Europe: Your Rope

European officials simply cannot get out of their own way. They are their own worst enemy presently.

First assurances that a durable comprehensive solution would be forthcoming. Then lower expectations, with even reports suggesting that at this late date Germany could cancel the summit. More likely that they agree to some frame work now and the details at an emergency meeting next week, but ahead of the G20 summit in early Nov. No wonder tensions remain high and the Italian 10-year yield is back above 6%, a key psychological threshold.

There are all sorts of financial pressures and strains as the modern political economy is like a pressure cooker. Variable prices for money (open capital accounts, interest rate flexibility, floating exchange rates) helped release the pressure so that the real economy can be more stable.

The instability of the markets may be being aggravated by the fact that two potential release points have been taken out of play. The Swiss franc and yen previously absorbed the hot money. Now they are not. Nor is the currency of the world's second largest economy allowed to function as a release point.

Under communism, a large part of the world was taken out of the market economy. In some ways, though the reluctance to allow currencies to adjust as a consequence of investor choices, takes them out of the financial economy. And in so doing, may increase the pressure on those that remain. This general view appears to be gaining currency in Washington, perhaps ahead of next year's election.

Meanwhile, Fitch reports that US money market funds continued to reduce their holdings of European bank paper in Sept. Its survey found a 14% decline in such holdings among the ten largest money market funds with a combined $654 bln invested. European bank holdings were at 38% at the end Sept, the lowest since 2006. As the markets have suspected, French banks were hit the hardest, with their paper now accounting for 7% down from 11%. Canadian paper was the single biggest country exposure at 11%.

This comes at the same time that evidence for early Q4 suggest a good start in the US. The four week moving average of weekly initial jobless claims is at its lowest level for months. The Philly Fed survey, which played an important role in souring sentiment previously, was significantly stronger than expected in the Oct reading. The headline rose to 8.7 from -17.5 in Sept. The consensus had expected improvement to -9. The components were also good, new orders and unfilled orders turned positive and the positive gap between orders and inventories (-7.7) is a positive indication of future production.