The ECB has released a letter from its former President, Jean-Claude Trichet, to the Spanish Prime Minister in August 2011. It is excruciating reading.

The letter starts with a reminder about the Spanish government's responsibilities:

“We recall that the Euro area Heads of State or Government summit of 21 July 2011 concluded that "all Euro countries solemnly affirm their inflexible commitment to honour fully their own individual sovereign signature....."

Well, ok, this letter is about the threat to the Euro caused by spiking Spanish bond yields and the fear of default and redenomination at that time, so it is probably reasonable of the ECB to ask for assurance that the Spanish government intends to honour its debt obligations. But that's not all:

“...and all their commitments to sustainable fiscal conditions and structural reforms.”

And the letter then goes on to explain in some detail exactly what "structural reforms" the ECB expects Spain to undertake. There are three groups of changes:

·         changes to the labour market, including decentralising wage bargaining, ending indexation of wages and "reviewing other regulations" in order to make it easier for the unemployed to find jobs. Apparently making it cheaper for firms to sack people and eliminating restrictions on the rollover of temporary contracts makes it easier for the unemployed to find jobs. I am not quite sure how this logic works.

·         additional "structural fiscal consolidation" (i.e. permanent spending cuts and/or tax rises) of 0.5% of GDP, apparently to "convince markets" that the 6% deficit target could be met. This was to be coupled with strict control of sub-sovereign budgets, new rules enforcing transparency in sub-sovereign accounts and a "spending rule" restricting spending increases to the trend growth of GDP.

·         product market reforms, mainly to improve competition in key sectors and promote housing rentals.

I am not in this post going to discuss the wisdom or otherwise of these proposals. I am interested in the fact that it was the ECB that made them. In what insane world is fiscal policy the responsibility of a central bank? Which EU treaty gives the ECB the right to dictate policy to a sovereign government, even one subject to the "excessive deficit procedure"? It is very hard not to conclude that the ECB strayed far beyond its mandate. But why did it do this?

The final paragraph gives the game away:

“Overall, we trust that the Spanish government is aware of its very high responsibility for the smooth functioning of the Euro area at the current juncture and will decisively undertake all necessary measures to regain market confidence in the sustainability of its policies again.”

The impression that this gives is that restoring market confidence in the Euro was the responsibility of the Spanish government, not the ECB. An emasculated ECB was desperately trying to persuade the Spanish government to do whatever was necessary to prevent a disorderly breakup of the Euro. Poor thing.

We now know that this is total nonsense. What markets really needed to restore confidence was not Spanish structural reforms or fiscal consolidation. It was a guarantee from the ECB that it would stand as "buyer of last resort" for Eurozone sovereign debt. And when the ECB finally gave that guarantee - though admittedly hedged around with conditions - calm was restored to the markets and bond yields fell to normal levels.

So it was not the Spanish government that needed to act. It was the ECB.

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4 Tips for Today's Trading - 19/12

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Brent crude hit a fresh five-year low close to $60 a barrel on Monday after oil producer group OPEC restated its determination not to cut output despite a global fuel glut, but the North Sea benchmark later rallied to trade around $63.

Market momentum appeared to be downwards, with analysts saying oil could plumb new depths before a sustained recovery.

Oil prices have collapsed over the last six months as high-quality, light crude from North America has overwhelmed demand at a time of lacklustre global economic growth.

The Organization of the Petroleum Exporting Countries has kept production steady, worried that any reduction in its output would have little impact on price and instead mean surrendering market share.

"The decision has been made. Things will be left as is," OPEC Secretary-General Abdullah al-Badri told a conference in Dubai on Sunday. "We agreed that it is important to continue with production (at current levels) for the ... coming period."

Analysts said further oil price falls were possible.

"Oil prices may move below $60 per barrel in the near term," analysts at Barclays Bank said, but added that "this (level) is not sustainable in the long run".

Barclays said it expected Brent to average $67 per barrel in the first half of 2015 and $78 in the second half of next year.

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Big banks have taken many steps during the past few years to ensure that they have enough capital on hand in case of another financial crisis. But the Federal Reserve wants them to do even more.

The Fed unveiled a proposal Tuesday for rules that would force several large financial firms to boost the amount of capital they need.

The Fed is calling the new requirements "capital surcharges." The amount that the banks have to set aside would depend on how risky the bank is deemed to be by a set of criteria determined by the Fed.

