Archive - Sep 13, 2011

Update: Italy Hasn’t Asked for Any Help From China, Deputy Min Says... Yeah. Full Retard

Wondering why stocks are soaring and the EURUSD is above 1.37 again? Why, nothing short of the latest rumor, this time that Russia will bail out Europe. Bloomberg reports that Russia may use its international reserves to buy common euro-area bonds if European policy makers back joint debt issuance, Reuters reported, citing an interview with Finance Minister Alexei Kudrin... Sorry, we just report them. Time for the trader diary to get its latest update. The only problem we see with this strategy of rolling daily bailouts is that after China and Russia, who would be far smarter to participate in a stalking horse bid of European assets than to invest general unsecured pre-petition claims, there will be nobody left to "rescue" Europe: after all who else is out there? Zimbabwe? Japan? Argentina? Iceland? We doubt even the 80286's will buy that...

In a brief moment of humility, JPM's masters of the universe admit, well, they are not. The firm sees markets revenue -30% from Q2 2011, sees lower asset management revenues, expects a modest loss in private equity, and will recognize additional litigation expenses. Overall corporate net income is expected to be a small loss.

While the market continues to trade purely on rumor, counter-rumor and refutation of a refutation, the facts demonstrate that Europe is ugly and getting worse. Today's now daily update focuses on continuing deterioration in both liquidity and solvency. First, the usage of the ECB Deposit Facility soared to €198 billion on Monday from €182 billion on Friday. This is a massive €118 billion increase in the past month alone. As the chart below demonstrates, a good word to describe the chart is parabolic. Furthermore, USD Libor continues to rise and has now risen nearly 40 days in a row. While not nearly parabolic, it is time to shift attention away from Credit Agricole, which is still the most "funding challenged", and focus on CSFB which once again rose by 0.01%, and threatens to overtake the troubled French bank in pole position. Time to refocus the shorts from France to Switzerland? Lastly, the CDS are ugly across the board.

Morgan Stanley continues to demonstrate just how badly it lags Goldman. While the vampire squid is mostly known for sending its employees to run such places as the US Treasury, the New York Fed and the ECB (in 2 short months), Morgan Stanley has to be content with the inverse, i.e. hiring former Fed apparatchicks, in this case former long-time Fed advisor Vince Reinhart, who among other things is best known for collaborating with Ben Bernanke on discovering that Operation Twist does not work, and, of course, proposing the currently overt Treasury manipulation operation (for those times when QE is not sufficient) which involves selling puts on Treasury futures (link).

Ever wonder what a page in the daily diary of a "sophisticated" institutional trader looks like? Wonder no more.

Let’s be honest here. Neither China, nor the ECB, nor the Federal Reserve can stave off the collapse that’s coming. Indeed, the Fed spent $900 billion and nearly one year to prop the markets up… and we’ve wiped out ALL of those gains in just one month.

Today's Import and Export Price Index, while not market moving, showed that the US still has some residual inflation to import (Prices of goods imported from China rose by 0.1% in August, and 3.6% from a year earlier). The August headline number came at -0.4%, on expectations of a -0.8% drop (0.3% previously), driven entirely by Fuel Imports which dropped by -1.8%, following a 0.4% increase in July, and a drop of -2.3% previously. In other words, the Fuel component of importer prices follows the Russell 2000 with a correlation of 1.000. AS for non-fuel imports, these was positive as has been the case for 12 months in a row with the exception of June 2011, when it was unchanged. Should QE3 be announced and priced in in one week, look for Brent, and its far less relevant cousin WTI, to soar, sending import prices to the moon once again, and so forth: we all know how the play ends.

Just when we thought Europe was fresh out of rumor ideas, they prove us wrong once again. From Reuters: "Greek Prime Minister George Papandreou will hold a conference call on Wednesday with French President Nicolas Sarkozy and German Chancellor Angela Merkel, Greek state television NET said on Tuesday. NET did not cite any sources and there was no immediate, official confirmation of the call." Judging by the market reaction, which is a big fat yawn, Europe will have to come up with something much better than this.  And we are sure they will oblige: look for the rumor mill to work overtime spewing furious gibberish all day, until something finally sticks to the wall. The end goal is insight: must prevent the unwind of the Eurozone for just 3 more hours when the market closes. And in the meantime, making sure she shoots herself in the foot once again, Merkel said she’s "very optimistic" that Finland’s demands for special collateral as part of the Greek bailout package "will be met within the parameters of measures agreed by euro-area leaders." Funny, because this is 100% backtracking on the official German position as of a few short days ago which was that no collateral would be granted to anyone. Sigh.

