December 7th, 2011
- According to the FT, last-minute negotiations have commenced to create a much bigger financial "bazooka" to present at this week's EU summit that could include running ESM and EFSF together as well as winning increased support for the IMF. However, the report was later denied by a senior German government official
- According to a senior German government official, he is more pessimistic than last week on overall summit deal. He also said that he can't foresee running EFSF and ESM simultaneously, and he is not sure if the summit will reach conclusion on using IMF funds in the Eurozone crisis
- ECB funding to Italian banks rose to EUR 153.2bln at the end of November from EUR 111.3bln at the end of October
- Bund futures received a boost following a strong Bobl auction from Germany
- ECB allotted USD 50.685bln in its 3-month USD operation vs. Exp. USD 10bln
- CHF moved lower after the SNB slashed its 7-day USD repo rate, and weakened further after a Swiss minister said that Switzerland is still looking at negative rate options
- Euro zone leaders may raise ESM, EFSF capacity limit (Reuters) - since denied by Germany
- EU talks on doubling financial firewall (FT) - since denied by Germany
- Martin Wolf: Merkozy failed to save the Eurozone (FT)
- Ireland to seek cheaper bail-out (FT)
- Fast-track ‘fiscal compact’ drawn up (FT)
- Clarke rejects call for EU power grab (FT)
- Obama Sets Campaign Theme as ‘Make-or-Break Moment’ for the U.S. Economy (Bloomberg)
- Spain Weighing a Fast, Costly Cleanup of Banks (WSJ)
As expected, virtually everyone, or a total of 39 banks (compared to 2 the week prior), scrambled to receive dollars from the ECB following the cut in the USD swap line rate from OIS + 100 to OIS + 50. Specifically, $50.7 billion in 84 day swaps (34 banks asking for dollars at a new and reduced rate of 0.59%) and $1.6 billion in 7 day swaps (5 banks at 0.58%) was just opened for a total of $52.3 billion. The expectation had been that just about $10 billion would be demanded, indicating how close to the cliff Europe's banks had been. This compares to just over $2 billion in the week before, and demonstrates the severity in the funding market that threatened to topple European banks like dominos last week until precisely a week ago the global central bank cartel announced an emergency dollar funding band aid. Reuters confirms: "Banks took more than $50 billion from the European Central Bank on Wednesday in its first offering since slashing the cost of borrowing dollars, a sign that some euro zone banks have problems finding dollar funding as the region's debt crisis intensifies." Elsewhere dollar libor continued to rise, passing 0.54% for the first time in years. This will continue rising as the self-reported dollar funding cost closes down to the OIS+50 differential, or where European banks can borrow from the Fed. And now that the dollar funding squeeze has been confirmed, all eyes turn to the ECB's LTRO announcement tomorrow. "What really matters is what the ECB does tomorrow afternoon, and in that especially what they do with the long-term refinancing operations (LTROs) and on the collateral rules," Societe General economist Michala Marcussen said. "What would be extremely helpful right now is if we get longer maturity LTROs." The ECB is expected to announce ultra-long 2-year or even 3-year refinancing operations after its meeting on Thursday." Needless to say, all these are stopgap liquidity measure to fix what is increasingly a pan European (in)solvency crisis, and thus will achieve nothing in the long run. And what is worse is that the non-USD liquidity indicators have once again hit an inflection point and turned negative: 3-mo Euribor/OIS spread rose to 1.002 vs 0.999 yesterday, near last wk’s high of 1.006 which was most stressed since March 2009. In other words, as we have been saying, the funding squeeze has now managed to shift away from USDs and is impacting the EUR market itself, something the Fed has no control over.
