Priced In Gold At Decade Highs

Peter Boockvar at The Big Picture blog mentioned that the S&P 500 was back at the March 2009 low in gold terms. I wanted to chart out $SPX/$GOLD going back 13 years, and it wasn't pretty. It's kind of sad that a shiny yellow metal has been the only thing of "real" value for the past 13 years. Well, except for Apple, Netflix and Facebook. Gold priced in Apple is around 13 year lows and actually made a new low earlier this year. Hopefully Gold/Apple can stay below that trend line.

$SPX/$GOLD (S&P 500/Gold) Courtesy of StockCharts.com

$GOLD/AAPL (Gold/Apple) Courtesy of StockCharts.com


Somewhat related from last month: GLD/SPY Ratio Down 16% From March 2009 S&P Low - 7/18/2011

VIX Futures Volume Makes New High, Curve and Options Update (VIX Up 35% at 31)

VIX (see below for a larger chart)
As you already know, the S&P had a bad day today closing down 4.78% at 1,200. However, the VIX, or Volatility Index, finished up 35% at 31.66! There are VIX futures and options on those futures that trade at the CBOE Futures Exchange. VXX, the short-term VIX futures ETN, had a nice day as well, up 19% on BIG volume (95 million shares, the most I see on the chart).

Below I put up charts of VXX, $VIX, the VIX futures curve and VIX term structure ("expectations of market volatility conveyed by S&P 500 (SPX) stock index option prices") to show the backwardation going on (front month value is way above back month). I also embedded two Option Monster Volatility Sonar Reports from yesterday and today. VIX Calls were active yesterday. CBOE said 137,132 VIX futures contracts traded today which is a new single-day record (press release below). So now the question is, where does the S&P find support and premiums on SPX options top out? If you are still confused about what all of this means or want to learn more, visit the VIX and VIX Options FAQ at cboe.com. The VIX measures market sentiment.

Venezuela to Compensate American Oil Companies for Nationalization? - Guest Post

Source: Wikimedia Commons
Guest post by John C.K. Daly for OilPrice.com

Venezuela to Compensate American Oil Companies for Nationalization?

If Cuba's Fidel Castro is America's favorite Latin American bête noire, then Venezuela's Hugo Chavez qualifies as Washington's reigning Prince of Darkness.

In 1960, Fidel Castro nationalized US business interests without compensation, bringing down on impoverished benighted country 51 years of sanctions that continue to the present day.

Similarly, four years ago Chavez completed the nationalization of foreign oil interests, transferring their shares to the state-owned petroleum company Petróleos de Venezuela, S.A., more commonly referred to by its acronym PDVSA.

The screaming was heard echoing through the boardrooms and canyons of Wall Street.
Now the picture appears to be shifting, as Venezuelan Energy Minister Rafael Ramirez told reporters this week, "We've never said we wouldn't pay" the two U.S. multinational corporations Exxon-Mobil and Conoco-Phillips, "the only two that didn't accept our laws and didn't accept (the terms of a compensation deal for confiscated assets) and took the dispute to the World Bank's International Center for the Settlement of Investment Disputes, or ICSID."

1-Month and 3-Month Dollar LIBOR Are Moving Higher, Eurozone Surprise Ahead?

During the past two weeks, 1-month and 3-month dollar LIBOR (London Interbank Offered Rate) spiked off levels not seen since March 19, 2010. Yesterday (August, 3), 1-month and 3-month dollar LIBOR were set at 0.206% and 0.268% respectively, which are still very low compared to the levels hit during the 2008 financial crisis (3-month LIBOR spiked to 4.2% on 10/7/2008 after Lehman went bankrupt). From what I remember, and I may be wrong, LIBOR spiked in early 2010 when banks started getting nervous over Greek sovereign debt and demanded U.S. Dollar liquidity. I was just looking at LIBOR charts at the time; the U.S Dollar was already catching a bid. Is a Eurozone surprise ahead? Or is the move higher in LIBOR related to something else. I found a Bloomberg article that explains what's going on. View charts of $LIBOR and $LIBOR3 after the jump.

