From: US GIO czi To: Undisclosed recipients:; Subject: J.P. Morgan Eye on the Market: European Central Bonanza Date: Mon, 05 Dec 2011 14:57:20 +0000 Attachments: 12-05-11_ EOTM - European_Central Bonanza.pdf Inline-Images: image010.png; image012.png; image013.jpg; image014.png; image015.png; image017.png; image018.png Eye on the Market, December 5, 2011 (attached PDF easier to read) Topics: Fig leaves preceding the ECB bonanza, better US data, and the US residential housing outlook (still flat/down) This will be brief, since there's only so much we will know before the EU summit on December 9th. As shown in the first chart, Europe needs an alternative to traditional debt markets before Q1 2012, when Italy's sovereign borrowing needs jump from 70 billion to 120 billion. Even with lower issuance in Q4 and ECB purchases, Italian yields rose anyway. Let's not waste time wondering about multiple outcomes, and cut to the chase. In all probability, the EU summit will result in ambiguous, unenforceable commitments to lower deficits and debt levels, which countries involved may or may not adhere to, making Maastricht 2.0 not that different from Maastricht 1.0. However, the ECB (headed by Italian Mario Draghi) is likely to greet summit pronouncements as if they were a combination of the Magna Carta and the Declaration of the Rights of Man, and proclaim that the era of European fiscal integration and soundness is upon us. After doing so, one can easily envision the ECB increasing purchases of Peripheral sovereign debt, and/or lending a few hundred billion [a] to the IMF (still run by Europe/France despite claims of neo-colonialism by China), so the IMF can support Italy and Spain. Financial markets would probably like debt monetization by the ECB, as it avoids for now all the unpleasantness of having sovereign debt markets clear at levels based only on private sector demand. Takeaway #1: don't sell your gold here. Italian sovereign debt maturities and 10-