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Having been at the forefront of the recent collapse in core European bank stock prices, Deutsche Bank has – as we first reported last weekend – been ‘crying uncle’ but not in a way most would expect: instead of begging for more central bank easing, DB told the ECB (and BOJ) to stop easing as negative rates and more excess liquidity, are crushing it. This is why central banks are trapped, because they are damned if they don’t ease any more with the global economy on the edge of recession, and damned if they ease further, pushing bank default risk even higher.

Which brings us to this morning’s note from DB’s Jim Reid who puts it best: “Markets are crying out for a circuit breaker at the moment.” 

There is just one problem: nobody knows what this circuit breaks would and should be, or if it would even work.

From today’s Early Morning Reid

Markets are crying out for a circuit breaker at the moment. There is lots of talk about whether the ECB could buy senior bank debt and also whether Europe might look to bring in their own version of TARP. The former brings a whole host of moral hazard, political, legal and logistical questions especially in a bank bail-in regime. Before the ECB embarked on each of their government bond purchases (from Greece in 2010 to QE in 2015) there were similar arguments so it’s not an insurmountable challenge but it’s not a policy that is likely to be conducted overnight. With regards to TARP, remember this was a government led initiative and achieving a similar one in Europe with all the different governments having to agree on it would be a challenge to say the least. It’s not as if Angela Merkel doesn’t have her work cut out dealing with the migration crisis/backlash.

 

The problem for the ECB is that there are increasing worries that another deeper cut into negative deposit rate territory will create more negative sentiment for the banks due to what it might do to their profitability. Is this just a passing concern or has the market now moved against negative deposit rates? If it is the latter then central banks had better decide on an alternative quickly. The ECB will certainly have a tough 4 weeks trying to design further stimulus / market support that hits the mark ahead of their hotly anticipated March 10th meeting.

In other words, much more important than the Fed’s March meeting (when it will certainly not hike rates), the ECB’s March meeting may be the one that makes or breaks Eurozone banks if Draghi finds no middle ground between throwing even more negatve rate kitchen sinks at the problem – which has crushed Europe’s banks – and doing nothing – which in December crushed Europe’s asset managers when the EUR soared the most since the Fed’s announcement of QE1.

Which means that in addition to the BOJ and the Fed, the ECB is the latest central banks which is now trapped.

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• Yellen’s dilemma: A downturn with no easy response (Reuters)
• Clinton, Sanders clash over Obama as they vie for minority votes (Reuters)
• Risk Grows of Markets Sparking Recession (WSJ)
• Global Stock Rout Eases Amid Oil Advance as German Bonds Decline (BBG)
• U.S. Benchmark Yield Will Be at Record Low in March at This Rate (BBG)
• Oil Prices Rally on Hopes of Production Cuts (WSJ)
• More Cuts Loom as Oil Nears $25 (WSJ)
• Euro-Area Maintains Momentum as Turmoil Threatens Outlook (BBG)
• Major powers agree to plan for ‘cessation of hostilities’ in Syria (Reuters)
• Dimon Just Spent a Year’s Pay on JPMorgan Stock After Bank Rout (BBG)
• Market Meltdown Threatens Japan’s Economic-Revival Plan (WSJ)
• Five-Decade Market Pro Who Called Bond Rally Sees 1% U.S. Yields (BBG)
• Facebook Steps Up Efforts Against Terrorism (WSJ)
• Oregon occupiers warn authorities of booby traps at refuge (Reuters)
• South Africa’s Zuma Faces Gravest Challenge Yet (WSJ)
• Have Millennials Made Quitting More Common? (BBG)
• Elon Musk’s vision is not for the faint of heart (Reuters)

 

 

Overnight Media Digest

WSJ

– World powers agreed early Friday to reach a cease-fire in Syria in one week, allowing aid in but giving Russia and the Assad regime time to press an offensive that has expanded the Kremlin’s clout in the region.(http://on.wsj.com/1SjRj0o)

– In a Democratic presidential debate on Thursday, Hillary Clinton pressed Bernie Sanders on the viability of his proposals for free health care and college tuition, and the latter didn’t hesitate to stand by his proposal to impose new taxes on the wealthy and Wall Street to provide those new services. (http://on.wsj.com/1QvnHY0)

– As crude prices slide toward $25 a barrel, many oil companies have little choice but to start making the steep cost cuts they have avoided up until now, jettisoning every well that can’t break even or isn’t needed to keep the lights on.(http://on.wsj.com/1TbKgpF)

– South Africa’s unraveling economy and a string of corruption scandals are coalescing into the gravest challenge for President Jacob Zuma in seven years in office.(http://on.wsj.com/1TV9ol9)

– As government pressure mounts, Facebook is speeding its process to remove and investigate terrorist content. It has assembled a team focused on terrorist content and is helping promote posts that aim to discredit militant groups like Islamic State. (http://on.wsj.com/1TVJNse)

 

FT

* Ministers have not yet claimed millions of pounds in EU compensation for UK’s devastating December floods, which was followed by many other storms. Time is running out and there is confusion over which department should submit the request.

