Major global banks are advising clients to prepare for a stock market rally and a resurgence of the euro if Greece is forced out of monetary union, betting that world authorites will flood the international system with liquidity.
Yesterday afternoon's "recovery" has come and gone, because just like that, in a matter of minutes, stuff just broke once again courtsy of a USDJPY which has been a one way liquidation street since hitting 106.30 just before Europe open to 105.6 as of this writing:
By Daryl Montgomery: Exactly three years after Lehman Brothers filed for bankruptcy and almost brought down the global financial system, central banks in North America, Europe and Asia engaged in a coordinated money pumping operation to prevent the EU banking system from stalling. The move created a sharp stock market rally, especially in financial shares, just as was the case when similar actions took place during the 2008 credit crisis. Involved in Thursday's action were the U.S.
In the aftermath of the record cash crunch in the Chinese interbank market, many financial institutions in China and abroad have been hoping that the PBOC would either end its stance of aloof detachment or at least break its vow of silence and if not act then at a minimum promise good times ahead. Alas, despite repeated confusion in various press reports that it has done that, it hasn't aside from the occasional "behind the scenes" bank bailout.
It is remarkable that China's central bank has been unable or unwilling to contain the spike in short-term rates, as the interbank liquidity squeeze continues. This is roughly the equivalent of the Fed not being able to control the fed funds rate. You can certainly have fluctuations, but within a couple of days a major central bank should be able to inject enough liquidity into the system to bring down rates - unless of course the central bank wants the rates higher.
Emerging markets risk an interest rate shock once the U.S. Federal Reserve and other Western authorities start to withdraw global liquidity, the World Bank has warned.
“There is the risk that the transition to higher rates occurs in an abrupt and disruptive fashion. In such a scenario, markets react pre-emptively, potentially trapping some participants in vulnerable positions that appeared manageable under low interest rates.”
With China’s credit-to-GDP ratio over 200%, it appears, as Barclays notes, that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth.
Cowards Win For NowWe will not get to see the precise wording of Prime Minister George Papandreou's referendum because enough cowards in the Greek parliament in conjunction with blackmail by Merkel and Sarkozy have put an end to Papandreou's regime.Thus, the on-off on-off Greek referendum is once again set to "off" this time permanently.Equity markets reacted positively to the referendum cancellation and also to the surprise rate cut by the ECB, but the euphoria will not last (except perhaps for gold).