G3 Recap 7-21-11

Main Items:

  • US Initial Jobless Claims rose to 410k vs 418k exp and 405k prev.
  • Philly Fed improved to 3.2 in July vs 2 exp and -7.7 prev.
  • S&P said it saw a 50% chance of cutting the US rating within the next 3 months, which caused a sell off in treasuries and a widening in swap spreads.
  • Germany and France have opted not to press for a bank tax to help finance the new rescue package for Greece. WSJ.
  • EU summit Statement details:
  • EFSF/ESM loans will be extended from 7.5 to 15-30 years at a rate of 3.5%, and includes Greece, Portugal, and Ireland
  • EFSF/ESM will be allowed to intervene on precautionary basis
  • EFSF/ESM will be able to recapitalize financial Institutions via loans to governments, including non-program countries
  • EFSF/ESM will be allowed to buy debt in secondary markets
  • There was no discussion of upsizing the EFSF
  • The statement notes that there will be "voluntary" private sector involvement through a "menu of options", at an estimated value of 37 bn euro. There will also be a debt buy back program, which will contribute 12.6 billion euro. And credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks.
  • Although the ECB is not mentioned it looks as though the promise to provide credit enhancement to allow collateral to continue to be used in liquidity operations might be the escape route the Bank needed to protect its position.


  • EU July PMI:
  1. EU Composite declined to 50.8 vs 52.6 exp and 53.3 prev
  2. EU Mfg declined to 50.4 vs 51.5 exp and 52 prev.
  3. EU Services declined to 51.4 vs 53.2 exp and 53.7 prev.
  • HSBC China PMI declined to 48.9 in July vs 50.1 prev
  • Australia NAB Business Confidence declined to 6 in 2Q vs 11 prev


  • Alright. So now it looks like the expectation of a big move down in risk assets I wrote about on Monday was just wrong. Monday marked the end, not the beginning, of the last move down. With the leaks from the EU summit today, the bankruptcy of the Greek banking system and the resulting contagion risk has been put off. I need to remember that the only trade to do when politician get involved is to buy gamma!
    With the EU periphery risk off the table for now, the market can focus on irrationalities from US politicians. So far, it looks like a do-nothing deal that increases the debt ceiling will get passed. This suggests further downside to mid and long term treasuries.