Archive - Nov 7, 2011

Here is what is happening in the world's melting pot of rumors and confusion as of this moment.

All you need to read.

That didn't take long.

• BERLUSCONI DENIES RESIGNATION RUMOR, ANSA REPORTS

Ita-Bund 8 wider on the news. We expect it to retrace the entire gain to 490 within seconds. In other news, we are all so lucky the market trades on fundamentals.

When all else fails, and with the Italian 10 Year hitting a new all time record of 6.6% and sending the Bund-Italian spread to the nausea-inducing 500 bps, all else has failed, spread wishful rumors of resignations. Sure enough, the Italian 10 year notes have pared dramatic losses amid reports of an imminent Berlusconi resignation. Italian PM Silvio Berlusconi may step down within “hours,” according to an article written by former minister Giuliano Ferrara in the online edition of Il Foglio, news agency Ansa reported. "Some people say it could be minutes,” Ferrara wrote on the website, according to Ansa. This, coupled with yet another round of ECB intervention has managed to bring the spread inside by... a meager 17 bps, keeping the Italy Bund spread still a well over 470 bps.

Based on the detailed exposures and DV01s thet Jefferies released on Friday, which we discussed as evidence of an implicit 2s10s (approximate maturities) curve steepener, it would seem that the dramatic shift flatter in the Italian bond curve this morning could be problematic. The huge 35-40bps compression in the spread between 2Y and 10Y BTPs is the second largest ever (largest being 4/8/11) and represents an 8 standard deviation drop compared to the last 8 years. This could mean a significant loss for the JEF book - unless they are perfectly hedged through BTP futures - which it does not seem is clear from the exposure sheet. The Italian yield curve has flattened over 100bps since the end of the EU Summit - inching perilously close to inversion which hasn't been seen since 1994.

FX traders are gearing up to test Jun Azumi’s resolve to keep intervening in currency markets to weaken the yen from its postwar high.

While Japan’s Finance Minister directed the central bank on Oct. 31 to sell what analysts estimate was about 8 trillion yen ($102 billion), sending it down as much as 4.7 percent against the dollar, the move failed to increase volatility. Traders avoid currencies with increasing price swings because they boost the odds of sudden losses.

UPDATE 1: ES -1%, EUR -0.5%, CHF -1.5%, Gold +0.9%, 10Y TSY -2bps, Bund -4bps, BTP spread +25bps at 479bps!

UPDATE 2: BTP spread widest since Jan1996, BTP 2s10s flattest since Sep2008, and BTP yield highest since Aug1997.

With EURUSD trading back to overnight lows at 1.3740 (100pips off its overnight highs), BTPs just opened 8bps wider to Bunds at +465bps. Gold is clinging to $1770 as Silver, Oil, and Copper drop notably thanks to USD strength. S&P futures are 16pts off overnight highs now having retraced almost 75% of Friday's late swing higher. US TSY yields are compressing but relatively parallel for now and in line with Bunds.

If you are a former MF Global account and you have your account transferred over to RJ O'Brien, or many others, you will have no choice but to fork out a bunch of cash to keep positions on, according to a statement awaiting all such accounts on the RJO website, or else be next in line for broad liquidations. To wit: "Former MF Global customers transferred to R.J. O’Brien were delivered with approximately 75% of the maintenance margin requirement related to their accounts. As a result, every former MF Global account faces a margin call. No excess equity was transferred." Naturally the next question is "Why are we not getting 100% of our MMR (Maintenance Margin) from the exchange?" And the answer: "This is an agreement between the trustee and CME Group. Please visit www.mfglobaltrustee.com for further information or questions." So, in addition to lowering initial margin for everyone, not just MF Global clients, did the CME iron out preferential terms over other exchanges and get larger equity of the account transfer than most? Because somehow we doubt that RJ O'Brien is the only exchange that is greeting their clients with this particular notice.