After opening over 1% higher, S&P 500 e-mini futures plunged to close at their lows of the day (down 1.5%) amid the widest range day in six months. Volume was heavy after ES touched up to its 200DMA at the Sunday night open slide along with Europe's weakness, stabilized at Thursday's closing VWAP around the European close, only to dump in the afternoon (as financials, materials, and AAPL led the plunge). The major US financials lost 5-7% from their opening ticks of the day with Citi, BofA, and MS the worst performers (as AAPL ended -1.5% after being up over 1%). Gold back at $1600 (and Silver) rallied 0.4% (diverging from recent sync with stocks) even as USD strength kicked in - ending the day +0.17% (from a -0.85% low in early European trading). Oil meanwhile ended down over 3% (ending below $81.50) from up 3% in early trading on OPEC chatter and global growth concerns (and we assume correlated risk liquidation). Credit underperformed - leading stocks once again - with IG back to last Wednesday's wides (as cheap macro overlays were laid out). Stocks and HYG (the high-yield bond ETF) plunged into the close to catch up to HY credit. Treasury yields dropped, along with stocks, down 2-5bps from Friday's close, as the 7Y segment outperformed (but were down 11-13bps from their opening high yields). VIX saw a huge range day of around 3.6 vols as we closed back above 23.5% and implied correlation soared almost 6pts to 74.5 (biggest pop in 7.5 months). Realized cross-asset class correlation rose significantly and remained extremely high into the close implying very systemic market movement - which given the weakness after-hours seems worrisome.
The bailout bullishness half-life is shrinking - dramatically - as it appears traders have become more aware of reality (and unreality). As we have noted again and again, the self-referencing, self-aggrandizing, self-pleasuring European government and banking systems are becoming more and more symbiotically linked. As JPM CIO Cembalest notes for Spain, Plan A was the 2010 announcement of government austerity targets. Plan B was the 2011/2012 ECB lending program to Spanish banks - to the point where Spanish banks now own around 50% of Spanish government debt. Neither plan worked and so on to Plan C - recap Spanish banks to cover the expected losses forthcoming. Recapitalization of the banks versus funding the sovereign is of course a semantic issue given the nature of the interplay. As Credit Suisse noted this weekend... "Portugal cannot rescue Greece, Spain cannot rescue Portugal, Italy cannot rescue Spain (as is surely about to become all too abundantly clear), France cannot rescue Italy, but Germany can rescue France.” Or, the credit of the EFSF/ESM, if called upon to provide funds in large size, either calls upon the credit of Germany, or fails; i.e., it probably cannot fund, to the extent needed to save the credit of one (and probably imminently two) countries that had hitherto been considered 'too big so save', without joint and several guarantees."
On Friday afternoon Zero Hedge brought the world's attention to a press release from a little-known company, that virtually nobody caught, one issued by Canadian company called Fortress Paper, which announced that "its wholly-owned subsidiary, Landqart AG, a leading manufacturer of banknote and security papers, has had a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012." Our simple conclusion was that "if the chart of De La Rue is any indication of how banknote printers respond to potential European disintegration, it just may be that the best hedge to a VIX soaring to 80, aka "disorderly Grexit" as explained earlier by Citi, just may be TSX:FTP." Below is the chart of TSX:FTP since our 1pm on Friday. The stock is up 25% since our post, and roughly 48,586,180,011% annualized based on today's action alone. Not a bad hedge to a "disorderly Grexit."
For years some of us have been preaching that the so-called American Dream, if it once existed, was then appearing as nothing more than a myth. Ronald Reagan, touted as the great communicator, articulated this myth quite well making most everyone feel hopeful and proud, while at the same time spreading the most perverse moral disease that can confront any modern day society: the cult of inequality – an inevitable result from the infamous trickle-down economics and the homage to greed. And, for three decades, that’s what we have been living in the United States: a morbid growth in inequality either sponsored or condoned by the leadership in the White House, all following in Reagan’s footsteps: the two Bushes, father and son; Bill Clinton; and now, our fizzle-savior, Barack Obama. The truth is that Americans have been fed by both parties the Great American Lie, while at the same time being humored with the placebo of the American Dream.
In the context of the last 20 years of banking crises, the #Spailout would rank in the middle on the basis of cost relative to GDP. Despite all the talk of its size relative to some self-diagnosed capital needs, we wonder if EUR100bn is enough, and as JPMorgan's Michael Cembalest notes: given conditions in Spain, it might need to be higher. Other reservations include the implied subordination of government bondholders, since the EU presumably sees itself as a preferred lender to the Spanish government - which ha snow been pretty much confirmed by ISDA. Spain’s private sector is still in tough shape, so Spain may still have to opt for a sovereign rescue package in excess of EUR300 billion this year or next. In any case, this latest step does not otherwise change the cautious view the JPM CIO has on Spain given low growth, inter-regional capital flight and rising debt burdens across the Periphery.
