Archive - May 2010

Liquidity. A word you will hear often-repeated today, in fact the more you hear it, the less of there is. Here is Morgan Stanley's Jim Caron discussing why worsening USD funding conditions will force the Fed's FX swap lines to start being used again, now that FX implied USD Libor has passed 1.22%. The problem (for Ben Bernanke) is that the market knows these exist, and yet that has not stopped Libor from rising. If even the blanket promise of endless money printing to satisfy dollar demand is insufficient to prevent the liquidity run, what else can the Fed do?

While some may think the carnage in stocks is bad, it is really a joke compared to the recent bloodbath in High Yield land, where (leveraged) funds are getting blown out and forced to liquidate high-beta (read: soon to be bankrupt unless they did a covenant lite refi) names en masse. Here is a good summary of the bloodbath happening beneath the surface courtesy of LoanConnector: "With the turmoil in Europe wreaking havoc on the high yield bond market, the week of May 17 saw the second largest spread widening of 2010. Spreads widened 69bp for the week and 33bp on Thursday alone."

• Britain's 1Q GDP growth revised upward to 0.3 percent from 0.2 percent.
• China cabinet agency urges action against rising food prices as higher inflation lurks.
• China, US sidestep Yuan confrontation as Europe dominates Beijing talks.
• Credit risk soars as Korea tension, Euro slump spook investors.
• Denmark reaches deal to trim public spending by $4.37 billion over 3 years.
• EU economy chief warns Europe will stagnate without major economic reforms
• European banks forced to pay more for short-term dollar borrowings than banks in US, Asia.

Libor is now at 0.53%, eurodollars are plunging, new Fed-ECB rescue facilities are rumored to be imminent, Germany is set to introduce a ban on naked shorting of all stocks, and sovereign risk is exploding: it will be a fun day. Spain, Italy and Korea are all more than 20% wider on the day, as the contagion virus is spreading faster and faster toward the heart of Europe.

The wheels are falling off the liquidity cart. RanSquawk reports that market rumors suggest the Fed is about to expand it Europe rescue FX swap facility. What form the new lifeline will take is still unknown.

The JPY chart says it all.

From Goldman - "On May 14, we published our latest FX Monthly, largely focusing on why we decided to not change our EUR/$ forecasts. We expect EUR/$ to strengthen back to 1.35 and then to stay broadly unchanged in that area." Oops. Read the latest mea culpa and event spin below.

Thank you, Mr. Market, for finally coming to your senses! It’s about time that you kicked your ecstasy habit. There are now more broken 200 day moving averages than National Rifle Association bumper stickers at a Tea Party rally. Building short lists of your next big trades. It’s way too early to pull the trigger on any of this stuff. (AAPL), (GS), (YCS), (TBT),

Big picture I keep my long term target of 380 on the S&P 500. Broken record but I stick to my guns one this one. Short term we are still advising to be short but moving in on key supports. Fundamentally my view is that the inventory rebuilding/federal spending is absolutely not anything organic and sustainable we can build a long term growth outlook on. We have renewed balance sheet deflationary forces at work which have triggered a relapse of credit markets and this time sovereign debt is on the table too. There are measures that have been put in place in terms of liquidity but so far the impact on markets has been null with disruption in the funding markets still building up. At this point we think the solution will be for the Fed to step in and reactivate the liquidity facilities they let expire, but that will come only after a heavy political battle. Politicians are slowly finding out that maintaining artificially a market that is bankrupt in every possible way without printing money is quite tricky and they have not found the answer to that riddle yet. An overleveraged system supported by a structurally weak economy can only be maintained by a flooding of central bank liquidity combined with austerity. It will take a solid decade to get balance sheets in good health at the consumer/sovereign level without masive wave of defaults, pick your poison. - Nic Lenoir

In case you have missed the (primary) reason why the world is imploding this morning, and futures are collapsing, from Reuters: "North Korea puts military on combat readiness. North Korean leader Kim Jong-il has ordered his military to be on a combat footing, South Korea's Yonhap news agency said on Tuesday. It quoted a local group of North Korea watchers as saying their sources there had told them Kim's command had been broadcast by a top military official. Tensions have risen sharply on the peninsula after the South inmposed sanctions on its neighbour, which it accuses of sinking a naval ship in March, killing 46 sailors." The Korean Won, and global futures, are plunging on the news.

Guess who may be exposed to what? We will probably dig a little deeper into this if the market doesn't punish the company before positions can be expanded, in the mean time their is plenty for subscribers to chew on. I have included much food for thought for non-subscribers as well. Oh yeah, as I type this, futures are down 28 as the global markets drop 3 to 5% (again), all due to what I warned about since January yet the pundits said was "contained". Yeah, globally contained!

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/05/10

The end of the welfare state as we know it is near. No doubt this represents a victory for the Chicago Boys and neoliberal economics. But the final chapter has yet to be written, and labor will not go down quietly.

Spreads closed the day weaker after clinging to gains until mid-afternoon and outperforming stocks. A slow-and steady decline in FINLs finally cracked the low activity rally in risk assets but we note IG underperformed HY as stocks sold off helped by the EUR stalling. Cash underperformed synthetic single-name credit once again but the late-day rush for protection suggests investors once again covering with macro overlays - not a good sign for bonds.