10Y Italian bond spreads are surging wider intraday as it appears Europe's bond vigilantes (otherwise known as portfolio managers executing some level of due diligence to cover their fiduciary duty) have rotated their attention to Italy. After a few days in a row of Italian bank stock halts, the implicit LTRO-driven relationship between banks and sovereign is snapping 10Y yields above their Aug 2011 crisis peaks - at almost 5 month highs. A 20bps jump from the intraday lows this morning in spreads, underperforming any other European sovereign, seems to reflect our earlier concerns of Italy's lifeline running short. 5Y CDS are also pushing higher - near record wides but do not forget Spain which is also now legging higher in yield and wider in spread after some relief earlier in the day.
It appears that more and more people are finally waking up to the sheer farce that calling a kleptofascist crony capitalist system with socialist overtones because "deficits don't matter", a democracy, has become.
In an epic rant, trumping Biderman, UKIP's Nigel Farage appears to have reached the limit of his frustration with his 'peers' in the European Parliament after the Spanish bailout. Rajoy's proclamation that this bailout shows what a success the euro-zone has been, sends Farage over the edge as he sees the Spaniard as just about the most incompetent leader in the whole of Europe (up there with favorites like Van Rompuy and Barroso). The erudite Englishman notes that by any objective criteria "The Euro Has Failed" expanding on the insane farce of Italy funding Spain's banking bailout at a loss (borrowing at 6% to fund a loan at 3% as we discussed here). "This 'genius' deal makes things worse not better" as it merely drives other nations towards needing bailouts themselves and while his socialist colleagues in the room are mumbling and checking their blackberries, he reminds them that Spanish national debt will surge and that 100 billion does not solve the problem, and that if Greece leaves, the ECB is failed, is gone, and to rectify this there will be a cash call from the very same PIIS (Ex-G) that are tumbling towards the abyss. Blood pressure surges as he screams "you couldn't make this up" concluding that "the Euro Titanic has now hit the Iceberg and sadly there simply aren't enough lifeboats."
In about an hour's time, Jamie Dimon will sit down before the Senate Banking Committee and prove, once again, not only who is smarter and calls the shots in the great Wall Street-D.C. soap opera, but that when it comes to purchasing a room full of senators (not to mention the script for today's "hearing"), JP Morgan is always at the top. Because as the following table compiled using OpenSecrets data, it cost JP Morgan just under $1 million, or $877,798.00 to be precise in lifetime campaign contributions, to buy itself precisely one Senate Banking Committee. And where it gets really fun is that between the Chairman, Tim Johnson (D - SD), and the ranking member Richard Shelby (R - AL), JP Morgan has been the top and second biggest campaign contributor, respectively. Also, 9 (at least) of the total 22 members of the committee have received some form of bribe from JPM over the years.
Two more data points, two more disappointments: retail sales declined in May by 0.2%, in line with expectations, and unchanged from the April revision from 0.1% to -0.2%. Worse however were retail sales ex autos which had the biggest drop in 2 years, sliding by 0.4%, on expectations of an unchanged print. And so the retrenchment of the US consumer arrives. But at least "housing has bottomed." And in further 'NEW QE is coming' news, PPI also missed for the nth month in a row, printing at -1.0% on expectations of -0.6%, with foods dropping -0.6%, but energy collapsing by a massive 4.3%. PPI ex food and energy (so the items everyone uses, but nobody ever really counts) was up 0.2%. Gold, however, appears to be ignoring the core items, and has soared by $10 since the report, as today's data screams MOAR NEW QE.
Equity markets have traded with moderate volatility so far today as peripheral news concerning Spain and Italy continues to be keenly watched by market participants. Overnight the Italian PM Mario Monti said he does not see any need for a bailout either now or in the future with the Italian and Spanish 10yr yields seen off their highs yesterday, lower by 9.8bps and 7.6bps respectively. On a sector breakdown tobacco stocks saw some slight support after US firm Philip Morris announced a new USD 18bln 3yr share buyback program, however, industrials have lagged as a whole following a profit warning from Swedish firm SKF. In terms of fixed income, the bund has continued yesterday's slide with the Bundesbank coming to market with a July 2022 tap. In initial reaction to the results, bunds saw a 20 tick spike higher, off session lows, following what was perceived to have been a "smooth" auction despite some concerns about the eventual credit worthiness of Germany given the recent bailout of the peripheral nations. Meanwhile, the long end of the EUR curve steepened in early trade as reports from the Danish government who have agreed to change the discount rate that pension funds estimate liabilities being noted. In FX, EUR/USD trades higher into the N.American cross-over with an Asian sovereign name being a touted buyer this morning. In other news the AUD also caught a bid shortly after comments from the German central bank who said that they are considering buying the antipodean currency.
