Problems with TLTRO, what next? QE=ABS+Gov.Bonds?

Hi,

In June this year, the European Central Bank has taken a range of measures aimed at reinvigorating the European economy, in response to declining inflation and negligible economic growth. One of the tools used was the introduction of a program known as TLTRO, whose target expected to be approx. nearly 400 billion euros, and the program should be directed to the recovery in lending in the Eurozone, and thus have a positive impact on the real economy.

I'll start with the following graphic showing who and how much borrowed during the auction TLTRO:

graph 1. September TLTRO Take-up

What's this TLTRO ?

• Long-term loans to commercial bank;
• Value of the program ultimately is expected to be approx. 400 billion EUR;
• Loans will be taken in September 2018;
• The value of loans to individual banks, will be determined from the increase in the value of each bank consumer lending;
• In the event that the banks did not increase lending, will have to repay the loan earlier;
• The interest rate of new loans for the TLTRO will be constant and will reach MRO of the start date of the loan plus 10 basis points. margin;
• Each bank will be able to borrow a value not exceeding 7% of its total lending as of 30 April 2014. (In the amount of credit will not be counted for the financial sector loans and mortgages);
• As part of the loan gets even restrictions that make loans to hit the real economy sector.
   

Published last week, data relating to the first allocation of loans TLTRO disappointing showing by the way, that the problem in the euro area is much more serious and is not limited to a temporary lack of liquidity in the banking sector.

According to economists, the main problem of European Eurozone is low demand for loans in the economy, which is reflected in the effectiveness of the programs implemented by the ECB. In the first tranche only TLTRO banks took 82.6 billion, plus economists interviewed by Reuters predict that in December, the second tranche is expected to be 175 billion euros. Summing up the two tranches, we can see that the 400 billion euros by the ECB offered nearly 30% of the amount will not be used. To not be limited only to the current data, it is worth comparing it with the programs introduced during the acute phase of the crisis in the euro zone, which resulted absorbed by the banking sector over one trillion (!) Euros.

European Central Bank is slowly beginning to end with the tools that it could affect the real economy. In the words of Mario Draghi interest rates in the euro area have already reached the lower limit and it is technically impossible to make them even lower. This gives banks a clear message - use and lend, because they will not be cheaper. The problem is that these actions are connected with others, introduced by the ECB at the same time, which can cause some indecision in the market and reduce their effectiveness. Loans targeted at the private sector falling for nearly two years, and since the introduction in June TLTRO improvement in this sector practically does not occur.

In summary, the actions of the ECB in recent months have led to increases in the stock market and the weakening of the European currency, but had little impact on the real economy, which inhibits the growth of both inflation and economic growth will faint. Because of this, the ECB may be forced to take further decisions, for example. Introduction of a broader QE in the form of buying government bonds, but the impact of such measures on the real economy would be even smaller than TLTRO program. In addition, it would delay fiscal reforms in the euro area, due to the lower costs of debt issuance, which are strongly opposed to Germany.

Mario Draghi will give an interview today.

After his words, it can be concluded that the European economy is doing so badly that significantly increased the likelihood of extension of the program buying ABS, additionally on government bonds.

regards,

oscarjp

note the dot-chart !

hello,

Today I want to focus on a very important aspect when making investment decisions in the long term. Dot-chart, is a tool introduced by BB and is intended to serve greater transparency in the policy of the Fed and the fact it is the role perfectly. However, often the problem lies in the fact that a large number of observers do not want to see this chart.

Each member of the FOMC, marked by dots, at what level would see the main interest rate at the end of the next three years, and the so-called long (unspecified) period. All decisions are made assuming that the economy is balanced. Chart is published on a quarterly basis, after the meetings, after which we get to know a new economic projections and followed by a conference Yellen.

This chart is very important, it says (almost) everything, especially that Yellen gives the impression that he wants to represent not his views, and was a consensus within the Committee. Shows what is the attitude of all members and not just Ms. Yellen.

