You know the something is really, really wrong when the best rapper is a white guy, the best golfer is a black guy, the tallest guy in the NBA is Chinese, the Swiss hold the America's Cup, the Pope is German, Europe's central banker is Italian, France is accusing the U.S. of arrogance and Germany doesn't want to go to war.
Risk-averse sentiment dominated the session yet again as market participants continued to focus on Spain and speculated whether the country will soon be forced to seek some sort of monetary assistance. As a result, credit markets continued to deteriorate, with the EURUSD cross-currency basis-swaps under pressure, while the spread between Spanish and German benchmark bonds widened to a fresh Euro-era wide level. Less than impressive demand for the latest Italian debt issuance where 2017 was underbid by EUR 0.20, while the 2022 issue was underbid by EUR 0.30 also resulted in aggressive bond yield spread widening. However, as we head into the North American open, reports that the EU is willing to envisage direct ESM bank recapitalizations saw Bunds spike lower by around 33ticks and EUR/USD by 44pips to the upside. EU stocks made an impressive recovery, but remain in negative territory. Going forward, the second half of the session will see the release of latest housing data (pending home sales), as well as the weekly API report.
- Finally, even the NYT gets it: Most Aid to Athens Circles Back to Europe (NYT)... compare to ZH from February
- It took less than 2 weeks: Zuckerberg Drops Off Billionaires Index as Facebook Falls (Bloomberg)
- Morgan Stanley derivatives switch hits hold-up (FT)... MS prevented from having non-existant deposits backsto $52 trillion in derivatives
- Solyndra goes global: Spain Ejects Clean-Power Industry With Europe Precedent (Bloomberg)
- Investors may be stoking the volatility they fear (Reuters)... Zombie Catch 22
- Facebook shares plumb new depths, valuation questioned (Reuters) shouldnt this have been questioned before?
- Italian auction reinforces eurozone woes (FT)
- Visa Beats JPMorgan as Cards Wage War on Cash (Bloomberg)
- Sweden Escapes Recession as Growth Returned in First Quarter (Bloomberg)
Moving away from baseless (or is that faceless?) European bailout rumors, and moving into cold hard math territory, we hear from JPM's David Mackie that "If a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." This may be a problem since as pointed out on Tuesday, the Spanish Fund for Orderly Bank Restructuring (FROB) is down to... €5.3 billion.
Update: sure enough "EU says accommodative ECB has little scope for more stimulus"
In a headline that is far less than meets the eye, we read the following:
- EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS
- EURO ZONE SHOULD MOVE TOWARDS BANKING UNION
As a reminder, this is the EU... not the ECB... and not Germany. The same EU which has for a while now been pushing for Germany to foot the bill. The same EU which without Germany's funding agreement, is a faceless zombie. Recall yesterday's Reuters story that made the rounds: EU proposes cross-border bank rescues. and which as Reuters admitted is "likely to upset some members, particularly Germany." Same here. As expected the record number of EUR shorts send the currency into the sky, but we expect it to come right back down once it is understood that Germany has yet to say anything on this plan.
... Which is not to say that the other usual suspects are fine, they aren't: Spain's 10 year just hit a record 6.72%, a spike of nearly 30 bps on the day, and just shy of the apocalyptic 7.00%, at which point everyone will quietly move to the bomb shelter (and JPM is not helping things, saying the total Spanish bank bailout may hit €350 billion even as the Spanish bailout fund has just €4 billion left in it...), even as the 2 Year rises above 5% for the first time since December 2011 on some rapid curve inversion moves. No: today the market simply had one of those epiphanies where it sat in front of a map, and finally remembered that last year as part of the continental contagion spread that forced the November 30 coordinated global central bank intervention, Italy was at the forefront. Sure enough, 2011 is once again becoming 2012. Today's catalyst was an Italian sale of €5.73 billion in 5 and 10 year bonds, less than the maximum €6.25, where €3.391 billion of the 5 Year was sold at a 5.66% yield, compared to 4.86% on April 27, and the BTC of 1.35 vs 1.34. But the optical killer was the €2.341 billion in 10 Years which priced above 6% for the first time in a long while, coming at 6.03% compared to 5.84% in April, and a dropping BTC of 1.40 compared to 1.48 before. The result is a blow out in the entire Italian curve, with the 10 Year point widening by 28 bps, and sending Italian CDS wider by 21 bps to 543 bps. In other words: welcome to the party Italy. You have been missed.
