Archive - Jun 2011

Anticipation of the Greek government passing through today's confidence vote successfully witnessed a re-emergence of risk-appetite in early European trade. This provided support to EUR during the session, witnessed strength in equities, and Eurozone 10-year government bond yield spreads narrowed across the board. However, EUR/USD did come under some pressure following much worse than expected German ZEW survey results, whereas Euribor futures received support after the ECB allotted higher than expected amount in its weekly refinancing operation. In other news, GBP weakened following dovish comments from BoE's Fisher, who said that further quantitative easing is still an option. Moving forward, markets look ahead to existing home sales data, allied with API inventories figures from the US later. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16-May'18, with a purchase target of USD 4-5bln is scheduled for later in the session. Moreover, any comments pertaining to the Greek debt situation or the vote of confidence will be keenly watched.

Open Europe has released a paper titled "Abandon Ship: Time to stop bailing out Greece?" which recaps all the salient points well-known to everyone on why continuing to bailout Greece is the worst possible decision available to Europe, yet which will come over and over simply to prevent the European banking oligarchy from encountering an Event of Actual Loss (as defined by Encyclopedia Britannica). "Considering Greece’s poor growth prospects and increasing debt burden, the country is likely to default within the next few years, even if it gets some breathing space through a second bail-out. EU leaders should instead be planning for how such a default could be managed in as orderly a manner possible." Yet the main reason why European taxpayers should be concerned about the happenings in Athens, which are nothing but the latest in a now endless series of taxpayer to banker capital transfers, is that as Open Europe says by 2014, almost two-thirds of Greek debt will be taxpayer-owned! "via the bail-outs, so-called official sector (taxpayer-backed) loans are gradually replacing private sector loans. We estimate that today each household in the eurozone underwrites €535 in Greek debt (through loan guarantees). However, by 2014 and following a second bailout, this will have increased to a staggering €1,450 per household. The cost to European taxpayers of what looks like an inevitable Greek default will therefore  increase radically in the next few years, making a second bail-out far more contentious than any of the previous eurozone rescue packages." Open Europe economic analyst Raoul Ruparel added: "“A second Greek bail-out is almost certain to result in outright losses for taxpayers further down the road because, even with the help of additional money, Greece remains likely to default within the next few years. Another bailout will also increase the cost of a Greek default, transferring a far bigger chunk of the burden from private investors to taxpayers....Although the uncertainty associated with such an exercise shouldn’t be underestimated, EU leaders should plan for a full, orderly restructuring, which would deal with Greece’s massive debt burden, as soon as possible. However, an honest discussion also needs to be had about whether Greece can realistically remain within the eurozone." But what "honesty" is possible when the only policy is to extend and pretend until it all finally comes crashing down?

• Papandreou Confidence Vote May Decide Greece’s Fate (Bloomberg)
• Fitch sees risk of Greece, U.S. debt defaults (Reuters)
• China’s new bond buying hints at shift to euro (MarketWatch) as was reported on Zero Hedge 3 weeks ago
• David Cameron: We won't bail out Greece (Telegraph)
• Change in China Hits U.S. Purse (WSJ)
• Debtors hail changes to EU rescue fund (FT)
• SEC Should Free ’Fab’ Tourre, Target Big Fish: (William Cohan)
• German energy plan seen as ‘viable’ (FT)
• Kenya Shilling at 17-Year Low on Inflation (Bloomberg)
• China Floods Claim Victims, Crops (WSJ)

Reuters has compiled a useful summary for everyone confused why the S&P may be trading with the volatility of a 3-page Hank Paulson blank check TARP proposal day, based on what a few MPs in Greece decide to vote, or not, for, in just under 10 hours.

