Another Incomplete Write-Up of Tuesday's Interventions In Free Capital Markets

Tuesday, August 14, 2007

The good news: The Bank of Japan did not replace its 600 billion Yen overnight tender from Monday.
The bad news: The European Central Bank added another 7.5 billion Euros and the Fed stands ready to accept more pleas for new cash.
The amusing news: ECB president Jean-Claude Trichet said markets are progressively turning towards a normalization. Then why do they need all that new money? Marketwatch has the British Bankers Association with quotes that the mess is far from over. The Bank of England has been conspicuously absent in the liquidity feeding frenzy. Bloomberg has more comments contradicting the ECB.
The result: Share markets worldwide lose in excess of 1% and US Treasuries saw good demand in an ocean of otherwise difficult to price debt paper.
Oil traded up 1% on news that OPEC sees continuing strong demand despite a potential slowdown in the Western world.
Gold's trading range has markedly narrowed down over the last weeks, raising the possibility for a strong breakout.
For a little more chuckling here is what Trichet said. No comment from my side needed as his statement sounds very much as if he himself is seeking to try to regain his composure.
As I indicated after the Governing Council meeting on 2 August, the European Central Bank has paid great attention to the developments in the market. We have provided in particular the liquidity which was needed to permit an orderly functioning of the money market.
We experience a period of market nervousness, a period in which we see increased volatility in many markets and a significant re-appreciation of risks. In some respects, what has been observed can be interpreted as a normalisation of the pricing of risk.
We are now seeing money market conditions that have gone progressively back to normal.
The Eurosystem will continue to monitor the situation whilst euro area financial markets in general are going back to normal functioning.
As I did after our last meeting, I call on all parties concerned to continue to keep their composure. This attitude has been welcome and effective in the recent days. It will help to consolidate a smooth return to a normal assessment of risks in liquid markets.
Remember, it is all just normal when the ECB dilutes its reserves by almost 17% in a matter of 5 days.
The folly of the central banks is not only chided by bloggers. The Financial Times cites the US comptroller general David Walker who said there are chilling similarities between the downfall of the Roman empire and the current state of the USA.
In another report the FT alerts us to the fact that Euroarea GDP growth slowed down to 0.3% (Q1: 0.7%) in Q2 2007, making it more difficult for the ECB to hike rates.
A clear loss of momentum in Germany, France, Italy and the Netherlands, "makes the ECB decision to pre-announce a September hike look premature, to put it mildly," said Holger Schmieding, European economist at Bank of America. Since December 2005, the ECB has raised its main interest rate eight times to 4.0 per cent.
Bright Spot China
Not all central banks have run amok with their electronic printing presses. The Wall Street Journal reports that China's money market rates have held stable despite the Bank of China draining funds.
If all that confuses you as much as it does markets, find some peace in facts. Former Fed NY research director Stephen Chechetti wrote an excellent primer what the Fed does when it acts in the market.

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