British Prime Minister David Cameron promised if he wins the next election, an In-Out referendum within five years on membership of the EU!!

Marooned

British Prime Minister David Cameron promised if he wins the next election, an In-Out referendum within five years on membership of the European Union. He said, “It is time for the British people to have their say. It is time to settle this European question in British politics…….I say to the British people, this will be your decision. And when that choice comes, you will have an important choice to make about our country’s destiny…..I know there will be those who say the vision I have outlined will be impossible to achieve. That there is no way our partners will cooperate. That the British people have set themselves on a path to inevitable exit, and that if we aren’t comfortable being in the E.U. after 40 years, we never will be. But I refuse to take such a defeatist attitude, either for Britain or for Europe…..When the referendum comes I will campaign for it with all my heart and soul……I never want us to haul up the drawbridge and retreat from the world….I am not an isolationist……We have the character of an island nation, independent, forthright, passionate in defence of our sovereignty. We can no more change this sensibility than drain the English Channel….“The biggest danger to the European Union comes not from those who advocate change but from those who denounce new thinking as heresy….And my point is this,  more of the same will not secure a long-term future for the euro zone. More of the same will not see the European Union keeping pace with the new powerhouse economies. More of the same will not bring the European Union any closer to its citizens.”

Mr. Cameron’s speech will further inflame tensions with his European colleagues, German Foreign Minister Guido Westerwelle recently said, “Germany wants the United Kingdom to remain an active and constructive part of the European Union. But cherry picking is not an option.” In a sporting analogy French Foreign Minister Laurent Fabius previously said, “You cannot do Europe à la carte….Imagine the E.U. was a soccer club: once you’ve joined up and you’re in this club, you can’t then say you want to play rugby.” Last week, a White House spokesman quoted President Obama as telling Mr. Cameron by telephone that, “The United States values a strong U.K. in a strong European Union, which makes critical contributions to peace, prosperity and security in Europe and around the world.”

Mr Cameron’s pro-European, Liberal Democratic coalition partner Mr Clegg, vented his distain with Mr Cameron’s speech saying, "We should always be governed by what’s in the national interest, and my view is that years and years of uncertainty because of a protracted, ill-defined renegotiation of our place in Europe is not in the national interest because it hits growth and jobs….It’s entirely for the Prime Minister as leader of the Conservative Party to set out what he wants to put in the Conservative Party manifesto and what he wants to do if there was a Conservative majority government…..My priority remains, and will always remain, yes, reform in Europe, yes, a referendum where the circumstances are right, as we’ve set out in law, but above and beyond anything else, promoting growth and jobs and building a stronger economy in a fairer society."

Lord Mandelson, the former Labour minister and EU trade commissioner said, "I think that many people, including many people in Brussels…will regard this speech as much more unvarnished, much more unqualified than they were expecting, but also unworkable…..(I) think other member states will not negotiate such a new settlement as the special state for Britain within the European Union. I don't think they will provide a new treaty to accommodate Britain's demands and I don't think they will agree a timetable for negotiation that suits Britain's needs. David Cameron will be left rather like a man without a plan."

Rebuked

In a public rebuke of his successor Mark Carney, Bank of England Governor Mr King last night in Belfast defended BoE policy since the crisis started, and the UK's inflation targeting regime. He argued that the BoE has played its part in supporting growth by implementing a powerful combination of medicines, he continued on to say that relying on generalised monetary stimulus alone is not a panacea. He argued instead for the implementation of supply-side reforms and suggested that UK banks may require further capital. Mervyn King said that credit conditions have improved, and “should improve further as the impact of the FLS kicks in……We could provide even more monetary stimulus through further asset purchases…..We will continue to assess the benefits and costs of further reductions in overnight interest rates. Be in no doubt that we are ready to provide more stimulus if it is needed.”

