Archive - Jun 18, 2012

LCH under investigation by Holder under antitrust statutes. And just who was the ultimate counterparty to the Corzine trade?

One European think tank which has been spot on in its skepticism over the past two years, is OpenEurope. Below they share their views on the next steps for Greece.

Having been the first, back in January, to propose positioning to gain from (or to protect client funds from - for bond managers) the implied subordination (or cram-downs) that the ECB's, or any other 3-letter acronym's, unintended consequences cause, as they decide to bailout the next European nation - via positioning in non-local-law bonds in all PIIGS nations (or 'swapping' local-law for non-local-law), our most recent Spanish-specific example has performed exceedingly well. Last Tuesday, we urged fixed income managers (for fear of fiduciary duty recrimination) to swap to the non-local law Spanish bonds and traders to arbitrage the litigation risk between local- and non-local-law bonds. In that time, the difference in price between the two bonds has dropped dramatically as the local-law bonds have dropped almost 8% in price, while non-local-law are practically unchanged. On a 50% margin basis, the trade is up around 80% in real returns in the past week (with the basis shifting from around EUR10 to EUR5.8).

It is the Great Game. They try to lure you into their various traps; I try to keep you out. They offer headlines from countless sources and I try to tell you what things really mean. They make use of a giant propaganda machine and I chant alone in the wilderness. They make up stories and present them as accurate data and I try to give you the facts. They want your money and I want you to “Preserve your Capital.” They are as diabolical in their pursuits as Professor Moriarty was in his. They are the political masterminds and I am a sort of Sherlock Holmes trying to analyze and conclude one case after the other. You may listen or you may not but I pay for my own supper while others ask for their compensation first. It is their Game, my Game; it is the Great Game.

With few (if any) natural buyers of Spanish debt (especially given the lack of CDS-cash basis now), Spanish bonds continue to crumble lower in price and higher in yield/spread. For the first time ever, 10Y Spanish bond yields have passed 575bps over Bunds - currently trading at 7.15% yield. Since the post-banking-bailout open, Spanish bond spreads have soared a remarkable 114bps and whether this is seen as the fulcrum security or Italian bonds (which are also deteriorating rapidly this morning), it would appear that just as Spiegel reports today from the G-20, via a senior EU official: "If Germany Doesn't Make A Move, Europe Is Dead".

The Spanish precedent is indeed spreading, and as noted here previously a week ago, the Irish demand to get equitable treatment may be about to be granted:

• TROIKA CONSIDERS CHANGING IRISH BAILOUT TERMS, RTE SAYS

However:

• BROADCASTER RTE DOESN'T CITE SOURCES FOR BAILOUT REPORT

So most likely just a trial balloon to see the European response. But why not? What is the downside: Europe blinked and now it is up to the peripherals to demand the same. Next up: Portugal, Greece (again), and again... Spain. And so on, until the socialist utopia finally does run out of other people's money.

Relief in the markets, after the worst case scenario from the Greek elections was averted, proved to be decidedly short-lived. Although the pro-bailout New Democracy party came in first with 129 seats (with an additional 50 seat bonus) the markets still await confirmation of an actual working coalition given a caretaker government has been in place now for approximately two months. A degree of uncertainty in regards to the demands the new coalition will place on negotiating the country's bailout terms has resulted in many investors being unwilling to get their toes wet just yet. Away from the election fever, rising Spanish yields continue to spook the market with the 10yr yield breaching the 7% level, prompting aggressive re-widening of the 10yr government bond yield spreads. The move comes at a crucial time for Spain as they look to come to market tomorrow in 12 and 18 month bills followed by three shorter dated bonds to be tapped this Thursday. Meanwhile, the FX markets have reflected the shift in sentiment with EUR/USD well off its overnight highs and the USD index firmly supported by the prevailing flight to quality bid. However, the biggest currency move of the day came in the early hours after the rupee (INR) weakened substantially following the RBI's decision to leave rates on hold, this coupled with Fitch changing the country's outlook to negative from stable has kept the currency under pressure throughout the day.

Gold took a tumble for the first time in 7 sessions in Asia as Antonis Samaras, leader of the Greece's New Democracy Party (pro-bailout) was victorious.  Today, Samaras plans to form a coalition with other parties backing the bailout – meaning that Greece’s future in the euro is secure – for now.  Gold’s dip in Asia was thought to be due to profit taking and increased risk appetite after the Greek election. However, this increase in risk appetite has been quite short lived with Spanish and Italian 10 year bonds again coming under pressure resulting in record Spanish yields over 7.13% and Italian 10 year over 6% again. Initial gains in equity markets have subsided and the lessening of risk appetite is seeing gold supported. Greece’s exit from the Eurozone is no longer a short term risk however it remains a real risk as does the risk of financial contagion in the Eurozone due to insolvent banks in Spain, Italy and France.

Just read.

• Greek radical leftist SYRIZA leader Tsipras says will not join coalition government (as expected)
• Egypt Islamists claim presidency as army tightens grip (Reuters)
• French Socialists vow reforms after big poll win (Reuters)
• Greeks Back European Bailout (WSJ)
• France, Socialists Win a Solid Majority (WSJ)
• Denmark Warns over Pressure on Krone (FT)
• Obama to press Putin on Syria at G20 amid skepticism (Reuters)... Putin to smile
• China Home Prices Fall in Record No. of Cities (Bloomberg)
• Europe Gets Emerging Market Crisis Ultimatum As G-20 Meet (Bloomberg)
• Wolfgang Münchau – What Happens if Angela Merkel Does Get Her Way (FT)

With all the europhoria over Greece, some may have forgotten Spain. It is time to remind them that the real "fulcrum country" of Europe has now shifted a few thousand kilometers to the West, where as also reported on Friday the pain will come primarily from more home price declines (up to another 25% lower from here), and loan loss recognitions. How much? As Market News reports, the number may be as large as €150 billion. Of course, if that full number flows through the insolvent banking sector's bottom line, and forces a comparable FROB capital infusion via any of the bailout channels, this is €50 billion more in bond subordination (because good luck raising the capital via equity) than even the worst case Spanish bailout scenario had anticipated. It also explains why as of this morning, Spanish bonds traded at all time record lows. Because, sadly, nothing continues to be fixed in Greece, Spain, or anywhere else in Europe.

While the market is finally figuring out what was obvious about 12 hours ago, that even if, and that is a big IF because Pasok has made it clear it will not join ND outright, there is some coalition government formed it will most likely last all of a few weeks before the whole charade has to be repeated once more as the entire plan is to keep Greece without a government as its last assets are plundered via the Greek "rescue vehicle", events in Greece are once again going through their preset moves. Below, courtesy of Athens News is what is happening in the Greek capital today. Needless to say, if the headline comes that Samaras is unable to form a government, watch out below.

Below is a market recap where we find that, yes, as we expected yesterday, the half life of yesterday's Greek euphoria is shorter than even that of the Spanish bailout.

• S&P500 Futures down
• EURUSD down 0.1%
  
• Spanish 10Yr yield up 24bps to 7.12%
• Italian 10Yr yield up 12bps to 6.05%

Hopefully this is not a surprise to Zero Hedge readers, who were warned on Friday, that courtesy of the idiotic desperation press leak, we shifted to a risk/reward momentum to a Tsipras victory being the only positive Risk On catalyst as it would activate a global central bank intervention. Looks like that is now off the table.

So... now what?