QE3 - Starts the Risk Off Trade

While we have yet to see the actual report, almost certainly emanating from Jon Hilsenrath, it appears that the QE3 rumormill has started, initially with speculation that the Fed's activity will be merely "sterilized" or more Twist-type purchases, unclear however if in TSYs or also in MBS. Via the WSJ:
Fed Officials consider "sterilized" option for Future bond buying
Operation Twist Reprise, QE Other Options For Fed Bond
Still Unclear Whether Fed Will Launch Another Bond-Buy
As a reminder, yesterday we said that according to the EURUSD, the implied market expectation is for a $750 billion QE. However, that is for sterilizied balance sheet expansion. If the Fed goes ahead and does not grow its balance sheet, it may well be EURUSD, and thus risk, negative, as no new money will be available for actual speculation. Which perhaps is precise ly what the Fed is planning, as every incremental dollar now goes into Crude first, and everything else later. In other words: this is a very big risk off indicator as no new money will be availble to pump up stocks!

Insolvency stupid...

Insolvency will keep dragging the Euro-Area economy down until sovereign and bank balance sheets are repaired, but as Lombard Street Research points out: eliminating the Ponzi debt without fracturing the entire credit system is impossible. The Lehman default occurred 13 months after the US TED spread crossed 100 basis points. The European equivalent crossed 100 basis points in September 2011, so its banking crisis would occur this autumn if a year or so is a normal incubation period. A Greek or any other significant default will precipitate a European banking crisis in the foreseeable future. Markets are already speculating on Portuguese negotiations for haircuts and Ireland can’t be far behind and the contagion to US (and global) banking systems is inevitable given counterparty risks, debt loads (and refi needs), and capital requirements (no matter how well hidden by MtM math). The contagion will likely show up as a risk premium in the credit markets initially as we suggest the recent underperformance of both US and European bank credit relative to stocks is a canary to keep an eye on.