The UK’s Monetary Policy Committee released the minutes of its most recent meeting, it voted 9-0 to keep rates unchanged and 8-1 to maintain the total level of QE at £375bn. The committee highlighted the pound’s strength may prove a hindrance to the rebalancing of the British economy. The committee said, “Substantial headwinds to recovery remained, including the drag to activity from fiscal consolidation, a further squeeze in household real incomes, and the deterioration in U.K. competitiveness over the past couple of years….The sterling real exchange rate might be above the level compatible with the necessary rebalancing of the economy.” Miles Davies requested the expansion of QE by £25bn. The MPC continued on to say, “Tensions associated with the imbalances within the euro area appear to have eased further,…. Developments had contributed to better financial market sentiment and generally higher asset prices…(Developments)…had not substantially altered the balance of risks associated with maintaining and increasing the size of the monetary stimulus, they had strengthened the belief of some of these members that no further asset purchases were required at the current juncture….There was a risk that the prospect of continued above-target inflation could result in an erosion of credibility in the monetary policy framework which could affect wage and price- setting behaviour.”

Mr King received some good news as British benefit claims data dropping by 12k to 1.56m, this is the lowest level in over eighteen months. The International Labour Organization (ILO) also released its unemployment measure for the UK, showing it unexpectedly dropping to 7.7% from 7.8% in the three months to November, the lowest since April 2011.

The issuance calendar was again relatively active, most importantly Portugal tapped its 10/17 issue (MS +395), ahead of the results of the auction, the benchmark 5y yield was off 7bp. Madrid sold €1bn 5y (SPGB +190). Further issuance included Toyota launching a €1bn 4.5y (MS +35) and a €750m 10y (MS +65). Unicredit issued €500m 5y (MS +163), CBA €600m 6y (MS +55), Veneto €400m 2.5y (MS +350), Terra Boligkreditt €1bn 10y (MS +43), NRW €1.25bn 3.5y (MS -8) and Deutsche Pfandbriefbank €500m 4y (MS +8). The EIB also issued £500m 6y (MS +36).

Guaranteed Weight Loss Program for Financial Professionals

A guy calls a slimming company and orders their 5 day - 5kg weight loss program. The next day, there's a knock on the door and standing before him a voluptuous, athletic, 21 year old babe dressed in nothing but a G-string and a pair of Nike running shoes and a sign around her neck. The sign reads, 'If you can catch me, you can have me.' Without a second thought, he takes off after her. A few miles later, huffing and puffing, he finally gives up. The same girl shows up the next four days and the same thing happens. On the fifth day, he weighs himself and is delighted to find he has lost 5kgs as promised.

He calls the company and orders their 5day - 10kg program. The next day there's a knock at the door and standing before him is the most stunning, beautiful, sexy woman he has ever seen in his life. She is wearing nothing but Reebok running shoes , a G-string and a sign around her neck that reads, 'If you catch me, you can have me'. Well, he's out the door after her like a shot. This girl is in excellent shape and despite his best efforts, there was no such luck. So for the next four days, the same routine happens with him gradually getting in better shape. Much to his delight, on the fifth day when he weighs himself, he discovers that he has lost another 10kgs, as promised.

He decides to go for broke and calls the company to order their 7 day - 25kg program. 'Are you sure?' asks the representative on the phone. 'This is our most rigorous program.'

'Absolutely,' he replies, 'I haven't felt this good in years.' The next day there's a knock at the door and when he opens it he finds a huge muscular guy standing there wearing nothing but pink running shoes, a G-String and a sign around his neck that reads, 'If I catch you, you're mine.' He lost 31kgs that week.

Let's Run, Baby!

Jack Lew’s signature (no joke)

No really data or news again today.  Obama has nominated a new treasury secretary, who’s graceful signature looks like the picture I’ve attached below.  You’ll see that on every piece of US currency for the next 4 years.

Jack Lew’s signature (no joke):

Mervyn King on Liquidity Coverage Ratio (LCR)

Mervyn King chaired the Governors and Heads of Supervision (GHOS) group, the committee of top regulators and central bankers agreed to delay the full implementation of the Basel Liquidity Coverage Ratio (LCR).  The Basel committee members believed at the end of 2011 banks had a €1.8trn liquidity shortfall. Under yesterday’s deal, banks would only have to meet 60 percent of the LCR obligations by 2015, and the full rule would be phased in annually through 2019. The LCR was created under Basel III, with the intention of preparing banks for the possibility of a 30 day funding crisis in the future.

