MidSession Review 31/08/12

The morning session in Europe has been characterized by headlines coming mainly from German and Spanish newspapers.

Early in the morning El Mundo reported that Angela Merkel has asked Italian Prime Minister Mario Monti to delay any bailout request for Italy, at the same time the Spanish newspaper said that Frau Merkel will ask the same of Spanish Prime Minister Mariano Rajoy when they meet in Madrid next Thursday. The reason behind Ms. Merkel's requests is to calm tensions with the German Bundesbank head Jens Weidmann, who has been vehemently opposing any action from the European Central Bank to buy Spanish or Italian bonds.

Mr. Weidmann's radical stance has left him without supporters in Germany and press reports there suggest he may end up resigning, El Mundo added.

The German tabloid daily ‘Bild' echoed the Spanish El Mundo reporting this morning that Bundesbank President Weidmann had considered his resignation and discussed the possibility with the board. The Bundesbank declined to comment, just saying that everything necessary to say on Weidmann decision was in his Spiegel interview published last Sunday. So we went to look at what he said: there he replied to a question regarding resignation, ‘I can carry out my duty best if I remain in office. I want to work to make sure the euro stays as strong as the deutsche mark.

the Bundesbank is currently isolated not only within the ECB but also in Germany as the government is clearly supportive of President Draghi and public opinion does not seem cleary on its side either. In this situation the impact of Weidmann's opposition to the new bond buying programme would seem to have limited impact. It was interesting to note that fellow German ECB Council member Asmussen seemed to be suggesting earlier this week that the ECB will take action even if Council support was not unanimous.

With Weidmann isolation the road for the ECB bond buying program seems flattened. As Reuters report Weidmann's predecessor as Bundesbank chief, Axel Weber, quit the ECB last year in protest at a previous bond buying scheme and was followed out the door by the bank's chief economist Juergen Stark, triggering fears of a German exit from the euro.

European benchmarks were pleased by this news flow heading north: the Stoxx50 rose 1.51% to 2,440.12, in the regional benchmarks space German Dax rose 1.32% to 6,986.42, Italian Ftsemib and Spanish Ibex lead gainers both up 2% .

At this point European headlines are taking lights off Bernanke speech to be addressed in the next few hours at Jackson Hole. It has be said that few in the market are expecting the Fed chief to signal anything major, such as a third round of quantitative easing (QE) or bond buying. The reason behind a decrease in the number of market participants marrying  a new round of QE has to be found in a steady stream of surprisingly good economic data from the United States over the past week in areas such as consumer spending, housing, inflation and employment.

The common currency broke the 1.2600$ mark, it gained 0.87% versus the greenback at 1.2615$ an ounce. Gold took back its road to north, the precious metal rose 0.38% to 1,663.40$, same story for Oil (Wti), the black gold rose  0.68% to 95.26$ a barrel. The Oil performance was helped by a UN report saying that  Iran had doubled the number of uranium enrichment centrifuges it has in an underground bunker, despite Western pressure and the threat of an Israeli attack.

Ten years Spanish government bonds yield rose 1.68% to 6.705 as the Spanish government approved a new financial reform that will create a “bad bank” to contain toxic property investments and will give the central bank more powers to shut down troubled lenders. The creation of the bad bank is among conditions set by the other 16 countries that also use the euro in exchange for a €100 billion loan for Spanish lenders hit by the country's real estate crash. The bad bank will be running by late November or early December and will exist for 10-to-15 years, Spanish Finance Minister Luis de Guindos said. The Bank of Spain will determine the price of the assets being transferred into the bad bank.

It's time now to turn our eyes at Jackson Hole..

Originally posted at www.77sigmatrading.com