The proposal would affect eight of the nation's largest banks. These financial firms are considered "systemically important" by the Fed and all have more than $50 billion in assets:

- JPMorgan Chase (JPM)

- Bank of America (BAC)

- Citigroup (C)

- Wells Fargo (WFC)

- Goldman Sachs (GS)

- Morgan Stanley (MS)

- Bank of New York Mellon (BK)

- State Street (STT)

These banks are already subject to fairly strict global regulations regarding capital, known as Basel III.

But the Fed thinks that its rules will (and should) be even more stringent.

In particular, the Fed is trying to make sure that large banks don't rely as much on certain types of short-term sources of credit known as wholesale funding. The Fed has expressed concerns that relying on wholesale funding could make these firms vulnerable to bank runs that could quickly threaten their solvency.

During a conference call with reporters, a Fed official said that the new rules will hopefully encourage the large banks to reduce the amount of risk they take on, which would make them less likely to be considered "too big to fail" in the event of another market meltdown like 2008.

The rules are set to phase in over a period of three years beginning in 2016. A Fed official said all eight banks are already on track to meet the new capital limits by the end of the phase-in period in 2019.

So the new requirements, if enacted, may not wind up having that big of an impact on the industry.

Nonetheless, several Fed officials on the call defended the proposal, saying it is necessary even after Basel III and actions taken by the banks themselves.

Wall Street didn't seem too concerned either.

Shares of all eight banks were lower Tuesday afternoon, but that was along with the broader market. And most of the banks moved off their lows as the day wore on. 

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American Airlines Inc. announced Monday that it will invest more than $2 billion in airplane and airport upgrades beginning next year.

It will modernize older airplanes in its own fleet and that of merger partner US Airways. It will update Admirals Clubs. And it will remodel airport waiting areas.

“In 2015, we’re going to have product improvements, a lot of them, to take the level of the product above where either airline is today,” American chairman and CEO Doug Parker said in a Nov. 25 interview, ahead of Monday’s announcement.

Passengers “should expect to see improvements over time and we want to make sure they know it’s coming.”

The $2 billion is in addition to the billions American Airlines and merger partner US Airways are spending over a number of years to replace older airplanes with newer airplanes. The newer airplanes generally have more amenities than the ones they are replacing.

Among the changes:

1. American will refurnish its Boeing 777-200 fleet from head to tail. American will have lie-flat seats in the premium class sections of 777-200s and other aircraft that fly on international routes, including the Boeing 757 and Boeing 767-300ERs.
   
   
2. The Airbus A319s flown by US Airways will get new seats throughout and will receive “Main Cabin Express” seating that provides more legroom. The A319s will also get powerports in each row. This work is scheduled to be finished by year end 2016.
   
   
3. Airplanes flying on international routes will be equipped with satellite-based Internet access for customers.
   
   
4. Its airport lounges, the Admirals Clubs, will be updated with new furnishings and décor and improved food offerings.
   
   
5. American plans to remodel its airport areas with better kiosks at check-in counters, plus 400 kiosks in gate areas so passengers can reprint boarding passes and ask for seating upgrades.
   
   
6. “Customers will also see 500 worktables with 12 power outlets each and seating for eight people near gates at all hub and gateway airports so they can charge their devices before their flight.”

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Sterling and the New Zealand and Australian dollars were the main losers among major currencies in early European trade on Monday, extending losses as the dollar continued to draw support from Friday's strong US jobs data.

Both the Aussie and the kiwi were hurt by trade numbers from China showing a sharp drop in imports with another 1 percent slide from oil also feeding sales of currencies traditionally dependent on commodity prices.

Among big events for markets this week are the European Central Bank's second offer of targeted loans (TLTRO) to banks and speeches by a handful of U.S. Federal Reserve policymakers ahead of next week's final policy meeting of the year.

"The jobs numbers supported the dollar and we expect this trend to continue ahead of the Fed meeting as interest rate expectations continue to adjust," said Josh O'Byrne, a strategist with Citi in London.

The surprisingly robust US jobs data bolstered the view that the Fed could raise interest rates sooner than expected next year and the dollar was up another 0.1 percent against a basket of currencies in early European trade.

Most major banks continue to predict further gains for the dollar against its major peers in 2015, although the surge past 120 yen has left some wondering how much juice there still is in the yen trade, at least for now.

There is also Japan's general election on Dec. 14 to contend with, currently seen as likely to give a boost to Prime Minister Shinzo Abe and reflationary policies which weaken the yen.

