Dexia passed summer bank stress tests with flying colors. A couple of months later it’s going bust. How can markets function without confidence in balance sheet accuracy? Or whether a government will even be around tomorrow? This is kind of a problem when sovereign debt is the cornerstone of the financial system… And yet, stock markets worldwide surged today on the news of a European ‘pledge’ to help banks. Do yourself a favor and stop watching their lips move. These ‘plans’ are nothing more than lies and misdirection. Just like our friend George, a Greek default has to happen. Politicians can pretend whatever they want, but in the real world where we live, financial deadbeats have no other options.
Today, all is good in Europe... Except for the festering wound at the center of the contagion of course. It appears someone forgot to tell Greece all is well - it must be that Columbus day holiday or something.
Three weeks ago we pointed out that the massive rout in the EUR is approaching its end courtesy of a huge aggregation of net short positions, leading us to conclude it was massively oversold, if only on a short-term technical basis. Since then, continued lack of organization, and a reliance on hope, and lies out of Europe, continues to pummel the EUR, and to bring ever more shorts into a trade that is now ridiculously overcrowded. Sure enough, today, with its 300+ pip move higher in the EURUSD, may be the day when the shorting has finally snapped. As can be seen on the chart below, the divergence between net non-commercial bias in the EUR and the USD has reached historic proportions. And as often happens in markets, this kind of rapid disconnect never works out too well. Expect to see even more compression in the net spread between EUR bearishness and USD bullishness, regardless of newsflow, as the vicious cycle of specs piling on other specs has now been snapped, and the short covering rally has taken on a life of its own, at least until the next mega failure in Europe materializes within a few days.
To anyone still believing that capital markets around the world express something other than government policy, the latest news out of China may come as a surprise: "Beijing will buy more shares in China’s biggest banks, in an expression of support for the beleaguered stock market and most concrete state action to date to shore up confidence in the slowing economy." The FT reports further: "Central Huijin, the domestic arm of China’s sovereign wealth fund, will buy the shares to help stabilise the pillars of the country’s financial system, the official Xinhua news agency said on Monday. Coming as the Chinese stock market closed at a 30-month low, the move was the strongest sign that Beijing wants to engineer a restoration of confidence in share prices and the economy. It paid instant dividends with a rally in the final minutes of trading on Monday." And there you have it: stocks are now nothing more than a means for governments to validate their "success" in something, since they have no more control left over either employment or inflation, or public expression of affection with capitalism as per #OWS. So why not ramp up the DJIA to 36,000? Granted that will happen as all global currencies get terminally davalued against gold, but so what - after all that only thing that matters now is whose stock market is the biggest.
Just when we thought the most ridiculous thing one could expect from the market was another "all shall be well" rumor from Merkozy (with details pending of course), and the algos naturally falling for it in what is set to be a record low volume session, here comes Italy and shows just how horribly wrong we were. From Bloomberg: "Italian Prime Minister Silvio Berlusconi's Undersecretary Carlo Giovanardi said the government will study if it's feasible to conduct drug tests on stock-exchange traders, with the help of the Milan Bourse and the country's market regulator. Giovanardi, who is in charge of family policy and drug prevention, said that the abuse of drugs including cocaine might explain part of recent stock volatility." And there you have it: cut out the Cocaine abuse by traders and all shall be well in the stock market, and retail will be delighted to flood right back in and throw what little money it has left into the grand global ponzi. We are not quite sure what binary stimulant will be used to explain the HFT-driven volatility - after all, and especially on days like today, about 80% of market volume is purely robotic, but we are confident Carlo will figure something out. And that, ladies and gentlemen, is how you deflect attention from market volatility as a byproduct of being a hooker-addicted pederast who blew up a country's economy.
So today, MAIN and SOVX, European CDS indices waited for US stocks to open before moving to their tightest levels on the day. So in a completely bizarro world, the markets that are most directly affected by this weekends statements and actions have a muted reaction, until the US stock market, with market least directly affected, opens with a bang. Maybe it makes sense, but the correlations seem all wrong. More likely, US stocks are just the happiest place out there and some investors who short the SPX into the close on Friday with all the negative headlines are being forced out, and have decided to sell some CDS indices in addition to covering shorts in stocks.
