Recap 11-23-11


  • Dallas Fed Mfg Activity improved to 3.2 in Nov vs 5 exp and 2.3 prev
  • A Bloomberg survey of Treasury dealers shows consensus median estimates for QE3 of 545bn in MBS purchases


  • Reports of a 600bn IMF loan to Italy by Reuters, which was denied by the IMF, helped send risk assets higher.
  • There is almost 10bn of EU sovereign issuance this week from Italy, Belgium, Spain, and France, with the majority of DV01 weighted issuance in the 10yr sector
  • EU Finance Ministers are meeting tomorrow to approve EFSF leveraging plans
  • Portugal was downgraded by Fitch Thursday morning. They were cut to BB+ from BBB-.
  • ECB’s Noyer said Italy is fundamentally sound and that it should be able to win back market confidence if it shows fiscal discipline.
  • German CPI declined to 2.8% in Nov vs 2.7% exp and 2.9% prev
  • New EBA bank capital shortfalls for each of Europe’s banks to be out by the end of this week according to the WSJ. The preliminary 10/26 release included an aggregate shortfall but since then the EBA’s forecast for total capital needs has risen. By the end of next week the EBA will publish the new higher aggregate figure as well as a break-down by individual bank. Commerzbank’s shortfall may rise to EU5B under the new revised test. WSJ


  • South Korea Mfg Business Survey improved to 83 for Dec vs 82 prev


The fundamental rationales for this risk rally are all flimsy. The IMF headline does not appear realistic. The prospect of Eurobond issuance is also a no go given the number of legislatures that need to ratify it. This leaves flow as the remaining explanation. With risk assets technically very oversold, liquidity poor, and with month end coming up, this may be the month end short squeeze that we also saw last month.
There was one headline anomaly. Sarkozy declined to press the ECB for further action at a meeting with Merkel and Monti late last week, a surprising move given prevailing stress levels. There may be some horse trading going on behind the scenes – if so, what did the ECB or Germany give up?