Archive - Jun 20, 2011

Not a great deal on the political calendar this week, with fiscal talks led by VP Joe "NFP of 500,000 coming any... minute... now..." Biden expected nearly every day starting tomorrow.

According to flashing headlines, the CDO better known as the European Financial Stability Fund will be increased to guarantee €780 billion in the future, up from €440 billion currently (the same EFSF which currently sees Greece, which has no money left at all, guaranteeing €12.4 billion of European bailouts). This was largely expected previously as many had noted that the EFSF in its current form is insufficient to cover the liabilities of Spain once the country is swept away to the Greek insolvency tsunami. Alas, for the EURUSD which is seeing this as good news, and has surged on the announcement, this development actually means that Europe is taking proactive steps to fund Spain imminently when the house of cards start falling potentially as soon as Tuesday night. This is nothing but a Spain, and then Italy, backstop. However, for Italy to be covered, expect the total covered amount to be €1. 5 trillion. Did the Eurozone just blink?

As QE 2 enters its (black) swan song phase, today the Fed will conduct only the first dual POMO of 2011. While two POMOs per day were a regular fixture back in 2010 when the Fed had to give the impression that "profits and earnings ratios" were low enough, they had been missing in the current year... So far. At 11pm and then at 2pm, Sack-Frost team will conduct two $4-5 billion POMOs, the first one targeting 10 years, the second, buying up 3 Year bonds. Which incidentally will be a good test to see if PDs are now in the Bill Gross camp expecting Operation Twist 2 to focus on the 2-3 year space. As a reminder, last week's 2 Year POMO saw exactly zero On The Run bonds monetized, after Bill tweeted his now infamous "QE3" tweet. In other words, while we expect Dealers to go balls to the wall in flipping the just auctioned off 10 Year reopening in the form of Cusip QN3, their interest in flipping the recently auctioned off QS2 will be far more muted. On the other hand, if QS2 is shuffled back to Sack wholesale, it may simply mean that PDs believe that the Fed will target just the 2 Year and leave the 3 Year+ part of the curve floating in the wind. We will know the result of this experiment at 11am EDT. Stay tuned.

• US budget talks hit tense stage (FT)
• Siemens chief warns on US skills shortage (FT)
• Greek Default Would Spell ‘Havoc’ for European Banks a Year After Bailout (Bloomberg)
• Spain protesters turn anger against Brussels (FT)
• Credit Suisse downgrades China banks, GDP (MarketWatch)
• Rare earth prices soar as China stocks up (FT), previously covered here
• H.K. Home Prices to Fall Up to 15% (Bloomberg)
• Americans gave $291 billion to charity in 2010 (Reuters)

Risk-appetite, which emerged last Friday, couldn’t sustain its momentum today after Eurozone finance ministers decided to delay any final decision on a new Greek rescue package till July. The decision led to a re-emergence of risk-aversion, which provided support to the USD-Index and in turn weighed on EUR/USD and GBP/USD. The ongoing Greek debt concerns once again weighed on equities, with particular underperformance seen in financials, which underpinned the strength in Bunds. Allied to this, Eurozone peripheral 10-year government bond yield spreads widened led by the Greek/German spread.

Everyone is on Rule 48 watch today because while speculation addicts in America was snoring, European markets were not doing that hot, leading to the now traditional exchange break. The reason per the FT: "NYSE Euronext’s European equities, bonds and ETFs markets opened later
on Monday due to technical problems, that knocked out trading on the
Paris, Amsterdam, Lisbon and Brussels." And from the horse's mouth - the NYSE "Boerse" Euronext said: “Due to technical issues the pre-opening phase for
regulated equities and bonds and ETFs, opening of the continuous trading
session will be delayed....Consequently, we have halted the regulated warrants and certificates
market given the unavailability of the cash markets." Translated: this is merely a test for an alternative ending for when the markets drop to that level where NYSE circuit breaks are triggered... anywhere between 1,200 and 2,400 points on the Dow Jones.

The "on again, off again, but totally clueless" European bailout whose fate may be cemented with a negative vote of confidence tomorrow in Greece, in what may be the most important offshore government decision in European history, continues to slaughter PIGS as the 10 Year Portuguese-Bund spread just blew out by 35 bps to a new all time high of 914 bps. From Reuters: "The premium investors demand to hold Portuguese 10-year government bonds rather than benchmark German Bunds hit a fresh euro lifetime high on Monday, due to ongoing concerns about Greece's immediate financing situation. Yields on bonds issued by euro zone's lower rated states were broadly higher after ministers delayed granting emergency loans for Greece. "There's general contagion in the periphery ... There's not a huge amount of trading but because the market is so thin prices are being marked wide on the screen," a trader said. "People are putting very defensive prices out there with the bid/offer being a lot wider."" And while risk is broadly off on the screen, this is wonderful news to Ben Bernanke, who as we have been saying for months now, will need crude to drop to at least $85, and the S&P to triple digits, to have a solid case for pushing on with more suicidal Keynesian policies (the cure for record debt is more debt^TM). Again from Reuters: "Crude oil prices fell by more than $1 on Monday, extending last week's losses, with risk aversion rising after euro zone finance ministers postponed a final decision on emergency loans to Greece. "The crisis in Greece has resulted in higher risk aversion, which is weighing on oil prices," Commerzbank analysts led by Eugen Weinberg said in a note.

Gold is being supported as default risk has increased after EU finance ministers failed to agree on a new Greek loan package. Gold priced in sterling rose to new record nominal highs this morning at £954.84/oz and the weakness of the euro has seen gold rise to touching distance (9 euros) from new record highs in euro terms at €1,088/oz. The cost of borrowing euros for three months in the interbank market continued to rise today with the three month Euro Interbank Offered Rate, or Euribor, fixed at 1.510%, up from 1.502%. Corporate borrowing costs in the U.S. as measured by U.S. swaps rose sharply from 20 to 26.99 last week - the highest so far in 2011. Societe Generale SA raised its third quarter gold forecast by $90 to $1,580 an ounce and silver by $3.50 to $42 an ounce.

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