Must watch two part BBC series recapping recent events from the perspective of the other side of the pond, including some much needed "on location" reporting (as opposed to persistent theorizing of "what may happen"). The first part provides the background on the currency crisis and how hedge funds are profiting from shorting the euro. As a commentator points out, the dilemma is moral hazard or austerity measures. And while countries certainly prefer the former, sovereign bond and currency vigilantes are making the second the only viable outcome. The second part is a great exchange between Nobelist Stiglitz and the ever outspoken, and conversation dominating, Hugh Hendry.
If you have been wondering what is the real reason for the recent upswing in the US dollar, read on. I am very bullish on its future rise. This report follows our early December comments, which were appropriately called “The carry trade now in trouble.” Very clearly, we stated, “The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends.” My recent enthusiasm is largely based on evidence gathered since 2007 of the loss of velocity in money aggregates. In other words, the money base is contracting or slowing down its expansion phase.
As just stated, the action of the last four trading days presents a few challenges. One scenario suggests that the rescue rally runs out of steam today or tomorrow. It then could reverse sharply to the downside, retesting or penetrating Friday’s intra-day lows.
A second scenario suggests that the rally hangs on, consolidating as it again tests the 1105/1110 area. There are also a variety of chart patterns that may be forming. The S&P looks to have a budding head and shoulders showing up on the napkins. Robert McHugh sees a potentially ominous wedge topping formation in the S&P. For today, the napkins suggest resistance in the S&P sits at 1083/1088 and then 1094/1099. Support looks like 1058/1063." - Art Cashin
As expected, following earlier protestation by the Greek finance ministry, Erik Nielsen recants (but not entirely). After all, who knows what else the Greek FinMin can disclose about GS swaps and other "financial innovation" exports, should this devolve to a full blown mudslinging competition.
Here we are, 2½ years into the global credit crunch and investors are still salivating over bailout prospects — the chatter is that the troubled European countries, Greece in particular, is on the precipice of receiving such a package, primarily, it seems, in the form of German loan guarantees. So, what we see today is Greek bond yields plunging and German bund yields on the rise. Great deal for the German taxpayer, don’t you think? Maybe it should be the Deutschland that plans an exit strategy (Martin Wolf’s column in today’s FT, and its dire conclusion, is worth reading — “a currency union whose core country not only exports deflation but also stands aside as members collapse is in deep trouble”). Investors seem to be believe that such a lifeline is being made available because the cost of insuring Greek bonds against default (CDS spreads) have collapsed 36bps, to 343bps (and down 15bps for Portugal, to 189bps since one bailout will most certainly beget another — this is a classic example of PIGS (Portugal, Ireland, Greece, and Spain) lining up at the trough). - David Rosenberg
Portugal Prices €3 Billion 10 Year Bond At 99.841, 4.823% Yield, 140 bps Over Swaps, 163.7 bps Over 2020 BundSubmitted by Tyler Durden on 02/10/2010 - 12:18
Portugal has managed to price the much anticipated €3 billion 10 Year bond.
- Price: 99.841
- Yield: 4.823%
- Coupon 4.80%
- 140 bps over Swaps
- 163.7 bps over 10 Year Bund
- Ratings Aa2/A+ (ha ha ha ha)
As we have been discussing the Bund seems close to a medium term top to us. We tested the resistance of the daily channel Friday afternoon, the slow stochastic has now validated the break, and we have a potential H&S pattern in progress here, with the top of the second shoulder around 123.50/60. We would be sellers here, adding to shorts if we break on a break of 123/122.95.
Goldman is not making any friends today (to be expected - Greece likely does not need Goldman's creative swap accounting anymore - after all, they (Greece, not Goldman) are bankrupt right? Why else would they need a bailout). Earlier we first reported about Goldman's novel read of the "revised" Greek budget. It appears Greece is not too happy with this and is already blaming Goldman for data misinterpretation. We await Erik Nielsen's mea culpa.
"Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority. The President of the Council shall inform the European Parliament of the decision taken." - Maastricht Treaty, Article 103(a)2
Confusion reigns day 2, only this time add a pinch of political dissent. Germany's ruling coalition of the Free Democratic Party and the Christian Democratic Union has commissioned a parliamentary report which concludes that "member states may not guarantee the debts of another member state" reports daily Handelsblatt.
For all Commodore 64 HFT setups expecting an imminent relief rally following a formal Greek bailout announcement, you may have to wait at least two more days. Dow Jones reports that a German official has said that finance ministers meeting this afternoon are "unlikely to make any decision and there is no aid for Greece on the agenda of Thursday's summit of EU leaders." Furthermore, "There doesn't exist any decision on such aid and it also isn't pending at present". Additional data points to the shape of the bailout: it appears a guarantee is the only, if any, way to go, after a source noted that a "refinancing of debt is not in Greek interest, as it would be seen as a default." With €3 billion in ten year notes set for auction by Portugal, we could be in for a very volatile day. The Portuguese 10 year Bund spread is currently 11 tighter to 137 bps.
More as we get it.
Goldman's Erik Nielsen lands the bombshell that the Greek deficit mysteriously increased from €29.4 billion to a shopping €37.9 (keep in mind, this is not Bernanke notation where only quad- prefixes impress people at this point). This increases the (running) 2009 budget deficit from 12.2% to 16%! While certainly not the last time we hear of "prior revisions", the question of just how patient Germany will be, should this number approach, oh say, 50% once the artificial support of various Goldman swaps expires (and at 50% the BSDs like Goldman will surely round up to 100%), is very much open.
- China's exports jump 21% as imports gain 86% in January, Government says.
- Fed to reveal its strategy for raising interest rates.
- Germany along with EU plans to offer Greece, other members loan guarantees.
- Japanese core machinery orders increased 20.1% in Dec, much better than expected.
- Oil drops to near $73 in Asia after report shows US crude supplies jumped last week.
- Stocks, commodities, Korean Won rise on speculation of Greek aid, China's growth.