What should pay attention to?

chart 1. Target federal funds rate at year end published in June 2014

In June, the consensus assumed rate at 1 or 1.25% at the end of 2015, which meant 3 or 4 increases. The market did not yet priced in such a scenario, but Now it is - which brought just a clear strengthening of the dollar. Therefore, to dollar appreciated further, dots should more clearly focus on the level of 1.25%.

Consensus for 2016 years is less clear, but let's assume that on average it is 2.5%, ie the next 5 to 6 increases.

Indeed, short-term market rates in the United States are rising in anticipation of the first rise, making the dollar gains. However, at the same time, long-term interest falling. Even at the beginning of the year, freshly Open Market Committee decision to launch QE3 limit, yield on 10-year-olds exceeded 3%. In the spring it was 2.7%, and when the S&P500 came out above the 2000 pts., Less than 2.4%. It is a change that investors in the stock market very gladly accept: the lower long-term interest rates, the more future earnings are worth today. And yet the share price is nothing more than the discounted stream of future profits.

For comparison chart placed below the latest projections of the FOMC members from September this year. Compared to the previous graph we see all that strong tightening of monetary policy in the near future.

 

chart 2. Target federal funds rate at year end published in September 2014

regards,

oscarjp

Goldman Sachs recommends buying U.S. stocks

hello All,

In today's entry I'm going to present the latest forecasts Goldman Sachs regarding the most interesting financial markets of the world.

In a recent report, Goldman recommends upgrading equities to overweight for the next 3 months, rolling index targets forward, and piling investors into high-yield credit.

"We upgrade equities to overweight over 3 months, in line with our 12-month view. We have rolled our index targets forward to higher levels for all regions except Japan and, following the dovish ECB decisions yesterday, we now see the risk to equities from higher bond yields as less imminent. We maintain a high conviction that yields will rise from here, but since our last GOAL, risks have clearly shifted in the direction of a slower path. Today we re-iterated our yield forecast for the US, UK and Japan and lowered our year-end Bund forecast from 1.60% to 1.30%"

table 1. Expected returns and recommended asset allocation

Goldman recommended asset allocation:

Equities: "We are overweight over both 3 and 12 months. We expect earnings growth, dividends, and high risk premia to support returns."

Commodities: "We are neutral over both 3 and 12 months but expect significant dispersion below the index level. We like nickel, palladium, zinc and aluminium, but see downside for copper and gold. Roll carry is likely to contribute significantly to returns, especially for oil, copper and aluminium."

Corporate credit: "We remain underweight over both 3 and 12 months. We expect spreads to narrow, but given already tight levels, rising government bond yields are likely to dominate the returns, especially for US IG credit. The exception is US HY, and within credit we would recommend an overweight in HY relative to IG."

Government bonds: "We remain underweight. We expect yields to rise due to sustained high US growth and accelerating inflation, a decline in deflation concerns in Europe, and support to inflation expectations from ECB policy action."

 

table 2. Goldman forecasts across asset classes

The assessment of the above recommendations will leave you to your own analysis.

regards,

oscarjp

 
The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

USD/CAD LONG

Hello,

Following the entry of the July 7 <link below> regarding the trend of the pair USD/CAD, today we go back to the main trend and the open LONG position.

My recommendation for USD/CAD activated dated 7 July 2014 

The most optimistic target is 1.166 and of course do not forget about the stop loss order. I would suggest there are currently quite distant levels of 1.093

chart 1. USD/CAD 4H, 2014-09-11

A summary of all transactions will appear in the weekend. In addition, all my transactions posted on the blog you can find the tabs "SUMMARY" and "MY BLOGGING TRADING" on the right side.

regards,

oscarjp 

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

Draghi will purchase Asset-Backed Securities

Hello,

Here are five questions from Bloomberg for Mario Draghi

Is more easing on the way?

