Trader Talk

Merkel and Sarkozy Put On the Sunny Face


German Chancellor Angela Merkel and French President Nicolas Sarkozy put on the sunny face: Meeting in Paris, Merkel says negotiations over a new multilateral treaty to address the debt issues are going well and she reiterated that it was possible to have a signed agreement by March.

The European Union merry-go-round is in full swing this week, with Merkel meeting with International Monetary Fund head Christine Lagarde tomorrow to talk about Greece, which is now in a critical stage of negotiations with bondholders over a 50 percent haircut, then meeting with Italian Prime Minister Mario Monti in Berlin on Wednesday.

The European Central Bank (ECB)meeting is Thursday; the overwhelming expectation is the ECB will leave rates unchanged.

Not a good sign for raising bank capital: Italian bank UniCredit down another 12 percent this morning, to below 2.30 euros ($2.94). Trading was halted several times this morning; the bank held a rights offering of 7.5 billion euros ($9.6 billion) last week, which was sold at 1.94 euros ($2.47). The rights began trading today. They sold at a 69 percent discount to the closing price last week, and the stock price is rapidly moving toward the strike price of 1.94 euros.

This is a head-spinning drop in the stock price and every bank in Europe that needs to raise money is watching this with trepidation.

Other European banks are going to do everything to avoid these types of capital raises. What alternatives do they have? You've seen a big spike in covered bond sales in the last week. In covered bond sales, banks put up collateral to back the loans. Banks will choose to do that, or sell assets, rather than going through what UniCredit is going through.

Parking cash: 1) Money parked with the ECB hit a new record of 464 billion euros; and 2) Germany sells bills at negative yields for first time on record: Germany sold 3.9 billion euros ($5 billion) of six-month bills at a yield of minus 0.0122 other words, investors paid more than par for the bills.

European stocks mixed, euro up: German November exports up 2.5 percent month-over-month, better than estimates of up 0.5 percent.


1) Shanghai Index up nearly 3 percent; December bank loans grew by 640.5 billion yuan ($101.5 billion), about 10 percent higher than expectations and the most since April. China has been easing its bank reserve requirements and it looks like this is having a salutary effect.

2) First five days rule widely followed: the S&P 500, up 1.6 percent in the first 4 trading days. The last 38 up first five days were followed by full-year gains 33 times. That's a nearly 87 percent accuracy ratio.

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