Archive - May 2012

• Greek pro-bailout parties lack majority, final poll results (Reuters)
• Greek Election Gridlock Raises Risk for Bailout, Euro Future (Bloomberg)
• Socialist Hollande ousts Sarkozy as French leader (Reuters)
• Merkozy End Means Franco-German Gulf; Greek Voters Rebel (Bloomberg)
• Election swing leaves Greece teetering (Kathimerini)
• Merkel's Coalition Appears to Suffer Loss in German State (WSJ)
• The Only Solution to the Eurozone Crisis (FT)
• Cameron Faces Clamour From Party Right (FT)
• Falcone’s LightSquared Said to Get Week Credit Extension (Bloomberg)
• Hungary plans three-year, 15 billion euro IMF deal: state sec (Reuters)
• Putin pledges unity on return to Kremlin (Reuters)

It was only a matter of time before the next bank bailout began despite all those promises to the contrary. Sure enough, as math always wins over rhetoric and policy, earlier this morning the shot across the Spanish bow was fired after PM Rajoy did a 180 on "no bank bailout" promises as recent as last week. From Dow Jones: "Spain may pump public funds into its banking system to revive lending and its recessionary economy, Prime Minister Mariano Rajoy said Monday, signalling a policy U-turn. The government had pledged to not give money to the banking industry that is struggling in the wake of a collapsed, decade-long, housing boom. "If it was necessary to reactivate credit, to save the Spanish financial system, I wouldn't rule out injecting public funds, like all European countries have done," Rajoy said in interview with Onda Cero radio stations. The weakness of Spain's banks is weighing on the economy that contracted 0.3% in the first and fourth quarters, meeting most economists' definition of a recession. The unemployment rate is at an 18-year high 24.4%, data showed April 27. Banks have sharply reined in credit in the face of rapidly growing bad debt and problems getting finance on international markets." And explicitly we learn that Spain will inject EU7 bln of public funds via contingent-capital securities to support BFA-Bankia, El Confidencial reports, citing Economy Ministry officials it doesn’t name. It actually sounds cooler in the native: "El Estado inyectará 7.000 millones de dinero público para salvar BFA-Bankia." So it begins. Which also means that the "Bad Bank" idea is about to be launched. So far so good... The only problem is that like the EFSF, like the ESM, like the IMF, all those "deus ex machina(e)" also had to find funding of their own... and failed: it is one thing to intend to rescue the system. It is another to find the cash to do it with.

By the look of things, French youth are celebrating Hollande’s victory by picking up all of their friends and then driving up and down the streets honking their horns incessantly. Most cars were packed to the brim with passengers hanging out of every window and even the sunroof waving French flags, singing, or simply yelling pro-Hollande slogans.

Germany's DAX is the hardest hit so far of the major European equity markets (futures) with a drop of over 2.2% (underperforming the French CAC40 -1.5% for now). The EuroSTOXX 50 is down 2% and reflects the general state of affairs in European equity markets as they open - which is a little worse than the S&P futures market's move since the European close on Friday.  European credit markets are very quiet and illiquid thanks to the UK's May-Day celebrations (and its position as hub for CDS market-making) but sovereign bonds are trading across mainland Europe and are being sold relatively hard so far. Spain, Italy, and Greece are underperforming with the former two pushing towards recent wide spreads even if yields remain off recent highs. EURUSD rallied a little off its overnight lows as Europe opens but has started to give back some of those gains. As the cash markets open there is some buying-the-dip pressure in stocks - even as govvies remain offered while financials remain under significant pressure. US equity futures and Treasuries remain in sync as ES limps a little higher off overnight lows.

With Citigroup raising the odds of a Greece exit from the Euro to between 50 and 75% in the next 12-18 months, it is perhaps worth reflecting on just what is holding them back and where Europe goes next. There has been and will continue to be much written on the faulty premise or failed-experiment of the Euro and using George Soros' recent less-than-sanguine discussion (at the INET conference as we noted here) of Europe in general (how did they get here? exactly where are they? and what are the scenarios going forward?) Gordon T Long and John Rubino expand on these thoughts in a must-watch-before-you-hit-the-BTFD-button clip this week. If there was a dummies guide to Europe's problems, this is it - plain and simple - and as this weekend's elections perhaps reflect "when you borrow too much money as a nation - you become ungovernable - as there is no painless way out."

