Key News

• The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists forecast and a sign that the region’s financial industry may be stronger than investors estimated. (Bloomberg)
• Chancellor Angela Merkel faces the biggest test of her second term today in a secret ballot to elect Germany’s largely ceremonial president, a vote that threatens to rattle her coalition.

Quotable

“Disobedience is the true foundation of liberty. The obedient must be slaves.”

                           Henry David Thoreau

FX Trading – Three Concerns: All seem real and leading back to jobs, again

Three drivers of yesterday’s big sell off seem to be:

1) European Central Bank refunding operations (tender) for banks, i.e. how much demand from banks and can the ECB provide the liquidity needed?
2) Concern that Chinese growth is slowing based upon a Conference Board leading indicator number
3) Sharp decline in US consumer confidence

This morning, it appears concern #1 is out of the way, as the demand for liquidity, rolling over of past lending, was less than expected suggesting to market players European banks in better shape than expected, at least for today.

Three-month European Rates Daily: Not too much in the way of tightness seen on this chart.

The euro is sharply higher this morning on this news:

Concern #2 an open question, but optimists point to Shanghai stocks falling only 1% today as positive—not sure there is too much correlation there; Chinese stocks have been clobbered even before the new growth concerns hit the fan.

Shanghai Stock Market Index (candles) vs. Commodities Index – CRB (red) Weekly: Who leads and who follows here? We can all go bankrupt underestimating the ability of the Chinese policymakers to keep the music playing. But, given the “everyman for himself” theme echoing from the G-20 meeting last weekend, things can change here fast. On Monday I laid out the case for some type of attempt by the US government to reinvigorate the old US-China symbiotic relationship; but given the politics of the current account and still crushing debt levels of the average US consumer, the chance of that scenario playing out still seem low. But, we watch and wait.

Of the three concerns, China continues to be the big dog. We saw the impact of even a hint of slowdown has on the markets; a real growth disappointment changes the game in a very big way.

Concern #3, US Consumer Confidence, is also a biggie. Mr. Consumer has a mighty big impact on #2—Chinese growth. So when you stack a nervous buyer of last resort (US consumer) on top of even a minor indication of slowdown in China and put that on top of news from yesterday that Canadian Raw Materials prices plunged 7.2 percent in May, you have the makings of air coming out of this bubble and providing more support for the double-dip recession camp.

US Consumer Confidence Index (black) vs. Commodities Index (purple dotted) Monthly: Is this real economy stuff?

Logically, with the oil spill, war news, and growing discontent with government in general, it is no surprise Consumer Confidence fell last month. This can turn around quickly if jobs materialize.

So, we are back to that again. Another non-farm payroll report is due out on Friday. It seems every month we keep hearing that “this is the biggie”, i.e. it will make or break markets and recovery expectations. Maybe this time there will be a lot of truth in that assessment.