Archive - Oct 2011

In yet another ironic twist, traditional market cheerleader Goldman Sachs, which discusses the factors for the "strong start to the week for equity markets" in the form of the 100 S&P point surge on nothing but hope and more rumor speculation, concludes with rather ominous: "beyond the headlines, it is only the process of grappling with the details and concrete plans that will force the political leadership in these countries to face the difficult tradeoffs involved. And as such, as long as there is not more clarity around concrete proposals – the distribution of legacy losses and the mechanisms for mutual support in the Euro-area going forward – and the details on implementation, we doubt that the current market optimism can be sustained over the medium term, and beyond the upcoming G20 meetings." In other words, precisely what we have been saying: rumors and "plans of plans of plans" are great for short term squeeze induced, bear market bounces, but in the long, or even medium-term, do nothing to address the fundamental math fail which states, quite factually, that going from point A (where we are now) to point B (where Merkozy wants Europe to be), will be virtually impossible absent massive equity losses. Yet, as also pointed out before, Wall Street career risk is always in the "here and now" never in what may happen a day or even an hour from now, now that markets are no longer a discounting mechanism, but a purely headline reactionary one.

Yesterday was one of the strangest days in awhile - and that is from a long list of strange days. The most confusing part is that over the weekend Dexia went through some form of nationalization - the details of which and the need for which remain sketchy. Erste decided to take some big write-downs on CDS positions it had written, and Merkel and Sarkozy yet again held a joint press conference to announce that now they were really serious about saving everything and everyone. European stocks and credit had a relatively muted reaction. Stocks were up small. The Dax for example was drifting from slightly down to up less than 1%. SOVX was a touch wider and MAIN was a few bps tighter. Then the US came along and told Europe that they didn't realize how good they had. Yes, US equity players came along and told Europeans they didn't understand what had happened in their own backyard. The US stock market dragged Europe higher and tighter with it. Investors who were short IG17 or HY17 were hitting bids in MAIN, XOVER, and buying JNK, LQD, and HYG, along with SPX. Today, Europe was basically treading water and tried to do better at 7am as the US opened for business. Since then we have started to drift wider and lower. Part of this is going to be funds getting their positions squared away as they can now sell some IG17 and buy back their other hedges. Credit traders who are left scratching their heads about how things were "fixed" over the weekend are back and fading this rally.

And in tried and true fashion, the counterrumor arrives:

Egypt cabinet spokesman denies report that PM handed in resignation of whole government

That revolution sure was fun while it lasted.

• EGYPT PRIME MINISTER HANDS IN RESIGNATION OF GOVT - JAZEERA TV

Now the anticipated "Thermidorian reaction" counterrevolution comes.

When a few weeks ago we coined the term "plan to plan to plan" we didn't realize we should have also trademarked it. Royalties and all that... That said, when it comes to the Chairman of the Fermentation Committee, we grant him a lifetime license of usage.

Today, at around 5:30 pm, the Senate will pass currency legislation squarely targeting alleged Chinese "currency manipulation" (which as a reminder is pegged to the USD, which begs the question just who is manipulating their currency). And while the PBOC pegged the USDCNY at a new all time low last night in what appears to be an attempt to placate US lawmakers, it may have been premature. As Goldman explains the likelihood of anything real happening as a result of this legislation, which will not pass Congress in its current form, is virtually negligible. That said, here is what the Senate in theory is attempting to achieve: "The bill would impose new penalties on countries whose currencies are found to be "misaligned," including tariffs on goods imported from those countries and an eventual WTO complaint. Like previous legislative efforts on this front, the likelihood of enactment seems low. House passage of the Senate bill seems unlikely, though it is clearly possible that the House could pass its own version of the currency bill instead." Bottom line: much ado about nothing, although China will probably not be too happy either way.

An artist's rendering of what a Merkozy statement on the chart below would be like: "Here you have a chart depicting a perfectly healthy liquidity freeze and a far better than expected interbank bank run. While the amount of money desperately dumped with the ECB is the highest in over 16 months at €269 billion, a very modest increase of €230 billion from the summer lows, we promise promptly, or by December 31, 2099, whichever comes last, to conceive of a plan which will address the subject of how to plan for the public's interpretation of this chart, and in the meantime promise to bend the laws of mathematics, thermodynamics, rhetoric, and money printing, and plug the inverse hole with nothing but even more promises. Please vote for us." Or something like that. To everyone else who likes it non-sugarcoated, there is now open panic in the Eurobank system, where not a single euro left outside the clutches of the ECB is deemed safe. In other news, all is well.

