Even European insiders are worried as the European crisis worsens

September 20, 2011

Global Macro

Italy was downgraded by S&P this morning on the basis of their debt level and other things and it has served to underpin the poor price action in European equities overnight, knock Dow and S&P futures out of their slumber and wacked the AUD and EUR which look headed a couple of cents lower.

I’ve been trying to post for a couple of hours but am having systems issues so I’ll make this brief.

Sure the S&P news on Italy is not good but the story that got my attention overnight is the one from the FT which says that the German industrial giant Siemens has been withdrawing money from European, specifically French, banks to place on deposit with the ECB,

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

In total, Siemens has parked between €4bn ($5.4bn) and €6bn at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

Not everyone has this option and the FT reports Siemens presciently set up a bank last year for this very eventuality but if insiders like this are pulling money from the system then we should all be worried.

On a related topic last night Suki Mann fro Soc Gen Credit Strategy wrote the following,

We’re less than 3-weeks away (Oct 6) from recording the first quarter since at least 1999 without a single senior deal from a European bank. That’s should be seen as nothing short of a disaster but the ECB’s refinancing operations are containing the banking sector’s strained funding situation for the moment.              

This is an incredibly uncomfortable period for Europe at the moment and with hindsight it seems stupid that I held out hope last week that the Merkel Sarkozy compact could draw the crisis back from the precipice. Luckily yesterday gave us an opportunity to close out longs with a profit from that call and yesterday morning’s piece gave us a chance to correct it on paper (or at least in this blog).

But where too from here?

For the EUR the 1.35 level is key as it was last week’s low and it seems a lot of people’s version of where any not material pullback should pull up. The chart below suggest however that if 1.35 breaks then it is on its way to 1.3092 at a minimum.

Closer to home it’s likely the AUD won’t be able to resist the tractor beam of the EUR’s fall and the resultant fear that this engenders with regard to risk appetite so that now that last weeks low is broken the outlook turns toward .9994.

I genuinely hope this doesn’t play out as it appears and I’m not sure that the S&P downgrade of Italy should be a surprise to anyone, and we know that market positioning in equities is already skewed towards bearishness so I’d guess that’s the case in other asset classes too. I still think the 2 big guys of Europe, Merkel and Sarkozy, are genuinely working toward some sort of resolution for Greece and thus wider Europe but with the lack of support from other nations the situation is careening once again.



This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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  1. Australian Dollar Crushed as FOMC highlights economic weakness | Lighthouse Securities - September 22, 2011

    […] couple of days ago I wrote that the AUD looks biased toward 0.9994 and even though as you can see from the MACD on the […]

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