Archive - Nov 10, 2011

Europe started the day poorly, following up on the weak close and its own poor economic data. Then the ECB got involved and started buying Spanish and Italian debt aggressively. Rumors is that the ECB will have unlimited buying power for Italian debt once the austerity bill is passed. The current buying spree is completely expected. They can't resist intervention and in spite of a massive inventory of unmarked underwater bonds, still believe it does something. This intervention didn't do much for a 1 year auction and the price action in the secondary market has become routine. Some quick short covering. Dealers snapping up some paper to offer back to the ECB. A few additional purchased to goose the market higher, tell the ECB how great they are doing and that it is impossible to source paper, sell your inventory at an even higher level, spoof around while trying to figure out when the ECB is done for the day and what targets they have, sell into the last bit of strength and then let the shorts who covered early reset at much higher prices.

Dismal data from French manufacturing and industrial production along with growing chatter of a 'core' Europe strategy having been discussed is sending spreads among sovereign bonds notably wider. As a reminder Italy faces a rather large 1Y bill auction later this morning and the front-end of the BTP curve is underperforming as 2s10s inverts for the first time since August 1994.

UPDATE 1: Italian Bond Futures opened -1.7%

UPDATE 2: Credit cracking hard now XOver +35bps, Main +8bps, SENFIN +13bps

UPDATE 3: BTPs opened +16bps at 569bps over Bunds

UPDATE 4: OATs trading over 150bps wider than Bunds for first time ever

With German Consumer Price inflation coming a little hot, Wholesale Price index deflating MoM (and less than expected YoY), and Finnish Industrial Production turning negative unexpectedly, (and now French Industrial Production and manufacturing dropping significantly), sellers returned in the early European day with EURUSD breaking below 1.35 (for the first time since 10/10) and ES -7pts from the close (and 12pts from overnight highs) at overnight lows. As everyone anxiously awaits the open of BTPs, credit markets are already playing catch up to the US afternoon with Main 5bps wider and XOver 23bps wider.

The last few weeks have seen numerous discussions of the less-than-perfect quarterly earnings picture and outlook and despite an endless barrage of 'well, 73% of firms beat expectations', it is the outlook that is critical to understanding valuations. With CEO Confidence, from Chief Executive magazine, at its lowest in a year and having dropped at its fastest rate since the first quarter of 2009, Goldman dissects the conference calls of Q3 earnings to discern four key themes: Uncertainty is hurting confidence and reducing activity, a more cautious tone on margins, and belief/hope in emerging markets' ability to power growth. Goldman's 'Beige Book' equivalent provides all the detail one needs to comprehend what is at best a defensive strategy going forward.

It was self-defense! Those skinny students must have been terrifying to those poor "peace officers" in riot gear ...