* Water companies are persuading the government to exempt them from stricter tax rules on interest costs which is likely to be announced in next month’s Budget. The utilities, mostly debt-laden, say that proposed changes threaten to push up customers’ bills.

* UK is being pressurised to clarify how and when the police and spies are given access to private communications. As militant threats from ISIS intensifies, it is only important that any new law grants the UK authorities the powers they need to keep the country safe.

* Ministers have less than two months to bring out a new system for financing cancer drugs in the NHS as a 340 million pound-a-year fund set up by David Cameron to plug gaps in treatment, is set to expire.

 

NYT

– The Swedish central bank’s decision on Thursday to lower its short-term rate to minus 0.50 percent from minus 0.35 percent, has heightened fears that brazen actions by central bankers are now making things worse, not better.(http://nyti.ms/1QvcKG2)

– Though the investors are fearing a global downturn and betting for no hike before 2017, the Fed expects the domestic economy to keep chugging along and says it’s thinking about raising its benchmark interest rate again as soon as March.(http://nyti.ms/1o4Sbcw)

– Billionaire investors Carl Icahn and John Paulson, who have been agitating for the breakup of American International Group, have reached an agreement to join the insurer’s board. (http://nyti.ms/20YKXFh)

– Internet radio service Pandora Media has held discussions about selling the company, and is working with Morgan Stanley to meet with potential buyers, according to people briefed on the talks. (http://nyti.ms/1SLayR3)

 

Canada

THE GLOBE AND MAIL

** The Ontario government will unveil a strategy in June to combat human trafficking, and while it will not focus solely on indigenous women, the province acknowledges that the exploitation “overwhelmingly” affects indigenous women. (http://bit.ly/1V8iY2z)

** Voters in an Ontario by-election have meted out a harsh blow to Premier Kathleen Wynne’s Liberals, handing a 24-point victory to the Progressive Conservatives in Whitby-Oshawa. (http://bit.ly/1owJiZL)

** Big Plastic is laying down the legal gauntlet against a Montreal suburb that is looking at banning plastic bags later this year. The Canadian Plastic Bag Association served the City of Brossard with a legal letter on Thursday demanding it back off on its proposed shopping-bag bylaw. Officials in the town are expected to pass a bylaw next Tuesday that would see a ban come into effect by September. (http://bit.ly/1V8n2je)

NATIONAL POST

** The multi-billion dollar sole source deal to build a new fleet of warships for the Royal Canadian Navy is being reviewed by a newly-formed Cabinet committee set up to take a closer look at controversial defence procurement contracts. (http://bit.ly/1Rvz9I9)

** Canada could be among a handful of countries to adopt negative interest rates in the next two years as the European policy experiment gains popularity, says a new report from Citigroup. (http://bit.ly/1QvUqN2)

** TransCanada Corp said Thursday more layoffs are expected as the energy sector grapples with plunging oil prices, after confirming it let go 10 percent of workforce in the fourth quarter. (http://bit.ly/1ovNDME)

 

Britain

The Times

Shire Plc has called time on its $50 billion acquisition spree as it attempts to digest its biggest deal yet. The FTSE 100 pharmaceuticals group expects its $32 billion acquisition of Baxalta Inc to close this year and said it would concentrate on integrating the American business before embarking on any other deals. (http://thetim.es/1PGqCgI)

Sweden added to the turmoil in financial markets yesterday by cutting its main interest rate deeper into negative territory in an effort to boost the economy and stave off the threat of deflation. (http://thetim.es/1PGqH46)

The Guardian

The Dublin-based banana company Fyffes Plc has been accused by the GMB trade union of having “no respect” for workers’ rights, amid allegations that staff on Central American fruit plantations are being serially mistreated. (http://bit.ly/1PGqUnK)

Justin King, the former boss of J Sainsbury Plc, has waded into the row over the tax paid by multinationals such as Amazon and eBay, saying it was unfair that traditional retailers must pay huge rates bills for services such as roads and waste collection, while their online rivals paid little but received the same benefits. (http://bit.ly/1PGramO)

The Telegraph

Staff at Guardian Media Group are bracing for further job cuts as the company looks to slash costs by 20 percent in the face of widening losses. (http://bit.ly/1PGrgef)

