Risk aversion coming back on...and hard: September 2010

We had two relief rallies via positive US ISM index on the 1st September 2010 and then the positive Non Farm Payroll data on the 3rd September 2010. Both reports showed tentative (very tentative) signs of recovery, therefore a relief rallied ensured that occurred globally across most indices. The US dollar was sold, bonds were sold and yields started to claw back on the 2yr and 10 yr. Dow and S&P 500 are now moving up into their sideways ranges, which could be argued is the central bank/s gift to the market, a sideways/range traded supported market. That frustrates both the perma bulls and the perma bears. With thin liquidity and rhetoric based central bank intervention; a market that is trailing sideways until the big one, which is most likely indicating a major sell off rather than a major buy up.

In the meantime risk aversion is coming back on, when a business (banks) wants to deal with another business (banks) they like to see each others balance sheet, it's health, before giving out risk and taking on risk. Of course the EU stress tests that happened in July 2010 were fascicle. So let the truth be known when banks now are starting to get a little paranoid, as they hoard their capital. Meaning? It's 'freak out' time.

The Euro (with IMF/ECB holding the line) was sell on the 7th September 2010 as the US slumbered after the Labor day public holiday. The thing about thin markets is that when risk is off, selling happens quite sudden and hard. All USD crosses have taken a hit with the USD being bought again (after the sell off from the mentioned relief rallies on US indexes).

German banks are a funding nightmare (from Bloomberg):

“Banks face enormous challenges,” Hans-Joachim Massenberg, the German banking group’s deputy managing director, said in a statement today. “It’s clear that more capital is necessary. But it’s also clear that raising additional capital comes with a burden.”

EU stress tests missed EU goverment toxic waste (from WSJ):

"LONDON—Europe's recent "stress tests" of the strength of major banks understated some lenders' holdings of potentially risky government debt, Wall Street Journal analysis shows.

As part of the stress tests, 91 of Europe's largest banks were required to publicly reveal how much government debt from European countries they were holding on their balance sheets. Regulators said the figures showed banks' total holdings of such debt as of March 31.

At the time, many analysts and investors greeted the data as a much-needed dose of clarity since the murkiness surrounding bank sovereign-debt holdings was fanning fears about the health of Europe's banking system. The banks' publication of that data was seen as the main benefit of the stress tests, which were widely panned as being overly lenient.

But a closer examination of banks' disclosures indicates that some didn't provide as comprehensive a picture of the institutions' holdings as European regulators claimed. Some banks excluded certain sovereign bonds from their tallies, and many reduced the sums to account for "short" positions they were holding—facts that neither regulators nor most banks disclosed when the test results were published in late July."