Archive - Apr 5, 2012

Two weeks ago we noted that all those banks that 'invested' in Spanish and Italian 'Sarkozy' carry-trades post LTRO2 are now under-water on their positions (on a MtM basis). The last week or so has seen this situation deteriorate rather rapidly with Spanish yields now backed up all the way to mid-November levels (and notably Spanish equities below their November lows) removing all the LTRO-exuberance leaving all Spanish banks under-water on their carry trades (should they ever have to MtM). At the same time, the critical aspect of LTRO (that is reliquifying tha banks to avoid the credit contraction vicious cycle that was beginning) has also failed. LTRO-encumbered banks now trade with a credit spread on senior unsecured (but now hugely subordinated) paper of 305bps on average (compared to non-LTRO-encumbered banks trading at 180bps on average) - back up near January's worst levels and almost entirely removing any of the tail-risk-reduction expectations that LTRO was supposed to provide. As Peter Tchir notes, there are two types of credit losses - default/restructuring (Greece and soon to be Portugal/Spain et al.) and bad positioning (or forced selling as risk becomes too much to bear - Spanish Govt/Financial credit) - these two sources of self-fulfilling pain are mounting once again. The simple truth is that without endless and infinite LTRO (or printing) funding for banks there is not enough demand for Europe's peripheral junk (as the Spanish auction highlighted) and the lack of performing collateral means the next stage will be outright printing (as opposed to a veiled repo loan) and that fact is beginning to creep into US financials as systemic contagion spreads.

Today's initial claims number printed at 357K, on expectations of 355K, a number which next week will be revised higher once again, likely to 362K. The game here is simple - just show a decline in claims, as what happened to last week's number, also revised higher, this time from 359K to 363K, just so it can show a 6K decline and allow the idiot media to blow such headline as "Weekly US unemployment benefit applications fall to 357,000, lowest in 4 years" from AP and "Jobless Claims in U.S. Decrease to Lowest Level in Four Years" from Bloomberg. In reality, this is the third consecutive miss of consensus in a row. Give us a break - funny then when one considers that last week's consensus was 350K, which has since been revised to 363K. Or what about that 348K print the week prior which ended up being a more realistic 364K. In other words, the headlines were 348K, 359K, 357K, and somehow this is indicative of anything more than outright and endless data manipulation. Needless to say, when next week the number is revised to a far greater miss, nobody will care as the embargoed headlines will once again say "Jobless Claims in U.S. Decrease to Lowest Level in Four Years" and the sheep will keep on buying it over and over and over. What is also notable, is that just like yesterday's ADP number, today's claims data gives no hint what to expect from tomorrow's market holiday NFP.

When it comes to energy, and specifically crude oil trading, few names are as respected, if controversial, as former Citi star trader, Andrew Hall, whose $100 million pay package in 2008 forced Citi to sell energy unit Phibro to Occidental. He currently is primarily focused on his own fund Astenbeck, where he trades what he has always traded - commodities, and primarily oil. As such, his view on the oil market is far more credible than that of the EIA, or any conflicted Saudi Interests. So what does he have to say about the biggest wildcard currently in the energy market, namely whether or not Saudi Arabia, can push its production from its recent record high of just under 10,000 tb/d to the 12,500 tb/d that would be needed to replace all lost Iranian output (a question we asked rhetorically two weeks ago). The answer? Don't make him laugh.

Liquidity never solves issues of solvency and the time that it buys is generally of a relatively short duration. After the $1.3 trillion loan by the ECB to the European banks which helped drive up the prices for European sovereigns what do we now find as the liquidity ebbs? Yesterday’s Spanish auction was abysmal and the French auction today did not go too well with rising yields and less demand. The austerity measures are driving Europe into a worsening recession and the financial positions of Spain and Italy are deteriorating even as new measures are put into place. In fact there are only two ways out of the European mess which are growth, not happening, and Inflation which may be the ultimate strategy employed by the EU and the ECB if the construct holds to the point of changing strategies which is surely no outlier event.

European equities are taking losses as North America comes to market, with particular underperformance noted in the periphery bourses. Risk-aversion pushed both Spanish and Italian yields higher, with the spread between the Spanish 10-year and the Bund crossing above 400BPS for the first time since Late November 2011. The yields have now come off their highs but still remain elevated. It should be noted that markets are generally light today heading into the Easter weekend as investors take risk off the markets, so large surges in volumes have been observed. In the FX markets, EUR/CHF briefly broke below the SNB’s staunchly defended 1.2000 level on some exchanges, but uncertainty remains over the exact low due to different exchanges registering different prints. Needless to say, all exchanges witnessed a 30pip spike upwards in the cross with significant demand seen pushing the cross away from the floor. EUR/CHF now trades around the 1.2020 level.

• Portugal Says Some Town Halls May Need to Restructure Their Debt (Bloomberg)
• Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive (Bloomberg)
• China PBOC Injects Net CNY25 Bln Into Money Market This Week (WSJ)
• BoE warns on mortgage limits (FT)
• Apple investigating new iPad WiFi issues, tells AppleCare to replace affected units (9to5Mac)
• Juppé promises French hard line in EU (FT)
• ECB liquidity fuels high stakes hedging (FT)
• Fed’s Lacker Says Markets Saw Odds of Policy Easing as Too High (Bloomberg)
• Japan minister to ask for nuclear reactor restart: media (Reuters)

And like that, Europe is broken again. Following a spate of negative European data (what else is there), including a miss in German industrial production as well as a miss in UK manufacturing output, all eyes are again on Spain, especially those of the bond vigilantes, who have sold off the sovereign European bond market, sending the Spanish-Bund spread to over 400 bps for the first time since December 2011. The main reason today: a Goldman report saying Spain will unlikely meet its 2012 and 2013 budget targets, as well as JPM Chief Economist David Mackie saying Spanish government "missteps" have raised questions about its credibility, making investors reluctant to purchase Spanish debt. Stress has returned to periphery, if it broadened into bank funding markets more LTROs would be forthcoming; if that “failed to hold yields at an appropriate level” Spain may need assistance from the EFSF/ESM and the IMF. Euro area unlikely to return to stability in sovereigns without some burden sharing; nominal growth likely to stay below borrowing costs, making fiscal targets “all but impossible to achieve”. UBS piles in saying Spanish banking stresses still haven't been addressed. Finally, a big red flag is that market liquidity is once again starting to disappear, and as Peter Tchir points out, Main is now being quoted with 3/4 bps bid/ask spread, all the way up to 1 bps spread. In other words, as we have been warning for weeks, the period of fake LTRO-induced calm is over, and the market is demanding more central planner liquid heroin. The question becomes whether Europe has even more worthless collateral in exchange for which the ECB will continue handing out discount window money in sterilized sheep's clothing. Yet nowhere is the resumption in risk flaring more evident than in the Swiss Franc, where the EURCHF all of a sudden broke through the critical 1.20 SNB floor, which was set back in September 2011, the day gold was trading at its all time high. Said otherwise, everyone is once again scrambling for safety. And since they can't get it in the CHF, it is only a matter of time, before gold resumes its ascent as the paper currency alternative that sent it to its all time highs late last summer.