After the ECB unveiled an unprecedented stimulus package in June, most analysts had expected officials to hold off on new measures until the end of the year. An economy that stalled in the second quarter, slowing inflation and the crisis in Ukraine changed the picture. Draghi acknowledged these developments, and their effect on inflation expectations, in a speech at Jackson Hole, Wyoming on Aug. 22, setting the stage for more stimulus, including quantitative easing.

Will there be changes to the TLTROs?

The ECB may make the terms of its targeted longer-term loans, the centerpiece of its June package, more attractive by cutting its benchmark rate or erasing the premium it plans to charge banks, analysts say. The current plan -- aimed at supporting the recovery by boosting lending -- offers funding at 0.10 percentage point above the benchmark rate. A rate cut would make what is already, according to Draghi, a “very, very attractive” offer even more appealing.

The first round of the TLTRO operation is due this month. Estimates of take-up in a Bloomberg News survey fell in August as the economic outlook for the euro area clouded. Italy’s seven biggest banks will ask to borrow as much as 30.3 billion euros ($40 billion) this month, according to a Bloomberg News report.

What’s happening with inflation?

A key thing to watch for is any change in the inflation wording of Draghi’s opening statement. In August, he said officials see “both upside and downside risks to the outlook for price developments as limited and broadly balanced over the medium term.”

The ECB will also issue new economic forecasts. It currently predicts price growth will gradually accelerate over the next 2 1/2 years, climbing from 0.7 percent this year to 1.1 percent in 2015 and 1.5 percent in the last quarter of 2016.

Inflation, which the ECB aims to keep just under 2 percent, has been below 1 percent since October and fell to 0.3 percent in August, the lowest in almost five years. In Jackson Hole, Draghi reaffirmed that most factors pushing down inflation -- from the exchange rate and geopolitical tensions to food and energy prices -- are temporary. Core inflation edged up in August to 0.9 percent.

Still, the ECB President recognized that “if this period of low inflation were to last for a prolonged period of time the risk to price stability would increase,” and said inflation expectations had “exhibited significant declines.”

Let’s cut to the chase, is quantitative easing coming?

After Draghi’s Jackson Hole speech, when he said the Governing Council “will use all the available instruments needed to ensure price stability over the medium term,” analysts from Berenberg to JPMorgan Chase & Co. said the chances of large-scale asset purchases have increased. While most analysts think QE, if it happens, will come in 2015, Citigroup Inc. economists predicted last month the central bank will unveil a QE program in December valued at 1 trillion euros.

At the same time, the technical, political and legal hurdles to asset purchases remain high, especially if they involve government bonds.

The ECB is also accelerating preparations to buy asset-backed securities. The central bank hired BlackRock Inc., the world’s biggest money manager, to advise on a program with the twin aims of reviving the shrinking European securitization market and providing another liquidity tool. ABS purchases may form part of a larger QE program.

What has Draghi been telling Europe’s leaders?

The ECB President met with France’s Francois Hollande and Italy’s Matteo Renzi in recent weeks and spoke on the phone with German Chancellor Angela Merkel. While such contacts are not news in themselves, they came as France and Italy have called for more flexibility in European Union deficit rules, something Germany opposes.

In Jackson Hole, Draghi also said governments’ “fiscal policy could play a greater role” in supporting euro area’s growth, alongside monetary policy and structural reforms.

regards,

oscarjp

current analysis of the futures SP500 Index

hello,

Below I put my latest analysis for futures contracts on the SP500 Index. According to me we got to the place where the probability of a deeper correction has significantly increased.

Of course, we have scheduled a second scenario saying that in case the course today strongly came to new heights while remaining there until the close of the american's session then you can talk about the continuation of the upward trend with the possible target in 2200 points.

Order closing our transaction set at the level of 2015 points. Our target at the moment is not known. If realization of my forecast, we should observe the market and successively lower the stop order.

chart 1. futures SP500 Index, Daily, 2014-09-04

 

best regards,

oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

next lies set the market for the day

Hi,

For the last two weeks, coming to market data regarding the economies of the countries in the European Union do not encourage, at least to me to buy the shares on the contrary, to reduce them in my wallet.

