Archive - Aug 17, 2011

The ECB's new bond purchases are not being sterilized like last year.  In fact, just the opposite.

So the conventional herd wisdom is that following last week's near implosion, Europe is now suddenly supposed to be fixed? Perhaps. Perhaps not. According to the just released results of the ECB's tender operation for emergency 7 day liquidity, arguably the closest the ECB has to a dollar denominated discount window (and the associated stigmata upon borrowing), just one bank borrowed $500 million in a 7 day liquidity providing operation at a 1.1% rate. Why is this notable? Because as the chart below indicates, there had been no borrowing under this facility since March 2011, and the last time there was a sizable borrowing under the 7 Day OT was back in May 2010, when Europe was blowing up for the first time and the ECB was scrambling like a headless chicken to contain the contagion fires. So the question now is which (French? Italian?) bank is still caught with its pants down and is crawling to the ECB for what is a quite sizable $-based capital injection (this same bank is certainly using the ECB's various other liquidity providing lines of credit).

Europe is shaking off yesterday's seemingly disappointing Merkel/Sarkozy press conference.  I can't find anyone who is particularly bullish about it, but the moves in the hedge products have to be respected.  XOVER is 26 tighter, back to 584.  Main is 7 tighter at 139, and even SOVX is 5 tighter with Spain and Italy leading the charge.  That is in spite of relatively neutral moves in the bond markets.  It seems like Europe must have had bigger and larger hedges than I realized.  The pain in trading books there is palpable today.  Bonds are getting marked marginally tighter, index shorts are getting marked a LOT tighter.  Investors are scrambling to get on side, and are using to the move in indices as an excuse to shift to "risk on" mode.   The theme of the market being "broken" continues to play out.  This time market is gapping tighter on what if anything, seemed like a disappointing announcement - No Eurobond, No new increase in EFSF, and Yes a new tax.  BAC CDS is already at least 20 bps tighter this morning.  Anothing shining example of a crowded (and possibly longer term correct) trade getting squeezed. 

Following a big drop in June energy prices, which pushed the broader PPI to a one year low sequential change of -0.4%, the PPI is once again in an uptrend, rising by 0.2% in July, higher than consensus of 0.1%. Core PPI was higher by 0.4%, following the 0.3% increase in June, and double consensus of 0.2%. Energy did drop modestly in July by 0.6%, but far less than the June 2.8% drop, and was more than offset by the rise in food Producer Prices of 0.6%. In terms of various stages of production, finished core goods rose due to a 2.8% hike in tobacco products, with light motor trucks and pharmaceutical preparations also contributed significantly to the rise in the finished core index; finished foods rose primarily due to a 2.7% rise in veal prices, while energy prices dropped due a 2.8% decline in gasoline. In intermediate goods, core was led by higher prices for plastic resins and materials, which rose 2.1 percent, energy was led by liquefied petroleum gas led this advance, increasing 2.5 percent, and foods saw a 6.3% increase in natural, processed, and imitation cheese. Crude energy benefited from a 5.2% decline in crude petroleum, crude foodstuffs actually dropped 0.8% in July, led by a 9.7% decline in prices for slaughter poultry led the monthly decrease in July. Lower prices for fresh and dry vegetables also contributed to the decline in the crude foods index. As for crude core, the biggest upward price mover was a 7.0% increase in prices for copper ores was a major contributor to the monthly increase in July.

Citi's Steven Englander was proven 100% in his skepticism to the SNB's intervention. Here are his follow up thoughts:

• We think that the SNB is still largely reluctant to intervene on the FX spot market. Investors expecting such measures in the near term could be
  disappointed in our view.
• The latest measures imply that the SNB will have to increase the size of its balance sheet by at least about CHF 40bn or 8% of the Swiss GDP
• FX spot market intervention is not a panacea and that the best that the SNB could hope for would be to prevent further CHF appreciation.
• While we could have seen the lows in EURCHF and USDCHF for now, we doubt that an uptrend in the crosses could be sustained.

