Trader Talk

A Triple Whammy for Bears

A triple whammy this morning: China, coordinated central bank action, and better than expected ADP report.

Stock futures jumped after China eased rules on bank reserves for the first time in three years, signaling they are clearly more concerned about global growth than inflation. The half a percentage point cut lowers the reserve ratio to 21 percent (near record highs). It doesn't sound like much, but when you are dealing with trillions of yuan it does free up cash that can be used to lend to businesses.

Futures surged another 20 points at 8 a.m. ET on coordinated action to lower bank swap rates by a half a percentage point by the Federal Reserve , the European Central Bank , the Bank of Japan, the Bank of England, the Swiss National Bank, and Bank of Canada, effective Dec. 5.

The key word is confidence. The central banks are trying to instill confidence in U.S. banks to lend dollars to their European counterparts. How to get the holders of those dollars to start lending? Lowering bank swap rates is a help because the return they were getting was not adequate enough to compensate for the risk. In a swap, the U.S. banks are giving dollars in exchange for euros (usually nine months to one year increments).

European bank stocks are up 5 to 9 percent.

The euro is up 1.3 percent against the dollar, while U.S. 10-year Treasury yields have risen and are now over 2 percent.

Futures were little changed earlier in the morning. A meeting of euro zone finance ministers has produced little: the European Financial Stability Facility (EFSF) appears to have little additional firepower. Overnight reports that Italian Prime Minister Mario Monti had met with International Monetary Fund (IMF) officials also did little to move markets. Reports over the weekend that there may be an IMF rescue package in excess of 400 billion euros ($539 billion) for Italy have been largely dismissed; the IMF simply does not have that kind of money, unless there is a substantial global recapitalization of that organization.

Still, any involvement by the IMF is welcome. Monti needs some cover for the coming austerity program he is going to steer through the Italian parliament — what better way to get it than by initiating an aide package from the IMF that comes with the usual tough conditions, then blaming the IMF for the austerity?

Not that austerity will help Italy: as Nouriel Roubini points out in today's Financial Times, Italy will need a surplus of 5 percent of gross domestic product(GDP) just to stabilize its debt. But growth will likely be negative in 2012, and the austerity measures that will be imposed by the ECB, Germany, and — likely — the IMF "will turn recession into depression," Roubini says. Roubini's alternative is to deal with the core problem: Italy's debt to GDP ratio of 120 percent should be reduced to at least 90 percent by issuing par bonds with a long maturity and a low enough coupon to reduce the net present value by 25 percent.


1. Stock futures popped a few points more at 8:15 a.m. ET as the ADP employment change for November came in much stronger than expected, a good indicator for the nonfarm payroll reports out Friday.

2. The S&P downgrade of banks, which occurred after the close yesterday, seem like a long time ago: Bank stocks such as Citigroup and JPMorgan Chase, down overnight, are up as much as 6 percent.

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