Euro Offsite

Looking at the price action overnight it looked similar to Friday with Asia and EM getting in a panic over Europe and selling off and yet Europe calmly correcting most of it. Which leads TMM to suggest that the stories out there are not just solely Europe but are multiple and overlapping, yet the general euro wrapper is being used to encompass all.

We have had dumps in western equities over the past week, but if you were to listen to the press and hadn't seen prices you'd think we were 20% lower than we are by now. TMM's DPI indicator and newly launched WMMT indicator are certainly reflecting that with weekend conversations pointing to a disconnect between where prices are assumed to be and where they actually are with "well, we are only back to where prices were in early August" being greeted with disbelief. (WMMT = "What My Mother Thinks").

Gold meanwhile has had all the spam chuckers scrabbling in their coffers to buy the dip, though "with what?" we would like to ask, as we thought they'd spent every scrap of fiat currency on it months ago. Maybe it will be just a little longer before they can afford to return to society from the log cabins. Having said that though, the bounce does look solid. -100 and + 80 bucks of gold within 7 hours is a pretty good sign of a blow off and would have TMM normally looking to buy. But if this is a long term play we can afford to wait.

Meanwhile Asian and EM moves continue to show signs of greater self-fulfilling worries than the rest. This just adds to TMM's belief that all of this is just that deleveraging trade we have all been talking about for so long. Europe may be the story, but the effects are global deleveraging. Europe is already so deleveraged on the long side that it's now short, the UK and US appear pretty neutral, so we are left with the leverage residing in EM and particularly EM fixed income.

Now then, looking at this proposed IMF super package that has been the result of the Euro offsite in the States (lots of coffee, lots of networking breaks, lots of playing blackberry games under the table and plenty of trying to stay awake after too big a "get to know you" evening the night before). Well, on the face of it we have nothing concrete, but instead see the first phase of EU policy launch. Having obviously learnt this trick from the Labour Party in the UK, it involves leaking a potential idea and watching how the market reacts. If it's a disaster, then deny it ever existed, and if positive, then work in that direction. If there is one thing that TMM are learning from this crisis, it's that tape bomb shock has induced an inherent mistrust of anything being done until it is. But as we also know with this style of leakage policy, by the time it is announced it will be fully priced in, so we are therefore forced to consider the ramifications of this latest idea leak.

The €2trn has not been agreed yet but it could come either from the ECB or from just allowing the EFSF to borrow more itself. In the first case, the EFSF would issue bills that it would present to the ECB in exchange for Euro just like a bank-like financing, or it would sell those bills/bonds directly to the market. The Germans (cf Schauble) appear to be leaning in favour of that latter though at the expense of credit rating (it would act in a CDO-like manner). Which is fine as long as the German public don't notice.

On the German point, TMM frequently come across the view that the Germans, finally realising that they will have to pay, will just give up and re-adopt the DEM. The problem with this view is that both the economic and geo-political consequences of such a move - which, judging by how spookily similar the past few years' events have been to the post-1929 Wall Street Crash timeline, may well end in War - seem too much of a hurdle for them to be worth considering. Indeed, TMM reckon the Germans have overplayed their hand, and the leaks coming from the G20 suggest they have no friends. It's a case of "JUST SORT IT OUT, OK?!"

But back to the IMF idea, TMM reckon that with a fund that big, coupled with a broad based bank recapitalisation, the ECB and EFSF buying of bonds would be enough to convince markets that Italy/Spain will not suffer the Greek fate and that should be enough to give real money the nerve to reallocate.

So overall, TMM are encouraged that even if it did take the Americans to ram it down their throats, the Europeans are perhaps at last "getting it" and are actually discussing the policy responses we would want to be in place. Even the hardened Eurobears would have to take note.

But, back at home in Euroland the random word generators of the Eurocrats continue to spew out non-committal statements about what they haven't decided and what is possible with a frightening lack of what IS going to be done.

*GERMAN FINANCE MINISTRY SAYS NOT MULLING THIRD EFSF EXPANSION
*ECB'S MERSCH - WILD EXPECTATIONS ABOUT ECB RATE CUT SHOW SOME PEOPLE HAVE LOST DIRECTION, ECB HAS ONE NEEDLE IN COMPASS
*ECB'S NOWOTNY - ECB INTEREST RATE CUTS CANNOT BE EXCLUDED
*ALMUNIA SAYS MERKEL, SARKOZY KNOW WHAT IS AT STAKE
*DUTCH PM RUTTE SAYS NO PLANS TO RAISE AMOUNT OF MONEY IN EFSF

So maybe all the great ideas hatched in the Euro "offsite" in NY will evaporate, like most offsite action plans, on the plane journey home. We look forward to the follow up call from the offsite coordinator in 3 months time .. "Hi, we wanted to know how your progress plan we discussed at the offsite in September is going .. You haven't had a chance to look at it? .. Your line manager isn't supportive? I see.."