Investor Demand Soars For German 5 Year Paper As Germany Refutes FT Rumor, Lofty Summit ExpectationsSubmitted by Tyler Durden on 12/07/2011 08:07 -0400
Following late November's disastrous 10 year Bund auction, in which the goal seekers saw everything from a failure of the repo market to the Bundesbank trying to fail the auction on purpose, yet which was nothing more than a simple case of little demand and high supply, today, following a steady leak wider in yields in the entire bund curve, Germany sold €4.09 billion in 1.25% 5 year bonds, with the maximum amount of €5 billion selling easily following bids for a total of €8.67 billion. The Buba retained €0.91 billion, which it always does, and is not an indication of some ulterior motive to have the ECB bailout Europe. As expected the Bid To Cover was a soaring 2.1x compared to 1.5x on the last 5 year auction on November 2. In other words, a stunning success and demonstrating what happens when you actually have demand for paper following a decline in prices. Below are the Wall Street responses to this strong auction. So that takes care of that. What is more important, and why futures are down is that as expected, yesterday's deux ex FT was promptly denied by Germany after a "senior German official" spoke to Reuters and said they are "not sure if summit will reach conclusion on using IMF funds in eurozone crisis" and "can't forsee running EFSF and ESM simultaneously". They have also said they are "more pessimistic than last week on overall summit deal". In other words, look for many moresuccessful Bund auctions as things resume their downward trajectory all over again.
Gold and Silver Mining Stocks Offer the Best Value of any Sector in the Stock Market By Far and By a Wide MarginSubmitted by smartknowledgeu on 12/07/2011 08:07 -0400
Today, gold and silver mining stocks offer the best value by far of any sector in any stock market anywhere in the world. Due to the recent massive volatility that bankers have introduced into the PM stock sector, and the fact that commercial investment advisers worldwide have erroneously re-educated millions of people with the concept that volatility equals risk, the majority of people worldwide will miss a massive opportunity in gold and silver mining stocks over the next several years due to their misguided belief that gold and silver mining stocks cannot escape the throes of banker manipulation.
Goldman: A Clean Resolution From Friday's Summit Is Now Ruled Out; Outcome To Fall Short Of Market ExpectationsSubmitted by Tyler Durden on 12/07/2011 00:31 -0400
The schizophrenia continues, this time as Goldman lays out the "Failure Frday" hypothesis in an attempt to incite some waterfalling risk off-taking, leading to escalating interventions by domestic governments (all of which captured just for this eventuality) and culmiating with the unleashing of the puppet head of the ECB, but not before GS has had the opportunity to sequester some assets on the cheap. We have rehashed this outlook so many times we won't repeat it again, suffice to say: those who want to know what happens, need merely to look at what happened in 2008, and who ended up gaining the most. In the meantime, this is what Goldman expects of the "summit to end all summits" - "Our bottom line is the following: the ‘clean’ solutions that would have seen clear resolution of that impasse appear to have been ruled out following Monday’s German/French meeting. That makes something altogether fuzzier likely to emerge from Friday, and this risks falling short of market expectations. The sequencing that we believe is being followed will be delayed further into the new year." Said otherwise - yet another failure. Which confirms that the Christmas rally over the past week has been nothing but. And all such "career risk" mitigation exercises in lemmingry, end in the same way: with someone defecting first.
UBS' Advice On What To Buy In Case Of Eurozone Breakup: "Precious Metals, Tinned Goods And Small Calibre Weapons"Submitted by Tyler Durden on 12/06/2011 23:36 -0400
Three months ago, Zero Hedge presented the first of many narratives that started the thread of explaining the "unmitigated disaster" that would ensue should the Euro break up, which in the words of authors Stephane Deo and Larry Hatheway, would leads to such mutually assured destruction outcomes as complete bank failure and/or civil war or far worse. Because if there is one thing the banks have learned in the aftermath of Hank Paulson, is that scaremongering when bonuses are at stake is the only to get taxpayer money to fund exorbitant lifestyles.,, Today, Larry Hataway has released yet another sequel to the original piece, focusing on this so very critical week for Europe, which as Olli Rehn said, must find a solution by Friday or see the EU "disintegrate", in which the vivid imagery, loud warnings and level of destruction are even greater than before. In other words, Europe has 4 more days, something which S&P tried it best to remind Europe of, as the alternative is "or else." And here comes UBS to remind everyone that anything but a "fix" to a system that was broken from the very beginning, would be a catastrophe, captured probably the best in Hatheway's recommendations of assets to be bought as a hedge to a Euro collapse: "I suppose there might be some assets worthy of consideration—precious metals, for example. But other metals would make wise investments, too. Among them tinned goods and small calibre weapons." But even that is nothing compared to the kicker: "Break-up runs the risk of becoming one wretched scenario. Sadly, however, it can’t be ruled out, just as it would have been improper to rule out the horrors of the first half of the 20th century before they happened." And there you have it: a reversion by Europe to the perfectly stable system from a decade ago, is now somehow supposed to result in World War. And with that the global banking cartel has official jumped the shark, just like the FT's latest rumor earlier today did the same by indicating that the well of European "bailout" ideas has officially run dry.
