No, it isn't 2008. It is a pale imitation. At least based on the Columbus Day (yes, bonds were closed then too) rally back in 2008 when the S&P soared by a ginormous 11%. Obviously what happened next was a roughly 40% plunge in stocks over the next several months. Suggesting the same could happen again would be preposterous: after all everyone knows Mars is willing and ready to bail out the world when the time come now that every single central bank is dodecatuple all in on preserving the status quo. Not for nothing, but even Greece recently ran out of ink...
Erste Group Reveals Stunner: Reports Billions In Previously Undisclosed Underwater Sovereign CDS; Who Is Next? And How Much More Is Out There?Submitted by Tyler Durden on 10/10/2011 - 13:36
Anyone looking at a heatmap of European markets today will see a sea of green punctuated by a very red island in the middle. The culprit: Austrian mega bank Erste, which issued an ad hoc and very unexpected press release, in which it warned that losses in its Hungarian and Romanian books would lead to a 14% hit, or €1.1 billion, to tangible book value, something that in itself is not a surprise to anyone (except the stress test). After all, since early 2010, most have known that due to Swiss Franc-based mortgage exposure, Hungary is next to follow in the PIIGS footsteps, and its collapse has so far been delayed due to lower overall public and private sector leverage. What was, however not only a surprise, but a shock, was that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures". Why is this a surprise? UK-based financial advisory Autonomous explains: "The fact that Erste had a sovereign CDS portfolio which was not marked-to-market has left many investors scratching their heads. As a reminder the EBA stress test data showed Erste to have zero sovereign CDS exposure within its sovereign mix compared to the €2.8bn it now appears to have ‘fessed up’ to (taking a cumulative €460m hit). They also have €2.4bn exposure to banks via writing of CDS. The bulk is non-PIIGS but banks spreads have moved in the same manner as sovereigns (albeit wider and more volatile)." And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (which had Dexia as its safest bank) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off.
Another poll, another blow (for Obama). While it is no surprise that the president's rating has tumbled to record lows over the past few weeks, courtesy of his inability to fix the unemployment problem, and to fix the bank loan situation (whether that is a function of lack of supply or demand is unclear, but it is broken dammit, the punchliners will say), according to the latest IBD/TIPP poll, "a majority of Americans now oppose giving President Obama a second term." And while this means that our chart which calculates how many jobs Obama will have to create by the end of his second mandate to get back to December 2007 unemployment will have to be scrapped, it still leaves the question open of which Republican is more qualified than Obama to preside over the Wall Street bribes collection agency. Oh and running the country every now and then.
Confused who ends up footing the bill for D(r)exia's bailout? Don't be: courtesy of INETeconomics, we have this brief and succinct video explanation, which confirms, as if there was any doubt, that the final invoice will either land in the hands of Europe's involuntary taxpayer "rescue rangers" via the ECB, or its involuntary and very much levered taxpayer "rescue rangers", via the EFSF, assuming the now priced in 3.0 iteration ever takes off (and Slovakia does not slam the door on EFSF 2.0 tomorrow).
Just out from Reuters:
- SLOVAK COALITION TALKS ON EFSF END WITH NO DEAL, TO CONTINUE TUESDAY MORNING - PARTY LEADER
- SLOVAK PM RADICOVA SAYS NO DEAL ON EFSF ON MONDAY, MORE TALKS 0700 GMT ON TUESDAY
It appears the euro likes to live very dangerously. Just bribe all the people involved already. Which, of course, is precisely what will likely happen, and a favorable last minute resolution (tomorrow is the deadline), will butcher any and all EUR shorts. Of course, if Slovak politicians actually have this thing called conscience and don't have this thing called Swiss bank accounts, then all bets are off.
In a splendid show of market wonderment, EURUSD managed a 350pip rally off Sunday night lows to pull off its biggest percentage gain since MAR09 at over 3.5 standard deviations. Correlations forced ES higher (breaking above its 50DMA intraday for the first time since late July) as every risk asset rode the FX carry train on 'new hope' that more debt will once again fix everything that is wrong with our debt-laden, risk-loving world. With TSYs closed and volumes 40% below average it seemed evident that the risk assets were beating to the same drum almost tick-for-tick as Oil broke $85, copper almost $340, and Gold $1670. European markets were relatively subdued until the US day session opened and then we were off to the races in equity and credit as Energy and Financials led the way (both up over 4% on the day).
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.