Yesterday, Austrian finance minister Maria Fekter ruffled the unelected Italian PM's feather by saying "forget Spain, Italy is next in the bailout line" - a statement which as expected was promptly loudly refuted, mocked, and scorned by everyone possible: the type of reaction that only the truth can possibly generate in Europe. So far so good: after all the typical European reaction to any instance of the truth is loud screams of "lies, lies" and promptly sticking your head deep in the sand. However, this time around Italy may not have the benefit of the doubt, nor the benefit of some sacrificial replacement of a prime minister: Silvio is long gone, and at this point switching one banker figurehead with another will do precisely nothing. Which is why this morning's assessment from Bloomberg economist David Powell is spot on: "Italy would probably be forced into receiving a bailout if it were to face another two weeks like the last seven days." But the punchline: "The bad news for Italy is the country’s stock of debt is already as large as Spain’s may become after years of fiscal turmoil. In other words, Italy already is where Spain may be heading."
It is really rather pathetic. The Prime Minister of Spain today called for a deposit guarantee fund, pleaded for the EU to take over the budget of Spain and said Spain would cede its sovereignty over its banks. This is all just one thing; a cry for money and money at any cost. The poor fellow has obviously lost whatever self-respect that he had and is behaving no differently than some street urchin begging for alms. What can be seen from this kind of behavior is the desperate state that Spain is in and it is reflected in his desperate pleas for help. I would speculate that so much has been hidden and so many balance sheets falsified that Spain has suddenly found itself in a sea of their own making which could be termed, “Dire Straits.” When Rajoy termed the bailout for Spain as a “Victory for Europe” I knew that he had left “sense and sensibility” behind and headed into the land of Don Quixote where windmills were imagined to be giants and fantasy had replaced reality. The problem is, unlike the creation of Miguel Cervantes, this guy is the Prime Minister of Spain and not some aged senior chasing after the Knights Templar in his later years.
Just because there aren't enough traumatizing events in the next week to look forward to, the market has already set its sights on the next "big" (let down) event in Europe - the EU summit on June 28/29, which will only benefit just one class - Belgian caterers. But for some odd reason there is hope that Europe will, miraculously and magically, after years of failing at this, come to some understanding over either Eurobonds, a fiscal union, a deposit insurance, banking union, or some or all of the above (expect many daily rumors regarding any of the above to incite small but violent EUR and ES short covering rallies). However, as we have been observing for the past 3 years, and as David Einhorn summarized visually, nothing will come out of this latest summit. JPM explains why the one thing that can save Europe is a non-starter, and will be for years.
- How original: Syria prints new money as deficit grows (Reuters)- America is not Syria
- Former SNB head Hildebrand to become BlackRock vice chairman (FT)
- Osborne says Greece may have to quit euro (Reuters)
- Osborne Risks the Wrath of Merkel (FT)
- China second-quarter GDP growth may dip below 7 percent - government adviser (Reuters)
- Italian Borrowing Costs Surge at Auction of 1-Year Bills (Bloomberg)
- Greeks withdraw cash ahead of cliffhanger vote (Reuters)
- Merkel’s Choice Pits European Fate Against German Voter Interest (Bloomberg)
- Italy Tax Increases Backfire as Monti Tightens Belts (Bloomberg)
- Dimon says JPMorgan failed to rein in traders (Reuters)
If yesterday was a repeat of the market action from that day three weeks ago before the last FinMin conference, when everyone expected Germany to announce it had agreed to a bank deposit guarantee, then today is, logically, day after. Because just like back then, so now, Germany has once again made it clear that it will first see the EUR crushed, and all off Europe begging for a bailout (as in the case of Spain - when presented with reality, they all will beg the one with the cash to come to the rescue). To wit from the German Finance Minister, via Stern magazine:
- Schaeuble Rejects European Redemption Fund: Stern Magazine
- German finance minister says redemption fund would violate EU treaties, in interview with Stern magazine
With all the buzz about the 'Fiscal Cliff' – that toxic combination of tax increases and spending cuts due to take hold in a few months – the subject of ongoing Federal budget deficits has fallen by the wayside. ConvergEx's Nic Colas believes that’s a temporary phenomenon, for Congress will have to hammer out agreements to raise the debt ceiling right alongside its negotiations over the 'Cliff' items. His back-of-the-envelope attempt to quantify how much a multi-year debt limit increase would run to take this burdensome legislative issue off the Congressional docket for 5, 10 or even 20 years is worrisome at best with a $3.4 trillion for the 5-year runway, but this assumes a high level of incremental taxation. The number could be as high as $4.5 trillion. As for the longer time horizon debt runways, think in terms of an incremental $6.5 -9.5 billion for a 10 and 20 year horizon. And without significant changes to taxes and/or spending, more. Much more. We cannot help but think about Paul Krugman as we ponder these numbers. His recent book, End this Depression Now, proposes that “A quick, strong recovery is just one step away, if our leaders can find the intellectual clarity and political will to end this depression now.” This “One step” is deficit spending that is orders of magnitude greater than anything spent already. We have no idea if he really believes any of this, since it is politically impossible, but he does have a Nobel (though so did the guys at LTCM).