• Confidence vote in Greek parliament at 2100 GMT
• Representatives from "troika" of EU, IMF and European Central Bank in Athens for talks through June 22
• European Union summit meeting in Brussels on June 23-24
• Parliamentary vote on more austerity steps tentatively set for June 28
• Main labour unions to launch 48-hour strike on day of austerity vote

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

India's heretofore "insatiable" appetite for precious metals will need to find a new adjective to describe it, after it surged by an absolutely unprecedented 500% in May MoM, and 222% compared to May of 2010, touching on a massive $8.96 billion in imports in the past month. Putting this number in perspective the yearly average Indian imports are about $22 billion: in one month the country will have imported about half its average quota for the year! And while inflation may have much to do with it, events like the Sensex flash crash from last night certainly are not helping matters: "The gold story is puzzling" added financial analyst A S Kirolar. "Consumers are shying away from stocks and bonds and heading to safe
assets like gold and real estate, but one cannot understand this given
the meagre 12% growth in imports of petroleum and oil products." Granted demand is not just at the retail level as ever more institutions are buying up gold: "Analysts maintained that India's central bank, the Reserve Bank of India's decision to grant licenses to seven more banks to import bullion has helped push up demand. Karur Vysya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Punjab and Sind Bank, South Indian Bank, State Bank of Mysore and State Bank of Travancore were added to the list. As of the start of 2011, some 30 banks in India have been granted permission to import gold and silver. Jewellers are getting easy supplies which is also helping push up demand. Moreover, the flow of scrap is also expected to fall from a yearly average of 200 tonnes, which could again boost imports, underlining the insatiable appetite of the Indian consumer." Add ongoing Chinese demand for PMs, and one can see why calls for an imminent gold crash absent a global deflationary vortex are largely overblown.

According to Mebane Faber, by investing in a portfolio with uncertain outcomes, pension funds could experience increasingly volatile and even negative returns. Paradoxically, in an effort to chase the universal 8% rate, pension funds may be laying the groundwork for returns even lower than the risk free rate...

Until the next one...

Yesterday, when we pointed out the surge in the overnight SHIBOR, many were quick to dismiss this dramatic contraction in liquidity, because it happened to be a replica of a comparable such move before the Lunar New Year which did not end result in an end of the world type event. And while many ignored this very disturbing interbank lending lock up sign, there was someone who did not: the PBoC. According to Market News, "The People's Bank of China has conducted reserve bond repurchase agreements with at least one bank in a bid to ease liquidity conditions, local media reports said Tuesday. The National Business Daily cited an interbank market trader as saying the central bank injected at least CNY50 billion into the China Construction Bank on Monday via a 14-day reverse repo at 7.5%." Which incidentally is how it should be done: want to get emergency funding from your central bank? Sure. But it will cost you a whopping 7.5%. Now the question of whether CNY50 billion is enough (and in related news, the USDCNY parity just dropped to a fresh all time record low of 6.4690) is a different matter altogether: we expect to get today's updated SHIBOR fixing any second, and have a feeling more reverse repos will have to be injected before this is over.

Following the release of its quarterly equity market update, Global Tactical Asset Allocation has released the must read Q3 debt update, which covers virtually every aspect of the fixed income space with more granularity than can be found in the best sellside research report. Since the imminent global insolvency is not about equities, and all about coupon and variable rate instruments, this could we be the most important update piece from Damien Cleusix this quarter. Your all in one compendium on fundamentals, technicals, and everything inbetween can be found inside.

Today the Obama administration launched its latest $1 billion "stimulus" in the form of the Emergency Homeowner's Loan Program (EHLP), certainly not to be confused with Homeowner Emergency something something, which would be abbreviated HELP (and would be way too cute). The formal reason for the program is to provide emergency loans to 'homeowners' facing foreclosure, or basically all of them, to help tide them over "a temporary financial crisis", the Department of Housing and Urban Development (HUD) has announced. The informal reason is to provide thousands of Americans with a $50,000 recourse and interest-free loan for up to two years (money which will go down to paying down equity an underwater mortgage, and will thus never be repaid), so that earned income, instead of being used to make mortgage payments, will be rerouted into such far more critical capital needs as the latest iPad or buying share ot LNKD at $122. But don't think for a moment that everyone will be able to access this money: "the program is available to homeowners who have seen their incomes fall and who could lose their homes to foreclosure due to circumstances beyond their control, including involuntary unemployment, underemployment, economic conditions or an illness" which, actually in retrospect, is all of them. Well, the effort of getting off one's couch and actually picking up the forms may be unavoidable. Of course, that process in itself may well limit 80% of the eligible participants.

