$FXE Bond market always gives Us Clues First

As we are prone to point out. The Bond market always figures out 'stuff' first.

- ECB’s failure to fully sterilize its
SMP bond purchases today indicates a high level of stress as
liqudity is constrained and banks continue to deleverage, Dan
Dorrow, strategist at Faros Trading, writes in note.
• Failed sterilization shows banks prefering to hold O/n cash than tie up deposits for 1 wk at ECB’s auction: Faros
• The high bank liquidity demand is consistent with other stress indicators including EUR/USD basis swaps and Euribor/OIS spreads: Faros
• 3-mo EUR/USD basis swap -5.7bps to -154bps; most stressed level since October 2008
• Euribor/OIS spread climbs to 0.95, highest since Nov. 3
• Investor base for peripheral bonds have also disappeared, another sign of euro-zone stress, as Italy’s 3- and 10-yr auction both yielded above 7.5%: Faros
• ECB is less aggressive in addressing credit crunch than Fed
• The slower ECB is to respond, the more it will have to ultimately ease: Faros
• EUR/USD may be pressured lower as ECB replaces non-euro-zone investors base via its SMP purchases; many investors who have left may not return for a few quarters, even with a Troika solution: Faros
• ECB may have to cut rates to new historical lows below 1% and also actively expand balance sheet: Faros
• Easing measures to weigh on EUR/USD: Faros
• EUR/USD +0.1% to $1.3338; off session high of $1.3442 following news of ECB’s failed sterilization: Faros