"Nomura Holdings Inc. advised betting that U.S. two-year interest-rate swap spreads will widen on renewed concern Europe’s sovereign debt crisis will increase demand for dollar-denominated funding in the region." (continue reading)

Drunken Bernanke Talks About The Economy At A Bar (The Onion)

Source: The Onion
The story of the day comes from The Onion: Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. Economy Really Is.

"Bernanke, who sources confirmed was "totally sloshed," arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was "pretty goddamned awful if you want the God's honest truth." (continue reading)

Lol, I hope Bernanke reads this. Here is a similar story: U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion.

S&P 2007 Bull Market Top, Wedge Breakdown Vs. 2011 Bull Market (SPY Chart)

SPY (S&P ETF) broke through the rising wedge from 2009 just like it did in 2007. Both had one previous test on wedge support. As noted yesterday, Peter Lee, Chief Technical Analyst at UBS, thinks we see one more bull market rally for the S&P that breaks above the recent highs and peaks out around 1440-1450.

$SPY 2002-2011 courtesy of FreeStockCharts.com (click for larger view)

UBS's Peter Lee: S&P Below 1,250 Triggers Stops, Cyclical Bull Rally Peaks At 1450

Peter Lee, Chief Technical Analyst at UBS, was featured on Breakout yesterday with Jeff Macke and mentioned important technical levels to watch on the S&P 500 Index. He said if the S&P breaks below 1,250 support, stop loss executions will cause a "fast drop" to 1,120 or 1,150 (decent move, 8-10%). But even if that's the case, Lee sees one more rally in the S&P that peaks out between 1,440 and 1,450, which unfortunately concludes the cyclical bull market. I embedded the video after the jump, or watch it at Yahoo Finance.

The S&P closed at 1,254 yesterday and the S&P future is currently up 0.6% overnight. I threw some lines on a chart showing the levels to watch. If the S&P does fall to 1,120, will QE3 spark the rally to 1450?

The Quiet Revolution: Latin America Moving Away from Washington's Influence - Guest Post

Petrobas Oil Platform P-20 (Brazil) / Wikimedia
Guest post by John C.K Daly of OilPrice.com

The Quiet Revolution: Latin America Moving Away from Washington's Influence

Perhaps the biggest foreign-policy story of the past decade, thoroughly overlooked by the American media after 9/11 and its subsequent monomaniacal focus on terrorism, security and the wars in Iraq and Afghanistan, is the fact that Latin America has essentially moved away from Washington's influence.

This quiet revolution from below, in rejecting the Monroe Doctrine, first enunciated in 1823 whereby the U.S. essentially barred European powers from influence in Latin America, has essentially for nearly 200 years served as an ideological platform for countless U.S. interventions south of the border but has yet to register on the radar the politicians in Washington.

From Ecuador to Paraguay, Venezuela to Brazil, governments increasingly composed of representatives of the indigenous people, are more and more rebuffing Washington's advice as they seek to determine their countries' futures without undue interference from their giant North American neighbor.

Nowhere is this more evident than in Brazil, which after suffering decades of corrupt government and intermittent military dictatorship in 2003 elected Luiz Inácio Lula da Silva as president, who's adroit and progressive policies until he relinquished the proposed last year have laid the foundations for the dramatic rise of Brazil's economy.

Moody's Confirms US Aaa Rating, Assigns Negative Outlook

Moody's just released this announcement and it was expected.

US Treasury Building - Wikimedia Commons
"New York, August 02, 2011 -- Moody's Investors Service has confirmed the Aaa government bond rating of the United States following the raising of the statutory debt limit on August 2. The rating outlook is now negative.

Moody's placed the rating on review for possible downgrade on July 13 due to the small but rising probability of a default on the government's debt obligations because of a failure to increase the debt limit. The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa.

In confirming the Aaa rating, Moody's also recognized that today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run. The legislation calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period. In the absence of the committee reaching an agreement, automatic spending cuts of $1.2 trillion would become effective.

In assigning a negative outlook to the rating, Moody's indicated, however, that there would be a risk of downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected.


