Photo: jurvetson via Flickr
Yesterday we mentioned the big spasm of “end of the world” analyst notes, as suddenly more and more people on Wall Street conclude that Europe is really going to blow it and collapse.So, how to know if this is really going to come to pass?
In his note cheerily titled US and Europe: At the Point of No Return?, Nomura’s George Goncalves offers some clues.
Pessimistic Path: There are plenty of doomsday scenarios thus we won‟t list them all. However if the worst case scenario were to unfold we believe that there would be some early warning signals from the money markets because the Fed liquidity from old QEs would dry up quickly for EU banks. If we were to see 10s break 1.90 in a meaningful way, we would go neutral as the next stop would be 1.40%. Such a move could happen quickly on a panic trade.
In the pessimistic case, the Fed at a minimum would come in with an intra-meeting ease via QE3 and cutting FX line charges in half, especially if ECB started easing too, in our view. Given the nonlinearity of market risks, we understand why investors are on the sidelines, but we also believe that rates won‟t stay at a new low if the worst case pans out because authorities will respond in force. In fact we now
believe the Fed will be proactive and do QE3 next year. Good Luck.
The other thing is to just keep an eye on various measures of banks’ willingness to lend to each other. We went over several of them (like the TED Spread, LIBOR/OIS), the other day.