Starting from 21 August, PMI Manufacturing readings were below the previous readings. For example, for France dropped from 47.8 points to 46.5 points, for Germany fell from 52.9 points to 52.0 points. Across the euro area, this ratio was only 50.8 points.

On the same day in the evening we had a press conferenc where Mario Draghiego said: "If inflation drop continues, risks for price stability would increase and governing council would need to use all available tools" The full report of the speech in the link here.

Despite the weak data, stock markets closed that day above prices at the beginning of the session.

August 25, one of the most important data was read German Ifo Business Climate, which recorded the fourth decline consecutive from 108 points to 106.3 points. Two days later, GfK German Consumer Climate also notes a decrease from 8.9 to 8.6

Analyzing further, Aug. 28, met on the inflation figures which largely also looks Draghi. And certainly at lower readings we have a chance to get to know more details about the introduction of QE program. But unfortunately the data was above expectations. In addition, all German Länder recorded readings above expectations. Therefore, in my view introduction in Europe QE moved away.

Most funny thing in that situation is that monetary easing never really reach business or households. Banks acquire inexpensive capital and turn 90% of it back into the financial markets thus inflating new balloons. Bank lending to households and businesses is not growing because the banks graduately raised the requirements for the new credit receivers, and those who have already borrowed - either don't want to risk for more or can't cover the banks tighter requirements. So ECB would never achieveemployment growth by pumping the financial markets with more devaluation of the currency value against hard equities. Without structural economy transitions - the QEs are just next recipe for crisis.

Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of Monetary Financial Institutions (MFIs), the annual growth rate of total credit granted to euro area residents was less negative at -1.9% in July 2014, from -2.3% in the previous month. The annual growth rate of credit extended to general government was less negative at -1.8% in July, from -2.6% in June and the annual growth rate of credit extended to the private sector was also less negative at -2.0% in July, from -2.2% in the previous month. Among the components of credit to the private sector, the annual growth rate of loans was less negative at -1.6% in July, from -1.8% in the previous month (adjusted for loan sales and securitisation2, the rate stood at -1.0%, compared with -1.1% in the previous month). The annual growth rate of loans to households stood at -0.5% in July, compared with -0.6% in June (adjusted for loan sales and securitisation, the rate stood at 0.5%, unchanged from the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, was less negative at -0.1% in July, from -0.4% in the previous month. The annual growth rate of loans to non-financial corporations stood at -2.3% in July, unchanged from the previous month (adjusted for loan sales and securitisation, the rate stood at -2.2% in July, unchanged from the previous month). Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) was less negative at -4.9% in July, from -5.9% in the previous month.

September 1, further readings PMI Manufacturing, easily observe the subsequent weaker readings than the previous. Spanish PMI falls from 53.9 points to 52.8 points. Italian PMI once again falls below 50 points and recorded 49.8 points. For the whole European Union recorded a slight decrease from 50.8 points to 50.7 points.

And finally we have an amazing day today, September 3. In recent days, as it was nicely presented above you can see a big inflow of cash into the European markets. Despite the weak data major indexes have been registering growth. Today, in order to hide another weak data from the euro zone, appeared on the market the lie about the ceasefire in the conflict Russia with Ukraine. Markets strongly fired up. After a few minutes there were more messages stating that there is no agreement what more there was intense conflict. "Separatists reported that Kiev does not want an agreement and do not want to withdraw the army." It is clear that Putin wants to take control over Ukraine, but it is best if she gave up. What Ukraine will never do.

Tomorrow is an important day. Speech by Mario Draghi. After behavior the markets in recent days suggests that, at least those who bought the shares they expect to get more information on the introduction of QE. But I think that nothing will happen and the last increases were nothing justified.

I hope that I presented purely my current opinion. And that all aspects are understandable.

regards,

oscarjp