With so many countries vying for the dubious honor of “Sick man of Europe,” ConvergEx's Nic Colas looks at some of the academic literature related to how doctors make sound diagnostic decisions. The medical profession suffers from many of the challenges we all face in making sound judgments, fighting off inherent biases and shortcuts to make consistent decisions based on the facts. The one difference is that medical professionals must often make their decisions “On the fly,” with life or death often in the balance. In contrast, European policymakers have, thus far, had the luxury of time in addressing the region’s challenges. But if the pace of crisis picks up in the coming months, the ECB/IMF as well as other monetary and fiscal policy bodies will have to move more like an army field surgeon than careful diagnostician. The ongoing challenges in Greece, Spain, Italy and other European countries could be considered either economic malpractice or misdiagnosis. Will they see “Austerity” as the cure for every ailment, or will they remain flexible? Will they remain overconfident and (potentially) overplay their hand? It is tempting to say that policymakers should follow the Hippocratic Oath and “First, do no harm.” Sadly, the situation in Europe is beyond that simple recommendation.
For the first time ever, 3 year Japanese government bond (JGB) yields are trading below 1 year JGB yields as the world's inexorable desire to repatriate, delever, and seek safety while reaching for as much term yield as is still 'safe' come home to roost. With Swiss rates already grossly negative and German rates rapidly converging, the world's (d)evolution (since evolution conjures a rebirth into something better) is shifting investors out the yield curve as ZIRP is here to stay forever, wherever you look in so-called developed economies (who can print their own money). In the last 4-5 weeks, 3Y Japanese bond yields have dropped 6bps to around 10bps (pretty much the same as every other maturity inside of 3Y) as the entire yield curve gradually flattens pushing out investor's perception of 'cash' to longer- and longer-maturities. Be careful what you wish for US equity investors, as the Keynesian Endpoint is upon us (and perhaps, just perhaps that is why Central Banks of the world are checking to the Fed, the ECB is playing hardball, and the Fed remains on hold unless apocalypse occurs - which, by the way, is not an 8% retracement of a 30% straight line rally).
Earlier today we reported of an instance of fiduciary impropriety so gross and abhorrent - namely the director of insolvent and nationalized Bankia preparing to receive €14 million in severance - that the public outcry was furious and instantaneous. The result: less than 12 hours later Expansion reports that according to Bankia president Jose Ignacio Goirigolzarri, the management of the the firm will waive their pension rights, and the infamous Aurelio Izaquierdo will not get his accrued pension when leaving the firm. Now, if only anyone in America had half the guts to do what it took Spain less than a day to turn around...
Repress extend-and-pretend; dismiss the can-kicking; and forget fake-it-til-you-make-it; Charles Biderman of TrimTabs recalls Jim Bianco's quote of the day on Spain's 'Delay-and-Pray' as the new normal for what is rapidly moving beyond farce in Europe. Beginning with the nations' own 'silly' perspective that the problem is 'unquantified' at the moment - implying it is in the trillions (which we already knew, but as long as they don't actually quantify it, it's not real - like the tooth fairy) - Charles goes on to destroy the hope that Germany can save them all (too big a problem now) and with state and local debt mounting trouble upon trouble the only outcome is a failure of the Euro. But it's not just Europe, between benefit payments and deficits, unexpectedly low returns for pension funds (thank you Ben), and union ignorance, the US is set for just as big a problem (though given the printing press we may just last a little longer). This leaves our union pension and government offocials with the same solution of 'delay-and-pray' as they hide in ever more intricate ways how much they are stealing from the future to cover the here-and-now. Biderman's back and this time he's really 'ranty' right to the end as he calls them out for criminal fraud.
First the ECB kicked the stimulus junkies in the crotch in the after hours session, now the PBOC is about to eat their faces for breakfast as both rumors causing overnight and intraday stock ramps are systematically denied. From Bloomberg: "China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008 according to the nation’s state-run Xinhua News Agency. “The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said yesterday in the seventh paragraph of a Chinese-language article on economic policy, without attributing the information. “The current efforts for stabilizing growth will not repeat the old way of three years ago." And with that the rug is pulled out from below anyone praying for non-Fed stimulus.
Is there a bottom in housing? It is entirely possible. However, for all the reasons stated herein, both financial, economic and psycholgoical, the "calls" for a housing recovery may be a bit premature. This is particularly true if our estimation of an economic recession in the next 18 months comes to fruition. The strains on the housing market caused by a recession will cause a secondary decline in housing. The reality of a recession is not a question of "if" — it is only a question of "when" and how bad will it be?