ECB Passes €200 Billion In Cumulative PIIGS Bonds Purchases: Now Monetizing 30% More Each Month Than The FedSubmitted by Tyler Durden on 11/28/2011 - 10:49
For a bank that everyone is bashing for "doing nothing" the ECB sure continues not only to be active in the open market but monetize well more than the Fed: in the past week the ECB's SMP program announced it purchased €8.581 billion in PIIGS bonds in the open market, which brings total notional purchases to €209.1 billion over the life of the program since inception on May 14, 2010. However, due to interim maturities, about €5.5 billion have matured from the total holdings, which means that on a net basis, total purchases have only now passed €200 billion for the first time, and are now at EUR 203.5 billion. More importantly, since the resumption of the SMP program in August, the ECB has bought €131 billion in PIIGS bonds, or about $176 billion. This works out to just under $60 billion per month (and no, it is not sterilized when the sterilizing banks exist solely courtesy to ECB funding as noted before) and is just modestly less than what the Fed monetized on a monthly basis at its peak QE, and about 30% more than what the Fed does now during Operation Twist! ($45 billion monthly at last check) So... Who was it that said the ECB needs to print more?
Forget any overly complex and meandering explanation you have heard about today's market action. The real reason for the bounce is simple: oversold market coupled with yet another short squeeze (NYSE Group biweekly short interest data showing shorts spiking in the first two weeks of November due out today). Art Cashin explains.
European equity markets began to rally around 830ET on Friday. Credit bottomed around 1130ET Friday with XOver and Sub financials the worst performers. Since then, equities have soared - almost entirely recovering last week's loss on the back of officially denied bazookas among other failed rumors. Corporate credit markets are outperforming financials (which are only back to Thursday levels) but the credit markets in general are massively less sanguine than the over-excited equity market for now.
Reuters reports the first shipment of gold bars arrived home in Venezuela on Friday “amid wild celebrations.” Excited crowds lined the roadside waving big Venezuelan flags and chanting "It's returned! It's returned!" as a convoy of soldiers and armored cars carried the gold ingots from Maiquetia airport to the central bank in Caracas. The President of the central bank, Nelson Merentes traveled into the city at the head of the convoy. He did not say how much gold bullion was brought back in Friday's shipment but said the bullion came from several European countries. "Our gold is being stored in the vaults," Merentes told the cheering crowds, sporting a baseball cap that read "The Central Bank of Venezuela with the People." "It has historic value. It has symbolic value. And it has financial value," bank chief Merentes said about the first shipment. "Each box of gold weighs 500 kilograms and is worth about $30 million,” Merentes said before cheering crowds. “We’ll bring the rest back little by little.” Merentes is in favor of the move and said, "The country's finances will be backed by autonomous wealth, so we are not subject to pressure from anyone," UPI reported. “This guarantees that if there are financial problems in the international markets our gold will be safe here at home,” Merentes said. Drums and sirens sounded out across the square as many in the crowd sang "Forward comandante!" in support of the president. Some waved homemade signs that said: "The gold has returned thanks to Chavez!" and "Long live our sovereignty!"
On October 27th we rallied 40 points in SPX and hit 1285. So far today we are up 32 points and are at 1185. About the only positive thing I have to say is that 1185 is cheaper than 1285. The reasons for the rally are largely based on headlines and rumors out of Europe and being too pessimistic about what happens if there is no “solution”. The IMF bazooka does not seem to be there (offically denied), the EFSF is nothing like what was promised, Euro-bonds seem practically impossible in any time-frame and 'fast-treaty-ing' remains a pipe-dream, Greece is closer to actual restructuring as it starts direct negotiating, and while Thanksgiving Sales were up it seems the main reason for a market rally is the amrageddon-like scenario of the break-up and the typical belief that 'the-worse-it-gets, the-better-it-will-be-in-the-end', so buy.
If all it takes for the ES to soar by over 30 points is some propaganda about US consumer spending (pretty much ridiculed by all at this point), and two outright lies about Europe being fixed, the following factual statement by Moody's should certainly send risk soaring now that bizarro mode is fully on: "over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area. The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise." Oddly enough, for once Moody's is not alone.
Wonder why futures are up over 2%? It appears all it takes is two strategically placed and false rumors, since denied. That and of course the fact that US consumers are literally spending as if there was no tomorrow. Because for a whole lot of consumer there may not be once the bill comes in. Ironically, the same can be said about European banks, only they never even got a 10% of iPad. Because while stocks may be doing their usual oversold Manic Monday thing which surprises no one at this point, European liquidity is as bad as it ever was. As the ECB reported, cash deposited by risk averse banks soared by €19 billion overnight to a December 7 3M ECB USD repo pre-reset high €256 billion. And what is worse, that all important metric of the 3 month EUR/USD basis swap not only did not improve but has continued to deteriorate, dropping 1.9 bps to -148, the worst since October 10, 2008. What is ironic is that while we know banks have a USD funding problem, they also seem to be having a EUR sourcing issue, despite being able to pull as much cash from the ECB as they want. That is of course assuming they have sufficient collateral for the repo market. Which then begs the question: is the European liquidity crisis shifting to one of evaporating repoable assets? And if the repo market is drying up, that means that the ECB will soon be forced to accept staplers are worthwhile collateral before it all falls apart.