The pool of assets that can be submitted to meet LCR has also been broadened quite dramatically. The additional securities types will get larger haircuts than currently applies and they will only be accepted for up to 15% of the total. Under the 2010 plan, banks would have been allowed to use cash and government bonds to meet the LCR, subject to the quality of the sovereign debt, lenders could also have used highly-rated corporate debt or covered bonds to meet 40 percent of their LCR requirements. The new agreement extends the range, allowing some lower rated securities to count, including some equities and highly rated residential mortgage-backed securities.

Mervyn King said, "Nobody set out to make it stronger or weaker…..but to make it more realistic….This was a compromise between competing views from around the world…. For the first time in regulatory history we have a truly global minimum standard for bank liquidity…… The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery…. It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard……The committee and the regulatory community more generally felt it was appropriate to broaden the class of liquid assets…..That doesn’t mean to say it’s a loosening of the whole regime…. It became clear during the process of discussing all this that it didn’t make sense really to think about an LCR without having a clear view about what to make of access to central bank facilities.”

Fiscal Cliff Dive

The US fiscal cliff compromise reduces the fiscal drag in 2013 by about 0.1%, this is due to a smaller tax increase and more generous unemployment benefit extension. The Senate voted 89-8 whilst the House of Representatives voted 257-167. Top tax rate increased from 35% to 39.6% for individual income over $400k and couples over $450k, with tax deductions reducing over $250k. Unemployment insurance was extended by one year at a cost of $30bn. Estate taxes will increase from 35% to 40% for estates over $5m

The burden of higher taxes will fall hardest on the top 1 percent and particularly on the top 0.1% of taxpayers. Those making more than $2.7 million will pay an average of $444k more in 2013, or 26% of the additional burden, according to the Tax Policy Centre. Households with income between $500,000 and $1 million will pay an average of $15k more.

The U.S. hit the debt limit Dec. 31 and the Treasury Department began employing so-called extraordinary measures to finance about $200 billion in deficits in 2013. A debt limit increase will be needed as early as mid-February, according to the Congressional Budget Office, and the automatic spending cuts will start taking effect March 1.

There was a raft of Manufacturing PMI data from Europe, with Euro wide printing 46.1 (exp 46.3, prev 46.3), German 46.0 (exp 46.3, prev 46.3), Italian 46.7 (exp 45.3, prev 45.1), French 44.6 (exp 44.6, prev 46) and Danish 57.0 (prev 56.6). EU YoY Harmonised CPI rose to 2.1% (exp 1.9%, prev 1.9%).

Germany sold €4.15bn two-year notes with a positive yield for the first time since October, with an average yield of 0.01%. That contrast with- 0.01% at a previous auction on Dec 5^th, receiving €6.24bn of bids, it expected to sell €5bn. The two-year yield rose four basis points to 0.02%. German regional CPI’s also upticked, with Saxony YoY 2.2% (prev 2.0%), Brandenburg YoY 1.9% (prev 1.5%), North Rhine Westphalia YoY 2.1% (prev 1.9%), Baden Wuerttemberg YoY 1.9% (prev 1.5%) and Bavaria YoY 2.2% (prev 2.1%).

Markit Economics and the Chartered Institute of Purchasing and Supply said in London today that U.K. manufacturing for December surprisingly grew at the fastest pace in 15 months, to 51.4 (exp 49.1) from a revised 49.2 for November, as domestic demand strengthened. One caveat Markit noted was that companies remained cautious and reluctant to hire. Markit economist Rob Dobson said, “There are increasing signs of firms starting to move out of this cost-cutting mode, though it is clear that the outlook remains far from certain…..Business confidence among producers therefore remains fragile and could easily be derailed.” Manufacturing employment fell for an eighth month, input costs increased the most in nine months and output price rose the most in eight months.

The market took the fiscal cliff news very well with a strong risk on tone to trading. Equities across the world ended the day higher, peripheral bonds rallied against the aggressive sell off in US, UK and German sovereign debt, leading to significant spread tightening by London close. E.g. Germany/Spain 2y -50bps, Germany/Portugal 10y -57bps, Germany/Greece 10y -31bps, even Germany/Italy 5y -34bps.