Hemorrhaging Resumes

Consistent with the theme seen among the EMU manufacturing sector, the UK reported its March manufacturing PMI. It fell to 47.8 from the flash reported of 48.0. It stood at 51.7 in February. Separately, UK financial shares are off over 6% today as banks stop dividends and share buybacks. No other sector is down more than 4% near midday.  

The euro (FXE) recovered yesterday from around $1.0925 to nearly $1.1040, but the bounce appeared to simply provide some players with a better selling level. It traded flat in Asia before coming off in the European morning to almost $1.0915. The (50%) retracement objective of the recent bounce is found by $1.09, where a roughly 600 mln euro option is set to expire today. A 1.8 bln euro option that also will be cut today is struck at $1.10. Sterling has not broken down as has the euro and is trading inside yesterday's range (~$1.2245-$1.2475). It has found support near $1.2330 in Europe today. There is an option for a little more than GBP315 mln at $1.2345 that expires today.  


The US efforts to absorb the economic and financial body blow were extended yesterday. The Federal Reserve moved first. It announced a new facility for foreign central banks to repo their Treasury bonds rather than sell them to raise dollars. It would be an overnight repo that can be renewed. The cost is the interest on reserves (10 bp now) plus 25 bp. In announcing the facility, the Fed explained the intent is to help restore order to the Treasury market. The Fed acts as a custodian for foreign central banks. Its custody holdings of Treasuries fell by nearly $110 bln in March (leaving them with roughly $2.9 trillion. Central banks may have sold Treasuries to raise funds to intervene or as an investment decision after a rally that pushed the benchmark yield below 40 bp in the first part of March. Central banks that wanted to repo their Treasuries could have done so with commercial banks. The Fed may not publish who uses the new repo facility. There may be a stigma to the bank that encumbers its reserves in a public way. It is different than the currency swaps, which seems aimed explicitly at making dollars available to foreign central banks that can make them available to their members.

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Read more by Marc on his site Marc to Market.

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