The meeting between German chancellor Merkel and French president Sarkozy yesterday yielded neither an approval for Eurobonds issuance, nor any immediate extension to the EFSF; instead the two leaders did say that a financial transaction tax will be proposed in September. The news promoted risk-aversion during the European session and weighed on equities, with particular underperformance seen in financials, whereas Bunds received support and marginal widening was observed in the Eurozone 10-year government bond yield spreads across the board. Elsewhere, weakness in the USD-Index supported EUR/USD, GBP/USD and commodity-linked currencies. However, GBP came under pressure following the release of BoE’s minutes, which showed that the MPC members voted 9-0 for no interest-rate hike, together with worse than expected jobs data from the UK. In other forex news, CHF received a boost across the board after the SNB didn’t mention EUR/CHF peg in its latest communiqué. Moving into the North American open, the economic calendar remains thin, however markets look ahead to the PPI and DOE inventories reports from the US later.

The Merkel Sarkozy plans to centralize financial and economic governance in the EU has failed to calm markets and there is further weakness in stock markets today.  A key aim of the meeting was to restore confidence in the euro. In the short term this has not been achieved and it is highly unlikely that it will be achieved in the long term.  Centralised financial and economic governance will not be a panacea to the current debt crisis. It does nothing to address the root cause of the problem which is massive indebtedness and the saddling of taxpayers with massive liabilities incurred by banks. Concerns about currencies and currency debasement is leading to continued safe haven demand for gold.

• AC Milan: -2.5
• Real Madrid: -2
• RSC Anderlecht: -10
• Ronaldo: +3
• AEK Athens: unch
• ManU: - .5
• Bohemian FC: +5
• Les Bleus: -5.5
• Vienna FC: -6
• Hamburger SV: -1

With no major newsflow out of Europe, and no notable economic news in the US (except for PPI), we assign a probability of 99.9% to another no-volume melt up (absent news flow, because any news is bad news) as HFTs bid up every offer while collecting rebates, afterwards getting petted behind the ears for doing Brian Sack's work.

• SNB boosts steps to check franc’s rise (FT) but no peg
• The man who taught the Fed to sell Treasury puts: Markets Go From Nightmare to Bad Dream (Vincent Reinhart)
• What to make of the Franco-German Summit (FT)
• Gold Market Is a ‘Bubble Poised to Burst,’ Wells Fargo Says (Bloomberg)... but not before the bad mortgage bubble that is Wells Fargo bursts
• Putin sets sights on Eurasian economic union (FT)
• Fed’s Bullard Says New 2013 Rate Pledge Not a Signal for More Bond Buying (Bloomberg)
• Walmart warns on US weakness (FT)
• DeMark Says Stock Rally May Begin in Weeks, Buy Europe Banks (Bberg), or he could be just as wrong as last time (ZH)
• Margin Calls Push Stock Leverage Down Most in Year as S&P 500 Tumbles 12% (Bloomberg)

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

As Zero Hedge was widely predicting (most recently here), there was no announcement of a fixed or floating peg in the CHF (which was obvious from a mile away: the desperate attempts to leak misinformation to the media and make the franc unattractive were enough to only fool various robots), and instead the SNB's now uber-powerless Philipp Hildebrand said that he "aims to expand banks’ sight deposits at the SNB further, from CHF 120 billion to CHF 200 billion." Translation: "we are terrified to do anything more, we can't afford any more balance sheet losses and for all those who called our bluff, you won" - the immediate result is a 300+ pip tumble in the EURCHF. Elsewhere - pervasive disappointment among the sellsiders who actually bought this theater hook, line and sinker: "SNB seems willing to drag feet for now before pulling trigger on FX spot intervention" Valentin Marinov, strategist at Citigroup, writes in note. Ironically the market is now falling for more of the same as it anticipates something to come out of the Swiss government to also discuss measures against the strength of the CHF. However, as Goldman says (note below) hardly anything will come out of it: "After all it is the SNB who decides on the currency regime and today's announcement is, in our view, a clear signal that the SNB first wants to see how the current measures work before they will decide on any additional measures." Prepare for another 11.5 sigma move in the USDCHF as the "priced in" central bank non-intervention unwinds.

The most liberal place in the U.S. - the San Francisco Bay Area - takes a page from Egyptian dictator Hose Me Mubarak ...