And just as ISDA was starting to become somewhat credible again, we get this from Bloomberg:
- Spanish CDS Trigger Unlikely on Subordination, Says ISDA *Dow Jones
So..... Subordination? Thank you ISDA for confirming that the true reason of today's sell off has now been enacted.
Wait, this can't... Europe is imploding, the world economy is crashing, and the Spanish banking sector has failed, and the BBA is telling us that in over 3 months Libor has moved by at most... 3 bps, has actually been unchanged for weeks and weeks on end, and has been used by construction workers in the place of a spirit level?
While much was made of WWDC with wall-to-wall media carpeting of the event, it seems the sad reality of a new laptop with more memory and screen that needs it own Lasik Surgery procedure to read it is just not enough to support the AAPL share price. The exuberance over a cross above the 50DMA does not seem as celebrated as we cross back below it.
Where does the money for the bailouts come from? All the governments in Europe including Greece, Italy, and Spain.
And who is allowed to receive money from it? All the governments in Europe including Greece, Italy, and Spain.
How can that possibly work? It can't, but Europeans like bad ideas that sound nice!
How do you get "consensus" in politics? You horse-trade. You give everybody something they want. You cut everyone into the deal. That passes for "consensus" in politics: divide the swag. If you want to understand President Obama's failure as a leader, ask (as my friend G.F.B. did) where did he learn politics? In Chicago. Big-city politics boils down to getting the ward bosses, ethnic-neighborhood leaders, Chamber of Commerce and public unions together and making them all happy with concessions, give-aways or some other slice of swag so they all agree to to support some minor policy tweak of the Status Quo. Any constituency left out of the swag distribution squeals like a stuck pig and kills the "consensus." This "making sausage" consensus is passed off as "the only way to get anything passed," but the truth is that it's the politics of failure: nothing meaningful can possibly get done in the politics of "consensus" because 95% of any useful reform must be traded away to get everyone willingly on board.
When US equity futures, Treasury futures, and FX markets opened yesterday to a 'risk-on / reality-off' scenario, we made it clear that we suspected things would look very different by the European close. Sure enough, the markets in Europe (and US) have seen a dramatic shift in sentiment as the realization of the end-game here grows louder. It is evident that any strength, any rip, is to be sold. EURUSD rallied 1.2% at its best near the open last night but is ending 0.2% lower from Friday's close. Europe's broad equity market is closing modestly red after being up almost 2% at the open. Europe's financial credits led the equity market once again as senior spreads swung from a 20bps rally to a 10bps sell-off by the close. Italy was crushed after opened up over 4% to close down over 2.75% as Italian banks were halted all the way down. Spanish banks gave back all their gains (SAN was up almost 6% at the open and closed red). Investment grade credit notably underperformed and high-beta XOver swung from a 35bps tightening to close modestly wider. European sovereign bond spreads all opened notably tighter but were crushed by the close with Spain and Italy underperforming (+60bps and +50bps from their intraday low spreads respectively). Quite simply, Europe has swung from Spanish bailout fantasy to Europe's contagious panic reasserting - and that was after a weekend when Spain (and Spanish banks and every bullish trader out there) got everything they wanted. It would appear that the investing public has become better-educated at what is really going on in Europe and how these interim 'solutions' are all to be faded as Franco-German relations remain tense and Germany stoic. In liquidity/safety land, Swiss 2Y rates plunged 7bps to a new record -35.3bps.
Here we go:
- EU SOURCES HAVE DISCUSSED IMPOSING CAPITAL CONTROLS AS WORST CASE SCENARIO IF GREECE LEAVES EUROZONE - RTRS
- IMPOSING BORDER CHECKS, LIMITING ATM WITHDRAWALS ALSO PART OF WORST-CASE SCENARIO PLANNING - EU SOURCES - RTRS
- SUSPENSION OF SCHENGEN ALSO DISCUSSED
In other words, that money you thought you had... You don't really have it. We can only hope this message was not meant to restore confidence and prevent future bank runs. Because if Europe wanted a continental bank run, it may have just gotten one.
This is getting scary very fast.
As if the news and rumor in Europe already was not enough, it seems we have a new candidate for full-retard-of-the-week. Greece's neo-nazi Golden Dawn party MP Ilia Kasidiaris (of woman-punching and water-throwing fame) has filed suit against the victims of his tirade and the TV station. Mind-blowingly, as reported by News.It, his suit claims that Antenna TV, which hosted the program, attempted "to hold him against his wishes and journalist Antonis Delatolas of abuse of power". As ekathermini notes, "Kasidiaris issued a statement over the weekend saying the incident had been staged with the aim of making him and Golden Dawn look bad." We can only assume that the next suit will be filed against Liana Kanelli's cheek for hitting his fist 3 times...