Tackling Liquidity, Policy, Geopol & Solvency

by Ashraf Laidi

Nov 30, 2011 14:31

Today's coordinated central bank liquidity injections coincide with liquidity concerns (USD LIBOR nearing the highs of June 2010 at 0.53%); policy concerns (EFSF & austerity deadlock), geopolitical concerns (storming of UK Embassy in Tehran) and solvency concerns as signaled by implicit (voluntary) default from Greece.

The last coordinated central bank liquidity injections (Sep 15) coincided with 3-yr anniversary of Lehman and 3 days after EURUSD hit 7-month lows in the midst of EFSF deadlock and soaring US-3month LIBOR. Today's coordinated central bank injections aim at completing the Sep 15 operations, 2 of which will mature next week. Back then, the ECB, Fed, BoE, BoJ & SNB agreed to conduct USD- liquidity injecting operations with 3-mth maturity, covering into year-end. Two of those operations are due to mature on Dec 7 & 8, allowing an outstanding operation to mature on March 1st, 2012.

The timing of PBOC's first reduction in required reserve ratio (RRR) in 3 years (to 21% from 21.50%) coinciding with unusually dovish remarks from ECB sources indicating ECB "open to rates cuts 1% no longer seen as refi floor" "ECB may also widen collateral framework in December" is therefore not be a coincidence.

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Tackling Liquidity, Policy, Geopol & Solvency - Global Cpis Vs SPX Nov 30 (Chart 1)

In a signal that China remains cautious with inflation, the PBOC began its easing cycle via the required reserve ratio on major banks, instead of lending and deposit rates (which were last raised in June). Recall that in 2008, the PBOC began its easing cycle by slashing benchmark lending/deposit rates 2 months before reducing the RRR.

Bottom Line

Global Inflation rates (see above charts) shall continue declining, reflecting falling growth rates in BRICS & developed nations. Meanwhile (as in 2007-08), global equity markets have already peaked before the peak in global inflation rates. With the 2007-8 pattern set to to re-emerge, the simultaneous decline in equities and inflation & growth suggests the downtrend from the April peak is here to stay and each and every rebound is nothing more than a short-term corrective move. S&P500, Dow-30, Dax-30 are seen limited at 1235, 12300, 6300 respectively, while rebounds in EURUSD, GBPUSD & AUDUSD are seen capped at 1.38,1.5950 and 1.05 respectively.

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