Futures gap up massively and everyone feels great. The bull is back, at least in the short term. Easy monetary policy has made stocks rise yet again, however there is a decreasing marginal return to bailouts.
I think the intraday trends in $USO $FXE $TLT $JJC and $UUP are tell the tale here, there isn’t much conviction here in my opinion, at least in the longer term. I think many people who were still long will use this opportunity as a chance to reduce exposure, meaning for us to go higher we really need to see conviction on the part of buyers. The close will be a good gauge of the short term conviction.
Looking at the longer term affects of this latest monetary intervention we turn to yields. Italian yields are almost unchanged, rallying intraday from a low of around 7.1% which is still unsustainable for the government. Italy simply cannot afford to refinance their short term debt at this interest rate.
Spanish yields are down, but certainly not massively at 1.9%. French yields are stabilizing at down just over 2.1%. This is hardly a massive help to Spain or France, but at least yields are moving in the right direction for now, although this is a drop in the bucket within the context of the recent spikes.
Most tellingly, German yields are rising (up about 1.9%) which is causing spread between German and other Euro countries bonds to close. The market telling us that they are beginning to view the risk attached to German debt as more similar to the rest of Europes, suggesting there may be some substance to this latest guarantee. How long the German government and people will bear the burden of higher interest and paying for the rest of Europe’s spend-free attitude is anyones guess.
However LIBOR is up another 1% today continuing its parabolic rise. Clearly banks don’t think this has made an improvement to financial stability. The willingness of banks to lend to other banks will be the true measure of if we can escape a liquidity contraction, and so far the market is telling us that an increase in financial stability is not being priced in.
However, the elastic is stretched very far and none of this precludes a one to two week face ripping rally in stocks as fear is still high and people are very short.
Edit: As espoused by the benevolent dictator of IBC and one of our most revered senators gold and silver look poised to benefit. Loose monetary policy may have an ambiguous effect on equities but is certainly beneficial for PM’s as people seek to preserve their purchasing power.
