Yesterday, I waxed effusive about the relationship partner who is easy to please. “Some days, the market acts much like a perfect partner in a relationship – it takes very little to make him or her happy.” Today, those words ring somewhat hollow, as I am reminded that the market is no ideal partner, and, in reality, the market is quite difficult to please. Yesterday, the market liked what the banks did when they bought up Spain’s debt and lowered Spain’s borrowing costs.
Short-term financing costs for euro zone struggler Spain more than halved on Tuesday as banks lapped up debt at an auction, with much of the purchasing power said to come from cut-rate money lent by the European Central Bank.
The news about the first tranche of borrowing is good. Today, European banks are far more liquid than they were yesterday, which is the primary goal of the ECB lending program. Cheap money is now shoring up the banks, in case the European mess gets further out of hand.
The near half a trillion euro take-up of ECB funds exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the 310 billion euros expected by traders polled by Reuters, making it the most the bank has ever pumped into the financial system. Liquidity on the banking system has now increased considerably …
Yet, even with the money spigot opened, pessimism and negativity have seeped into the market mindset, turning what seemed pleasing yesterday into more uncertainty today. Yesterday, the “analysts” thought the banks would use the money to buy up sovereign debt, and they did in Spain, but today, for some reason, the news is now …
But analysts said there was little prospect of the cash being hurled at the debt of euro zone weaklings and, while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved.
Alas, what does one do in a relationship of such volatility? How does one figure out what is pleasing to a partner and what is not? Perhaps, one way to understand this conundrum is to look at it from a different angle. Perhaps, today’s market reaction is not about reversing course regarding the ECB’s lending program in relation to the European debt crisis. Perhaps, the market demonstrated its pleasure yesterday and today the market is simply reaping some reward from the run up yesterday. Yes, it could be about taking some good, old-fashioned profit.
Then again, maybe Europe is not the focus of today’s less-than-tepid market response. Maybe, another reality is seeping into the market mindset – Europe is not the only one with serious political conflict keeping those in power from doing what is right for the country.
A payroll tax cut for 160 million American workers was in limbo on Wednesday with Democrats and Republicans in Congress accusing each other of bringing an extension to a dead stop.
Extending the payroll tax cut is a big deal for the U.S. economy, and it would make the market happy to see it extended. Threatening not to extend it makes the market unhappy, I suspect. I know this relationship thing is confusing. Maybe, though, the market is not the problem here. Maybe, the source of market conflict is the inability of those in power to step up and boldly do the right thing, no matter the political consequences to themselves.
Trade in the day – Invest in your life …