Who would have thought it possible? Greece, a tiny country on the Mediterranean which is, in the grand scheme of things, economically insignificant, has become the centerpiece of the global financial media and the “make or break” sovereign debt battle for the entire European Union. Let’s face it; Greece dominates the psychology of the markets. Even after a “partial” default this year, equities still hang upon every new EU meeting, every new IMF press release, every meaningless conference between Merkel and Sarkozy, causes violent swings in the Dow, not to mention every other stock index across the world. Greece collapsed months ago. The discussion is over. Yet, global investors still wait anxiously for a sign that all is well in the land of the Parthenon and the Gyro.
With the zEURQ.BB surging, it appears nothing can possibly rain on Europe's parade today. Nothing, perhaps, except for the poorest country in the Eurozone, Slovakia, which as we detailed over the weekend appears poised to destroy the Eurozone, the Euro, and force a fresh restart, one that actually works. As Reuters reports, "Slovakian coalition leaders meet on Monday in a last-ditch bid to reach agreement on widening the mandate of the euro zone's bailout fund, under increasing pressure from turmoil in euro zone banks and a shift in public opinion at home. The small liberal Freedom and Solidarity (SaS) party argues that, as the zone's second poorest member, Slovakia should not have to bail out other euro zone countries, but it says it is still open to talks. The coalition parties called a meeting for 4 p.m. (1400 GMT) ahead of a vote on the EFSF in parliament on Tuesday, a spokesman for the SaS said. The party has so far said it will vote against the EFSF expansion." Alas, that was 4 hours ago. We just got an update from Bloomberg: Slovak SAS Party Says Won’t Change Position on EFSF. It may be time to book those EURUSD profits and sit it out for the rest of the day as it can get quite messy.
Three things in life are certain: death, taxes, and political theater in Washington. Goldman summarizes: A holiday today, but a busy week starting tomorrow with passage of currency legislation, consideration and likely passage of bilateral trade deals, consideration of the President's jobs legislation, the proposed Volcker Rule, and continued private meetings of the fiscal "super committee" (no public meetings scheduled yet for this week).
As expected from any company that gets Bear Stearns'd (as we had predicted regarding said Bear Stearnsing), even as the CDS is now rapidly on its way to pari status with Belgium (and potentially could trade inside due to the implicit French support of the now insolvent bank), the stock, after two days of halts, has reopened with a "slightly bearish" bias, down 30% and plunging. Considering that there is no more common equity value left in the name, the stock will rapidly become an HFT whipping boy, and a penny-stock darling. For reference see FNM/FRE after their respectively nationalization (which sent the market soaring when it was announced back in August 2008... briefly).
After another weekend on headlines coming out of Europe stock futures are up nicely and credit, while better, isn’t performing quite as well and sovereign debt yields are up across the board. After a quick glance at the credit markets and the headlines, it seems once again that equities have gotten ahead of themselves.
The epic case study of unprecedented corporate suicide just keeps getting better and better. In the meantime, the biggest loser is the Twitter account of the squatter @Qwikster who should have sold while he could.
- Belgium to Buy Dexia’s Consumer Unit for $5.4B (Bloomberg)
- New $1.4 Trillion U.S. Stimulus Is in Sight: Douglas Holtz-Eakin (Bloomberg)
- Banks to be forced to boost liquid assets (FT)
- Trichet Reminds U.S. Euro Built to Last (Bloomberg)
- White House Aims to Lure More Foreign Investment (WSJ)
- Fannie and Freddie debt fuels anxiety (FT)
- Merkel and Sarkozy set euro deadline (FT)
- ‘Time short’ for eurozone, says Cameron (FT)
- Former PBOC Adviser: China To Continue Tight Monetary Policy (WSJ)
- Risk-appetite gathered pace during the European session after Germany and France demonstrated a united front in tackling the ongoing Eurozone crisis. Meanwhile, Russia said that it may help the EU and Spain with the debt crisis, and is ready in principle to buy the Spanish government debt
- S&P affirmed France's ratings at AAA, with a stable outlook, and affirmed Belgium's ratings at AA+, with a negative outlook
- Slovak government party SAS turned down a compromise offer from coalition partners on the EFSF ratification, however the Slovak Parliamentary Budget Committee recommended the EFSF approval
- Weakness in the USD-Index provided support to EUR/USD and GBP/USD
- The governments of Belgium and France agreed to nationalise the Belgian subsidiary of Dexia