Summarizing the Troika'a statement, with some gratuitous commentary

• Sixth tranche depends on Eurogroup, IMF approval: the use of Greece as a passthru vehicle for Eurobank funding will continue until morale and bank CDS improve
• Troika says Greek recession to be deeper than anticipated, 2011 fiscal target no longer within reach: the 50% negative revision in deficit to GDP in the past month has been duly noted
  
• Recovery only expected from 2013 onward: when it will be Bundesrepublik Griechenland
• Privatization revenue below expectations: must sell more islands to the Chinese, more gold to Qatar
• Additional Greek measures likely needed; essential more emphasis placed on structural reform - back in the day "freefall bankruptcy preparation" was not called "structural reform"
• Greece needs additional measures for 2012, 2014 - must be certain future penetration can proceed absent lubrication
  
• Greece overall made important progress - riotcam viewership is now PeyPerView and is used to pay for G-Pap's 3rd winter vacation

• Market participants keep a close eye on the outcome of the EFSF ratification by the Slovak parliament. In the latest news, Slovak lawmakers have adjourned the EFSF session until 2pm local time
• The Troika Commission said Greece will miss its 2011 target, however it will get the new aid tranche when the Eurogroup and IMF approve results of their review, most likely in early November
• According to sources, haircuts of 40%-60% on Greek bonds are under consideration, however the debate is over whether the haircut should involve the ECB and EU governments
• ECB's Nowotny and Trichet said that the EFSF will not be leveraged with ECB funds
• Strength in the USD-Index weighed upon EUR/USD, GBP/USD and commodity-linked currencies

• New bankruptcy ripples may emerge in tough economy (Reuters)
• Europe’s banks may get €200bn bailout (Independent)
• US to unveil criteria for picking “systemic” firms (Reuters)
• China Props Up Bank Shares (WSJ) as reported yesterday
• Europe warned of systemic crisis over debt (Reuters)
• US Voters Will Weigh Ballots Focused on Budgets, Higher Taxes (Bloomberg)
• Regulators stand up for new capital rules (FT)
• Jobs Panel Pushes Help for Start-Ups (WSJ)
• Dutch favour tough stance for Eurozone (FT)
• BIS Report Aims to Debunk Banks’ Criticisms on Capital Rules (WSJ)

Update: Slovakia’s Lawmakers Delay European Bailout Fund Vote, WSJ Says. WSJ reports that Repeat vote on EFSF may be held later this week; unlikely to take place Wed. as more time for political talks needed, WSJ reports, without citing anyone. Govt expected to lose confidence vote, paper says. However, the confidence vote is expected to still pass, or rather, fail. Which would lead to a government reshuffle into a configuration that will pass the EFSF vote. All speculation.

In terms of binary events on today's docket, the most important for the euro and eurozone by a wide margin is the Slovakian EFSF-ratification vote which is set to begin shortly, and where hopes have faded that a favorable resolution can be reached, at least in the immediate horizon. Those who want to follow developments in real time can do so courtesy of the following live blog at sme.sk updated every several minutes.

A week ago our post announcing that the Greek deficit target was going to be revised higher once again, from 7.6% to 8.5%, started with the following sentence: "As the Greek parliament meets to finalize huge public sector job cuts, Reuters is reporting that Greece will miss the deficit targets set in its EU/IMF bailout this year and next... We would say "again" but at this point "as usual" makes far more sense." Guess what: it is time to "as usual" re-re-revise it once again.

It's all code for German backstops, which begs the question: How exactly are things going for Germany?

Physical demand for gold in Shanghai has been “extremely strong” this week following the week-long Chinese holiday, Mitusi note in their morning report. UBS are more circumspect but note that physical demand in China appeared to be “quite decent” in the first trading day after the Golden Week holiday. They note that combined volumes for the SGE Au9999 and Au9995 contracts surged to the highest since February 14th. Year-to-date volumes are now 11% higher than 2010 levels. UBS “expect demand to remain strong until the Chinese New Year holidays in late January 2012.” A further sign of the significant scale of demand from Asia and from China in particular is seen in the news today that China has installed its first gold vending machine. More importantly, China and Chinese banks are planning to roll out another 2,000 gold ATMs nationwide. Each ATM can hold up to 200 kilograms of gold bullion in varying denominations at once.