SuperGroup Plc founder Julian Dunkerton is selling a 4.9 percent stake worth 53 million pounds ($76.69 million) in his first share sale since the fashion retailer listed on the stock market six years ago. It is understood that Dunkerton is selling 4 million shares to fund a recent divorce settlement. (http://bit.ly/1PGrli3)

Sky News

PricewaterhouseCoopers has become one of the UK’s biggest private sector employers so far to engage staff on the merits of Britain’s membership in the European Union. Sky News understands that the ‘big four’ accountancy firm last week held an event for more than 100 UK partners to discuss the implications of Brexit. (http://bit.ly/1PGrqlY)

The Independent

Matt Brittin, president of Google’s European, Middle Eastern and African arm, told the Public Accounts Committee that he was not sure what his basic salary was. The Public Accounts Committee is currently conducting an inquiry into a tax settlement announced between Google and HMRC. (http://ind.pn/1PGrsdy)

J Sainsbury Plc has said it will be the first UK retailer to call time on multi-buy and buy-one-get-one-free promotions. The supermarket operator said that by August, customers will no longer see the deals across brand products and its own-brand soft drinks, confectionary, biscuits and crisps. (http://ind.pn/1PGrxxG)

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It was just over a year ago that Greece elected Alexis Tsipras and Syriza amid a flurry of anti-austerity sentiment.

Things didn’t exactly go as planned.

The new PM and his “radical” finance minister Yanis Varoufakis thought they could shake things up in Brussels and wrench Greece from the clutches of Berlin-style fiscal rectitude. As it turns out, Wolfgang Schaeuble is not a man who is easily bested at the bargaining table and after more than six months of negotiations, the imposition of capital controls, a referendum on the euro that Tsipras promptly sold down the river, Greeks ended up facing an outright depression.

In the end, Varoufakis unceremoniously resigned and Tsipras agreed to a third bailout before calling for snap elections that would ultimately see the PM re-elected albeit at the helm of a party that was completely gutted by the arduous bailout talks.

As we and quite a few others warned, the new bailout and the attached terms would do exactly nothing to turn the Greek economy around. We’re all for being responsible with the budget but you can’t very well implement fiscal retrenchment during a depression unless you intend to remain in said depression in perpetuity, but alas, that’s exactly what Brussels forced Greece to do and on Friday we learn that the country has slipped back into recession.

GDP contracted 0.6% in Q4 after shrinking 1.4% in Q3. “With opposition mounting to the government’s pension reform plan, the European Union pressuring it to stem the tide of refugees entering the country and the global market rout hastening the sell-off in Greek assets, dark clouds are gathering again,” Bloomberg writes. Ironically, capital controls appear to have helped the economy perform better than expected: “The economy fared less badly than those initial expectations in part due to a 90 percent annualized increase in cashless payments since the introduction of capital controls in June, shifting activity out of the shadow economy.” Another justification for banning cash we suppose.

Earlier this month we noted that Greek bank stocks were cut in half in just a matter of 72 hours while Greek equities as a whole had fallen to their lowest levels since 1989. Yields on the Greek 10Y had spiked back above 10%.

Greece, sources told MNI, “seems unable to deliver” on a number of measures Brussels says Athens needs to implement an effective fiscal consolidation plan. “We agreed to disagree,” one official said. “Judging from (last week’s) talks, the negotiations could drag for months. Anyway, I don’t see any real funding needs for Greece until June,” the official went on to note.

Maybe not, but things are getting dicey again. Tsipras faced the largest public revolt he’s seen since his re-election earlier this month when a massive general strike that cancelled flights, ferries and public transport, shut down schools, courts and pharmacies, and left public hospitals with emergency staff. Even the undertakers were striking.

Tens of thousands took to the streets to protest pension reforms and in relatively short order, it was 2015 all over again. 

And it didn’t stop there. “Greek riot police fired tear gas at farmers protesting against pension reform plans on Friday who hurled stones at the agriculture ministry in central Athens ahead of a major demonstration outside parliament scheduled for later in the day,” Reuters reported on Friday. “Under the planned reform of the pension system demanded by Greece’s international lenders, farmers face a tripling of their social security contributions and higher income tax.” Here are some images from the scene: 

So no, Greece is not “fixed.” And even as the farmers swear “they won’t make us bend,” something will have to give because as Poul Thomsen, head of the International Monetary Fund’s European Department wrote in a blog post on Thursday, “Grexit fears to resurface once again [if all sides adopt] a plan built on over-optimistic assumptions.”

In other words: the reforms are a must if Greece wants to remain in the euro and those reforms entail tough times ahead for the farmers and for everyone else living in the socialist paradise. 

Throw in a couple of hundred thousand refugees that are lliterally arriving in boats and you’ve got a particularly precarious situation that will likely devolve into the type of chaos shown above on an increasingly frequent basis.

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