This just happened. What was really said however will never be reported... Which is why we leave it to our readers.

If anyone has a clear idea what is going in Europe, you are smarter than us, and may move on to a different post. For everyone else, here is a must read piece from SocGen that tries to make sense of what is rapidly becoming the biggest clusterfuck in modern European history, in which everyone hates the outcome that is predetermined by the bankers, yet nobody knows just how to achieve it. From SocGen's James Nixon: "What is so surprising is how much the Eurogroup appears to have handed the initiative to Greece itself; if the Government falls after Tuesday’s vote of confidence presumably we reach the point where the crisis starts to get really sporting. And, if there weren’t hurdles enough, the latest from Mr Papandreou is a referendum on the whole kit and caboodle in the autumn. The risk for the Eurogroup is that the gambit of pressuring Papandreou may now backfire with some of the Greek press seeing this as a full frontal attack on the PM. In many respects the situation in Greece very closely mirrors the political situation in Portugal. The right-wing business orientated opposition is unhappy that their spendthrift socialist government still haven’t bitten the bullet and undertaken root and branch reform of the public sector. Hence Mr Papandreou continues to rely too heavily on hypothetical increases in tax revenue rather than wield the axe over his own supporters. As in Portugal, the opposition may be prepared to bring down the government over this if they can and force new elections. This would leave the Eurogroup having to negotiate with the different political parties in Greece in order to secure agreement on further austerity."

Back in April 2010, Zero Hedge wrote an article titled "Banks Stifle First Amendment, Attempt To Create A Tiered Market Of "Clients" And "Everyone Else" As Theflyonthewall.com Is Blocked From Instant Stock Research Reporting" describing how "Theflyonthewall.com, which is a news aggregator service (much like most
of the blogosphere these days, but without the snarky commentary), and
is hosted on Zero Hedge, has just seen a major driver of its business
model cut off, after several banks just won an injunction that blocks
Fly from notifying its clients when a bank may have issued a research
event such as an Upgrade or, on those extremely rare occasions nowadays,
Downgrade. The banks who feel violated by everyone getting access to
information about their sellside detritus contemporaneously, not just
wealthy accounts and wire services, are Barclays,
Bank of America Corp.’s Merrill Lynch, and Morgan Stanley." We spared no words to explain the stupidity of this action: "this injunction is about the dumbest thing one could imagine: news of sell side research changes are reported immediately by Bloomberg, Reuters and all the major newswires. Why did Lehman, Morgan and Merrill not take them on? Oh yeah, limited budget. And now that they have a case precedent, the door is open to demand cashola or threaten with shutting down the big boys. As for the rest of the blogosphere - good luck."  Well, it won't come to that. Our friends at Fly just won their case.

While it didn't lower ES margins just like before the S&P rout started several weeks ago, the CME has just decided to lower margins across virtually all interest rate products. Again. This is the second consecutive margin drop in under 3 weeks, following an identical action on June 3 when the CME slashed IR margins initially. Some examples: TEN maintenance and initial margins are down from $2160 and $1700 to $1485 and $1100 respectively, or over 30% each in under weeks, 17 (the 30 Year UST Bond Futures) maintenance and initial margins are down 3713 and 2750 to 2700 and 2000 respectively, another 30% drop, and so on. Most amusingly is attempting to validate this margin cut when looking at the Treasury complex vol expressed by the MOVE index. Oddly enough from 71.50 at the beginning of June, or a 2011 low, vol since surged to nearly 2011 highs, or a roughly 20% jump. Yet it is precisely this jump in volatility that somehow is conducive to not one but two margin cuts in three weeks. Luckily, the end of QE3 in precisely 10 days has nothing to do with this decision which makes investing in Treasurys by speculators so much more easy...