USD/CHF Pierced 2-Year Channel Support (-2%), Crashed Intraday After Debt Ceiling Bill Passed Senate

Look at USDCHF's 2-year descending channels and the crash today. To be bullish it needs to take out that near term downtrend line and find support on one of these descending channels. USD/CHF just crashed so the first attempt at finding channel support didn't work out that well. The Senate vote on the debt ceiling just passed, so is U.S. Dollar/Swiss Franc now pricing in downgrade risk? QE3? Or something else. Swiss Franc is a safe haven currency. More from CNN Money:

"The dollar has become the safe haven currency of last resort," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon. "The fact that it's still weakening against the Swiss franc and the yen immediately raises a red flag."

E-Mini S&P Future Technical Update (QE Trend Line, 200DMA), Senate Vote Tomorrow

source: optionsxpress
I'm watching the E-mini S&P future (ES) tonight because it's been making interesting moves during this debt ceiling volatility. The Senate votes tomorrow at noon on the bill, so watch how traders price in the progress. Last night when a "bipartisan agreement" was reached on the budget control bill, ES initially spiked 1.5% overnight and gapped up in the morning to test the 50 day moving average. But after weak economic data hit the wire (see below), the S&P lost all of its gains and closed in the red. So you can't always trust what happens overnight.

ES is currently down 0.47% overnight and pierced the QE2 uptrend line and 200DMA on my chart. I've been watching the S&P during the day and overnight mainly to see when it will start pricing in the next recession, or break bull market trend lines. GLD/SPY, or Gold priced in the S&P 500, has been an interesting ratio to watch recently (posts 1, 2).

U.S. Economy: Manufacturing Almost Stalls as Orders Drop" (Business Week)

"The Institute for Supply Management’s factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier, the Tempe, Arizona-based group said today. Figures less than 50 signal contraction, and the July index was lower than the most pessimistic forecast in a Bloomberg News survey."

Economy grinds to halt as consumers pull back (CNN Money) -from July 29, 2011

"Gross domestic product, the broadest measure of the nation's economic health, rose at an annual rate of 1.3% in the second quarter, the Commerce Department said. 
While that's an increase from the revised 0.4% growth rate in the first three months of the year, it is hardly good news. The government originally reported that the economy grew at a 1.9% annualized rate in the first quarter."

10-Year Spain-German Bond Spread Makes New High Again (374)

The 10-Year Spain-German Bund Spread made a new high today. Weak U.S. and European manufacturing growth could be responsible (read: Bunds Climb, Italian, Spanish Bonds Drop After U.S. ISM Data), and/or it's related to Spanish credit risk. It is just interesting to see this bond spread keep making new highs after it broke out in early July.

Image source: Bloomberg.com

Watch TimeScapes Trailer To Get Mind Off Debt Ceiling For A Second

This is the trailer for TimeScapes, a film by Tom Lowe. Visit timescapes.org for more information. He posted this on Google+.

Watch Senate and House Debate, Vote On Debt Ceiling Plan Live (Twitter Conversations)

Watch the U.S. House debate and vote on the debt ceiling plan live via CSPAN. I also embedded the Twitter conversation on the 'debt limit' as well as House Speaker John Boehner's twitter stream. More from Bloomberg:

"Republican leaders, with no extra time before a default threatened for tomorrow, voiced optimism that Congress will pass a compromise with President Barack Obama to raise the U.S. debt limit by at least $2.1 trillion and slash federal spending by $2.4 trillion or more."

If interested, here is text of the BUDGET CONTROL ACT AMENDMENT (courtesy of Chicago Sun-Times).

Obama's Statement and Fact Sheet of Budget Deficit-Debt Limit Deal

The S&P future is bouncing off trend line support overnight and using this "bipartisan debt agreement" as a catalyst, for now. The September E-mini S&P Future is up 1.48%, Gold is down 0.90% and Treasury Bond Futures are down 0.51%. The House and Senate still need to pass this bill. Below is more information on the bipartisan debt deal from the White House and House Speaker John Boehner, as well as President Obama's statement (transcript and video). I'm waiting to see how everything reacts. From the White House fact sheet:

Mechanics of the Debt Deal (Source: whitehouse.gov)

  • Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
  • President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.
  • Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
  • Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.