Archive - May 26, 2010 - Story

Earlier today, Germany conducted a €7 billion Bobl auction, which however filled out the entire order book at a sub 1x Bid To Cover with just €6.12 billion in bids submitted, a €0.9 billion shortfall. In other words, this was a failed auction, with the government having to "retain" €1.555 billion in order to make the BTC seem an acceptable 1:1. Combining this negative news with the disclosure that BBVA may be suffering a commercial paper liquidity crunch, as reported earlier, has resulted in a material spike in demand in today's ECB's 7-Day Dollar auction, which came in at 5.4 billion, compared to 0 a week earlier. Expect the Fed's FX swap lines to increase by a comparable amount when the Fed's updated H.4.1 data is released this Thursday. The euro continues to slide on the negative news, although stocks both in Europe and in the US, continue trading higher as momentum programs once again take control.

More troubles for both Spain and the Commercial Paper market. Spanish top bank BBVA is said to have be unable to renew a $1 billion commercial paper line, according to the WSJ, which touches on the topic we discussed yesterday first about complications developing in the top-tier ECP market. BBVA still has substantial european-based funding and deposits, and another $9 billion in CP, which will likely also soon be pulled. This will certainly put further pressure on CP spreads, as the European liquidity crisis is alive and well. The news has impacted both the EURUSD and the price of European financial firms, which have sagged since this news has come out.

• FT editorial: how to cure the euro's ills (FT)
• How big banks window-dress their debt (WSJ)
• WSJ: Is gold the next bubble? If so, it has about $5,000 more to run before it peaks (WSJ)
• Germany prepared to go it alone to curb speculation (Bloomberg)
• Durable orders in US increased more than forecast (Bloomberg)
• The bank that won't let its customers withdraw less than GBP300 over the counter (DailyMail)
• The Greek secret bailout exit clause follow up by Alphaville (FT)
• North Korea expels South Koreans as Clinton offers olive branch (Bloomberg)
• Jim Cramer interviews Ted Kaufman, mans up, admits he was wrong on HFT, and explains why he changed his tune (MadMoney)

Yesterday we reported a rumor that the Fed and the ECB were set to announce "new liquidity measures." Today, the WSJ's Jon Hilsenrath reports that this development would likely materialize in the form of a lowering of the rate at which the Fed offers Euro-Dollar swaps, currently priced at 100 bps over OIS. This has not gone unnoticed by the market: even with 3M Libor flat from yesterday, the front month Eurodollar has surged from yesterday, on this most recent confirmation that the central banks will drown the world in free liquidity before another session of liquidations has to take place.

• Asia stocks, copper, oil rebound on speculation China's demand to increase.
• Bernanke says central banks must be free from politics to prevent crises.
• China shares flat amid Europe debt woes.
• Durable goods orders, Home sales probably rose as US recovery broadens: survey.
• Euro declines third day on concern European budget cuts will damp growth.
• Geithner to discuss with European finance officials efforts to promote continued economic recovery.
• German consumer confidence down due to unsettled euro.
• Greece discusses privatizations as finance ministry investigates its own for tax evasion.

James Montier's latest white paper on the flaws of modern portfolio theory in general, and traditional asset allocation in particular, is a must read for anyone who manages even one dollar of capital in our increasingly manipulated, centrally planned and inefficient capital markets.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/05/10