Prime ministers get replaced every 8 to 15 months. Bureaucrats and corporate interests stay. Public debt turns into a mushroom cloud. Is it finally time to bet against Japan Inc.?
It appears 'It Is On' as Bloomberg offers its well-reasoned and eloquent response to Mr. Bernanke's 'egregious errors' note to Congress. Without naming names, Bernanke makes a number of points regarding the reporting of the secret bailout terms and profiteering, which we discussed here, and now Bloomberg comes 'Over-The-Top' Stallone-style with a much more fine-toothed refutation of Bernanke's refutation of their reporting. "Bloomberg stands by its reporting" and offers a point-by-point take-down of the Fed-head's perspectives.
One of the most frequently-used phrases we hear is 'The Markets Are Broken' and while there are many anecdotal events almost every day in and across asset classes, there is more to it than sudden 'flash-crashes' or Italian bond levitation. The world is increasingly dystopian and Citigroup's credit group recently noted, as part of a pitch for structured credit products, the most critical aspects of our broken environment. While not quite as memorable as the five D's of Dodgeball; the five D's of Dystopian markets are decidely less comical.
While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it. And the focus on repo while useful misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued. What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe both are virtually nil. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.
My annual report on Social Security.
Equity and credit markets traded in a narrow range for much of the day - especially post the European close - only to swing violently up and down in the last hour on the back of FT rumors or a bigger bailout. Volume was notably lower than average though as ES sold off hard into the close, and picked up significantly higher as we crossed VWAP, with the market closing well below that balance point. Broad risk assets were generally a little more positive this afternoon as the commodity sector saw decent outperformance all day (most notably Silver and Gold) but it was TSYs post-Europe sell-off (and EUR strength) that continues to ring the bell of repatriation flows. Today felt a lot like ES (the e-mini S&P 500 futures contract) was the tail of the CONTEXT dog with these 'TSY-EUR' flows having a significant impact. Credit indices in general tracked ES, though lagged its late day rally and sell-off, ending the day modestly outperforming equities (though this was likely a liquidity issue more than anything else). HYG once again outperformed supporting HY bond net buying as IG saw decent new issue volumes on the day. While broad assets are modestly supportive or risk appetite as we close, the divergence between VIX and Implied Correlation (which closed at two-week highs) raises an orange (maybe red) flag once again.
While it hardly comes as a surprise, Bloomberg last night reported that Italian banks are the culprits. The Top 5 Italian banks (which comprise 90% of the country's derivatives market) increased their net sold protection by an amazing 41% to the end of June, now standing at $24bn. Of course, there is no evidence of them selling protection on one another in a quid-pro-quo sense (a la Greece), but it seems the creation of carry out of thin air remains alive and well and given that every credit in the world is significantly wider no than it was on average through the first half of the year, we hesitate to guess at the MtM losses their trading desks are sitting on. What is even more incredible, and a topic we have covered vociferously, is the 13% rise in notional derivative amounts. We know full well, from every liquidity indicator, that USD funding is hard to come by for European banks which just makes us wonder, given the USD-denomination of European Sovereign CDS, how much easier it is to sell protection and gather USD cashflows, than to swap your EUR or stigmatize yourself with the ECB or Fed swap lines?