Complete conflicted, planted and rumor-based schizophrenia overnight. An article in the FT saying that the Italian government is working on measures to facilitate the sale of the Italian government paper to China provided positive sentiment to the market early in the European session.However, the move was short lived on the back of market talk that China will not buy Italian bonds but instead seek various infrastructure investments, which resulted in a sell-off in equities. Equities came under further pressure after an article in the WSJ wrote, citing an unnamed BNP Paribas executive, that the bank could no longer borrow USDs from the money market, which also resulted in a sharp decline in Eurodollar futures. Weakness in equities provided support to Bunds, and the Eurozone 10-year government bond yield spreads with respect to Bunds generally widened. Particular widening was observed in the Italian/German spread leading up to and following a lacklustre 5-year Italian BTP auction, where the yield hit an all time high. Elsewhere, EUR/USD traded in negative territory during the European session, however did come off its earlier lows as the USD-Index weakened, together with comments from the Italian Prime Minister who said that the Italian Parliament will approve the budget proposals tomorrow. Also, AUD/USD remained under pressure following worse than expected business conditions/confidence data from Australia overnight. In other forex news, GBP/USD lost ground after BoE's Posen said that the central bank should resume its quantitative easing programme.

Import prices and the budget balance; On the funding side, Treasury will auction off 4 week bills and 10 Year bonds to pay for all this fun and games. Luckily nobody ever expects to be repaid pre-hyperinflation.

Sorry, no announcement. Just more rumors from the Eurozone. This is, if nothing else, becoming fucking hilarious.

• Sarkozy spokesman says no Franco-German initiative on Greece today

Additionally, Europe has officially run out of rumors to recycle for the next 24 hours: even vacuum tubes remember stuff about China and Merkozy bailing out stuff.

How many times can we rally on the same story. Back in April of this year, there were big stories about Chinese buying European sovereign debt. At the time the Greek 10 year bond was trading at almost 60 then. It is below 40 now. The Greek 2 year bond was at almost 70, now it too is at 40. The Italian 5 year bond yielded less than 4%, today it is almost back to its highs of 5.5%. I am quite positive that I can find articles quoting Chinese support for Greece going back to March 2010 when Greece issued a new bond in what was deemed a VERY SUCCESSFUL auction. I have written about it before, but it seems worth mentioning again. In March 2010, Greece issued a 5 billion EUR 10 year bond. It had a 6.25% coupon and was priced at 98.942 It traded up and the whole market breathed a sigh of relief that the auction had gone so well. It is hard to count the number of times that China has come in to buy European bonds or that a successful auction was a sign that the crisis was over, I only have so many fingers and toes after all. None of those actions was enough to save Greece from some from trading at prices far below what investors a year ago thought were conservative recovery rates. And Greece only has about 330 billion EUR of debt. How is China going to save Italy with 1.6 TRILLION EUR of debt? China could buy up all the 156 billion EUR of Portuguese debt if it wanted to solve the "contagion" there. They haven't done it. Again, if this was new news, or had shown any sign of working in the past, I would be more excited. This seems like a story that is trotted out every few months, provides an initial pop, and then bonds return to their grind lower in price.

Well, the China rumor came and went... So it's time for more "Magic From a 'Mergency Merkozy Meeting." From Reuters:

• FRENCH GOVERNMENT SOURCEE SAYS SARKOZY AND MERKEL WILL MAKE AN ANNOUNCEMENT ON GREECE TODAY
• GERMAN BUND FUTURES <FGBLc1> HIT SESSION LOW AT 137.68 AFTER MERKEL-SARKOZY NEWS

Bottom line: either they file Greece, or they don't, and the vigilantes realize that "emergency" meetings become not monthly (remember Zero Hedge's question how long until the next Merkozy "date" following the last one?), not weekly, but daily, and German and French CDS soar to record highs... Which will likely happen today.

Despite another round of unsubstantiated rumormongering by the FT yesterday (more on this in a second), investors in this morning's critical round of Italian bond issuance were nonplussed and demanded 10 pounds of flash with every bond, which in turn sent 5 year BTP yields to the highest since the introduction of the zEURo. If the purpose of the planted Debtwire/FT story was to make this auction attractive, one can only conclude that it failed. The result is yet another"Europe is Open" type market session, where everything is tumbling on Greek default and contagion fear, further stoked by a front-page WSJ story which says what we have been warning about every single day for the past 3 weeks (those pretty Libor charts that go from the lower left to the upper right are not just there to make the place pretty): namely that banks, in this case French mega institution BNP, no longer have access to dollar funding markets. The result: yet another increase in the actual 3M USD Libor rate, nearly the 40th day in a row, which in turn makes the dollar lock out even more painful. From the WSJ: ""We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore. He's not the only one worried. Société Générale has lost 22.5% of its value since the beginning of the summer. In early September, BNP released a statement—in English, which is highly unusual—explaining that it has abundant dollar liquidity and that BNP has nothing to worry about, unlike other banks. France's three biggest banks have been the subject of whisper campaigns about their solvency throughout the summer." It gets worse: "Now that the situation is bordering on catastrophe, analysts are suggesting that the government is set to start nationalizing France's banks. The banks have remained silent on the matter, and the government denies this talk." Well, whatever good will the FT tried to create with its rumors,the WSJ destroyed with its facts.