- According to La Stampa, the IMF is preparing a EUR 600bln loan for Italy, in case its debt crisis worsens, although the report was swiftly denied by IMF officials
- Several papers reported that Germany is considering the option of joining the five other AAA-rated Eurozone member states to issue common bonds. However, the German finance ministry dismissed the report later in the session
- Particular narrowing was observed in the Belgian/German 10-year government bond yield spread partly after Belgian negotiators reached an accord on the country's 2012 budget during the weekend, together with well received OLO bond auctions from Belgium
- Welcome LSAP: Dealers See Fed Buying $545B Mortgage Bonds (Bloomberg)
- And more central planning: Central Banks Ease Most Since 2009 to Avert Contagion (Bloomberg)
- Italy’s PM in austerity race, IMF denies in aid talks (Reuters)
- OECD Cuts Growth Forecasts, Blames Euro Crisis (Bloomberg)
- Thanksgiving Weekend Sales Set Record (Bloomberg) - we give this story one week before the truth comes out
- China Eyes European Assets (Reuters)
- US Urges Speedier Action on Debt Plight (WSJ)
- Chinese Profit Growth Slowing as Real-Estate Curbs Bite (Bloomberg)
- China Vice Premier Says Property Curbs to Stay, Xinhua Says (Bloomberg)
The La Stampa rumor that the IMF would bail out Italy has come and gone, roundly refuted by none other than the IMF as expected, but not before lifting futures by over 30 points in the premarket session, and setting a very favorable tone to the market overnight. How long it lasts now depends on the amount of time it takes the bipolar market to realize that the tapped out consumer, already at near multi-year lows in savings, will be unable to carry this holiday period despite what the Retail Federation reported about supposedly record Black Friday sales. But for now all is forgiven and not a moment too soon: after all S&P had just downgraded Belgium which was coming to market with a new 10 year bond issuance. And courtesy of the US consumer, the auction was not a failure, yet still pricing over 1% higher compared to a month ago, or at 5.659% compared to 4.372% on October 31. Still, the bid to cover rose, and thus the modestly successful auction saw the 10 year yield drop 16bps to 5.7%, the biggest decline in a month and the first in 6 days; hit 5.91% earlier, highest since 2000. Just shortly before Belgium, Italy sold €567MM in 2.6% 2023 Inflation Linked linkers at a bid to cover of 2.16 but most importantly at a yield of 7.3%. This was an epic collapse compared to the last such issuance from October 27 when 2.1% I/Ls due 2021 priced at a 2.14 B/C and a 4.61% yield: nearly a 2.7% increase. And somehow this unsustainable yield (not to mention another BTP auction tomorrow) is considered a good thing: the 10 Year dropped to just over 7% in the auction aftermath after hitting 7.3% earlier. And for now Europe is on the backburner with all eyes on how few contracts of ES can get the S&P up 3% today: all signs of a perfectly functioning market.
Back in August when Bloomberg first scoured the depraved depths of the almost-30,000 pages of FOIA-released Fed documentation surrounding the biggest ever bailout in history, the sheer volume of the loans, ultra-low cost of funds, and lying-through-their-teeth nature of the bank CEOs was enough for some vindication of tin-foil-hat-wearing fringe blogs. In this month's Bloomberg Markets magazine, much of this is rehashed but the truly incredible part - though not entirely shocking to us - is the magnitude of the profits that the banks amassed directly as a result of these 'secret' bailouts. Almost a quarter of their entire income was generated during this period from bailout-related sub-market funds. Over $13bn profit was 'appropriated' during the crisis with Citi and BofA among the largest profiteers.
As the hopes of an IMF bazooka fades, Market News is reporting that the ever-ready-to-print-a-story European newspaper Die Welt says Germany and the other 5 AAA-rated nations of Europe are discussing jointly issuing 'Elite' bonds. We assume the borrowings could be used to fund the less-well-rated nations and avoid a true Euro-bond joint-and-several issuance which Merkel and other have been so opposed to. For now, it is clear that the 'Have's and the 'Have-Not's are becoming increasingly divided and this - much like our earlier discussion of the recap section of the EFSF draft - seems to be further from a fiscally united Europe and any inevitable endgame. We wonder what will happen when Austria gets downgraded? It certainly seems that the much-ridiculed ratings agencies are now playing an even more important role?
It is increasingly clear that Europe is bifurcating in many ways - High-grade and everyone else - and it appears the preparation is beginning. Is Germany becoming the mercantilist vendor-financier to its hugely imbalanced European trade partners?
UPDATE: Some comments from China not helping sentiment
*MOFCOM'S CHEN: EU RESCUE FUNDING STILL FACES SHORTFALL :MOCZ CH
*MOFCOM'S CHEN: CHINA OBSERVING QUIETLY EURO SITUATION :MOCZ CH
*MOFCOM'S CHEN: WORLD ECONOMY FACES DOWNWARD PRESSURE ON EU DEBT
Well they bought the rumor and now comes the sell-the-news/rumor/denial part of the evening as Dow Jones cites an official that 'No Discussion Within G-7 Of Reported Large Package For Italy".