The euro fell further in early trade in Europe, hitting a low of $1.2252 after comments from ECB policymaker Ewald Nowotny highlighting the weakness of the euro zone economy.

"We expect the euro to continue to weaken in the week ahead," analysts from French bank BNP Paribas said in a note to clients. "Another low TLTRO uptake could put some upside pressure on euro front-end rates. However, low demand would also increase the chances of an increase in asset purchases (by the ECB) early next year."

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American companies added 208,000 net new jobs in November, posting another solid though slightly disappointing month of labor market gains, payroll firm Automatic Data Processing said Wednesday.

The figure was down from an upwardly revised 233,000 private-sector jobs created in October, ADP said. November’s total also came in below the 225,000 analysts had expected.

Still, the closely watched figure indicates that the economy is continuing its nearly yearlong stretch of strong job growth.

“Steady as she goes in the job market,” said Mark Zandi, chief economist at Moody’s Analytics, which assists ADP in preparing the report. “Monthly job gains remain consistently over 200,000.”

Zandi predicted that the pace would lead to the unemployment rate dropping by 0.5 percentage points a year.

Economists expect the Labor Department to report Friday the private and public sectors added a combined 230,000 net new jobs in November and that the unemployment rate held steady at a more-than-six-year-low of 5.8 percent.

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Gold climbed as oil prices increased and on signs of more physical purchases from Asia. Platinum and palladium rose.

Brent crude advanced for the second time in three days, as a rout to the lowest since 2009 prompted by OPEC’s failure to curb production faltered. Gold traders often track the cost of oil, which can impact consumer costs and inflation.

“Crude is more positive, which means gold should be supported,” Sin said today by phone. “Physical demand overall is quite robust. Bargain hunters will come in every time we see a dip.”

The Bloomberg Dollar Spot Index reached the highest since 2009 before data on Dec. 5 that may show American employers added more than 200,000 jobs for a 10th month, boosting the case for tighter US monetary policy.

“The expectation for the US economic recovery to continue, and the lower inflation outlook because of falling oil prices will keep precious metals under pressure,” Mark To, head of research at Wing Fung Financial Group, a trader and refiner in Hong Kong, wrote in a note. “Investors will keep an eye out for the US payroll report.”

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Asian equities rose on Tuesday, with a rebound in crude oil and other commodity prices favoring the stock markets of resource-exporting countries.

Crude oil held on to its gains after rebounding sharply overnight from five-year lows. The bounce in commodities including iron ore, copper and gold was also good for commodity currencies such as the Canadian and Australian dollars.

"Yesterday much of the move higher right across the entire commodity complex... suggests that there was a strong element of people increasing their allocation to commodities, taking advantage of these low prices," said Mark Keenan, head of commodities research Asia at Societe Generale.

The dollar was steady at 118.480 yen but then jumped to a seven-year high of 119.15.

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The UK's manufacturing sector continued to recover from its autumnal slowdown, with a closely-watched gauge beating expectations in November.

Although the UK's economic recovery has slowed somewhat recently, it remains one of the strongest stories among the major developed economies. Sterling's strength earlier this year has weighed on industry, but the currency's recent slide is another fillip.

Markit economist Rob Dobson wrote that despite the slower pace of expansion compared to earlier this year, “growth is still coming from a broad-base that will aid its sustainability".

The Eurozone’s manufacturing outlook is much glummer, with the manufacturing PMI for the common currency area dipping dangerously close to the 50 mark that signals the difference between contraction and expansion of activity last month.

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Oil prices extended their losses and sunk to fresh four-year lows on Thursday as expectations of a cut in OPEC oil production faded following the Saudi Arabian oil minister’s comments Wednesday.

The Organization of the Petroleum Exporting Countries meets in Vienna within a few hours to decide whether its members will cut production to remove some of the glut in supply in global markets and boost oil prices.

The 12-member oil cartel typically steps in to adjust output when prices move sharply due to excess or insufficient supply. It currently has an oil production ceiling of 30 million barrels a day and has been producing in excess of this level in recent months. Read: A brief, wondrous history of OPEC landmark events

Crude-oil prices have plummeted this year, losing almost 30% of their value since June, mainly due to rising US oil production driven by the shale boom and slowing demand growth in Asia and Europe.

Analysts say that OPEC will need to cut oil production much lower than its current ceiling for prices to make a significant recovery. Today’s OPEC meeting and any decision on production cuts is likely to set the tone for oil prices for the next few months and well into 2015. Read: We’re about to find out if OPEC’s cartel still has sway.

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