Irradiation is bullish ... and the glow-in-the-dark thing reduces lighting bills

But I would contend that you need to be careful for what you wish for as something has happened to the relationship between bonds and stocks over the past 2 years.

The market appears to be topping out after we were all told that this is one of those can't miss you better jump on board now the train is leaving the station moments that you will certainly regret.

US Treasuries opened just over an hour ago and are now trading considerably lower in yield. 10Y yields are under 1.84%, their lowest since February 3rd and within a few bps of ther 1.7959% yield lows of mid-December which would all but guarantee a return to the September 2012 2011 low yields. More critically for all those QE-hopers, the massive divergence which we have been vociferously arguing as unsustainable between 10Y yields and the S&P 500 has how collapsed and converged perfectly. From last Tuesday's Bernanke press-conference when he hinted (albeit hedged with chatter of recklessness) that QE was still on the table (which we argued meant that - should the entire world suddenly go pear-shaped, we will step in but until then we are on hold), US equities decided that they should forget fundamentals once again and simply bid the market on nominal price improvement based on fiat-debasement - which enabled a 50 point divergence from reality- which has now completely converged and in fact S&P futures are now 10-15points below the pre-Bernanke-week-hope lows.

We will hear that QE3 is a sure thing tomorrow. I disagree.

Two big events down, many, many others more left to go. Below is a full European event calendar for the rest of May and June. Just like in 2011, Europe got unhinged around this time and things peaked by November when only a coordinated global intervention saved the world courtesy of $1.3 trillion from the ECB, expanded FX swaps from the Fed and a PBOC rate cut. Only unlike in 2011, with Silvio and Sarko both now gone, the roster of political scapegoats is getting very, very thin. Whose head wil the vigilantes demand next? We will find out over the summer and fall, which promise to be even more exciting than last year.

While it is still early in the overnight session, initial indications are for a full spectrum Risk Off market. In fact, S&P 500 futures (ES) have not fallen this fast over a two- or three-day period since the third week of November last year. As many may remember - a few days of drops like this took ES from 1260 to 1136 in a week but more importantly was followed very quickly by a massive and coordinated Central Bank intervention that ripped ES over 6% higher in an overnight session - sparking the entire rally of the last six months as it appeared the central bank put strike had been dragged higher. Admittedly the two-day fall so far (while the largest in almost six months) is still small in context, it would appear the world is waking up to the true event risks of a debt-saturated fiat system going through its death throes. Back of the envelope would suggest we need to drop to 1285 or so on the S&P before the same kind of hit-the-big-red-central-bank-panic-button kind of move comes into play. Sure enough, Gold is only very modestly lower (-$3 at $1640) so far in the face of a rip higher in USD and broad liquidation everywhere else - perhaps the patience of sound money will be paid off once again.

While clearly dramatic, the outcome of the French presidential election was very much anticipated and at this point the only real question is how many promises will Hollande reneg on before the week is over: if Berlusconi is any indication, all it will take is for OAT yields to spike by 20-30% and all shall be well for the status quo. Greece, on the other hand, where as we said the people have lost everything so are free to do anything, just did more or less that, and have shocked Europe with an outcome which as we warned could result in the lack of a pro-bailout coalition government, which means no IMF aid, which means "no bailout for the Greek people", which means no bailout for European banks under the guise of a Greek DIP loan. And with 63% of precincts reporting, ND + Pasok have 153 as of this moment which is enough for a majority although paradoxically the anti-bailout parties will have among them nearly 60% of the finaly vote which means they could form an anti-bailout coalition if they buried their diferences. Finally, there is still time, so for all those curious if the two Greek parties will be able to form an all important coalition government, can keep track of the vote count in real time at the link below.