7/5 Comments on the US Bank Stress Test release

Scheduled for 2100 this evening, GMT. This is a good spot to measure whether we will see a “sell the fact” kind of reaction to the release of the results, though so much has already been leaked and discussed at this point, it is a bit hard to see this as a dramatic event risk trigger. We should be on guard, however.

In the end, the stress tests involve all kinds of projections for where the economy is going from here and assumptions about declines in asset values, etc… so the Fed’s projections would be rendered totally meaningless and wrong if the economy double dips and asset values continue to decline and defaults rise. The banks capital reserve levels are only as good as the Fed’s spreadsheets assume them to be . Considering how these kinds of assumptions and models got us all into this mess in the first place, we are as good as flying blind and should take absolutely no confidence away from the Fed’s conclusions.

7/5 Comments on the US Bank Stress Test release

Scheduled for 2100 this evening, GMT. This is a good spot to measure whether we will see a “sell the fact” kind of reaction to the release of the results, though so much has already been leaked and discussed at this point, it is a bit hard to see this as a dramatic event risk trigger. We should be on guard, however.

In the end, the stress tests involve all kinds of projections for where the economy is going from here and assumptions about declines in asset values, etc… so the Fed’s projections would be rendered totally meaningless and wrong if the economy double dips and asset values continue to decline and defaults rise. The banks capital reserve levels are only as good as the Fed’s spreadsheets assume them to be . Considering how these kinds of assumptions and models got us all into this mess in the first place, we are as good as flying blind and should take absolutely no confidence away from the Fed’s conclusions.

7/5 ECB comments

The ECB reduced rates 25 bps as widely expected to bring the rate to 1.00%. Mr. Trichet planned remarks outlined an extension of the term of its refinancing operations to 12 months and will extend the liberal collateral rules until the end of 2010.

Critically, Mr. Trichet also indicated that the ECB would buy covered bonds, and said during the Q&A portion of the press conference that the technicalities of the bond buying would be outlined at the next meeting and that the amount of the purchases would be approximately EUR 60 billion.

When asked whether 1.00% would be the low point for rates, Mr. Trichet said it is not necessarily the lowest point, because it cannot control the trajectory of future conditions, but that it is the appropriate rate for now. So how does this performance from the ECB measure up to expectations in the market.

Considering the background of risk willingness in recent weeks, this was a relatively dovish performance from the bank. But considering the expectations originating from the previous meeting, the ECB announcements were relatively inline.

Most importantly, EUR has been a terrible laggard for a couple of weeks or more now and the reaction seems to be more about sell the rumor, buy the fact on QE than anything else. Look at EURAUD for an example of this. Longer term, the driver for EUR will continue to be risk appetite and relative economic performance. The latter and fears of the QE reality have seen the EUR weaker in some of the crosses and on a broader basis until today, and the former will be what puts a halt to the EURUSD and EURJPY rallies.

7/5 Gloom - Czech republic

In last week's Prophet of 1 May, we showed scary IMF numbers that, for example, showed that the Czech Republic owed more than double its level of FX reserves, in short-term external debt payments due in the next 12 months. This implied that if the Czech Republic could not rollover its external debt, then it would be bankrupt in 6 months. We noted that our data suggested a much better ratio, which would suggest the Czechs could last a year even if no debt could be rolled over.