Archive - May 2010 - Story

Today Spain will test the capital markets with a downsized E2-3 billion 5 year issue (from E4.5 billion) carrying a 3% coupon. The yield on the note is expected to come higher than existing comparable maturities which are trading at 3.3%, thus pricing will likely be in north of 3.5%. At the end of March, Greece managed to raise 5 year bonds at 2.8%: there are no concerns that Greece will be able to repeat that result, much to the negative P&L of all those who bought into the last bond issue. "Spain is firmly in the eye of the storm, and the Spanish treasury cannot allow this sale to fail," said Jose Garcia Zarate at consultancy 4Cast. Yet as we showed yesterday, traders are not so worried about Spain, whom they have pretty much written off now, as the UK, France and Germany. In the meantime, the PIIGS fire is raging: Greek 3 Years just hit 15%, as its CDS trades 30 bps wider since the NY close, now at 877 bps. And the eye of the hurricane is moving west: Portugal CDS hit another high of 456 bps today, implying a 33% chance of a sovereign default. Lastly, the euro is plunging and after hitting an overnight support in the low 1.27 area, has bounced slightly. Spain will need all the help it can get. In the very least, today will be a test whether the recent rumor spread by a prominent nationalized and GGB heavy UK bank, that Spain has requested a E280 billion rescue package, was true or not.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 06/05/10

Portugal... Spain...Greece...these are all last week's news based on CDS trading patterns. Indeed, this week saw the biggest trade unwinds of all top 1000 CDS entities (including all corporates) precisely in these three names. As the PIIGS implosion is finally being appreciated by everyone and their grandmother, the "speculators" are booking massive profits: the net cover/rerisking in Portugal and Spain was a massive $500 million net notional unwinds in each in the week ended April 30. Also known as taking profits. Greece and Ireland were also in the top 5, so as we have repeatedly claimed, the market will no longer make the news in Club Med. So where will it? No surprise there - the UK, France and Germany. The smartest money in the world is now actively betting the core of the eurozone is where the next CDS blow up will take place. With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names. The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million. Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net notional derisking.  This week the number is even higher: $558 million. There is now over $1 billion in net risky bets made that the UK may not last. And Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.

Oil markets were hammered again on Wednesday, as the selling continued for a second consecutive day in equities and commodities. The US dollar was strong again on Wednesday, and it seems that concerns over euro-zone sovereign debt have plucked the yarn that has unraveled the whole cloth of risk appetite. The DJIA finished with losses of slightly less than 60 points, and it seems that oil and equities are the two taking the real brunt of the risk regurgitation. Gold, silver and platinum prices have been kicked lower these last two days, but buying re-emerged in the precious metals – and in copper – even as oil prices and equities refused to rally.

Things are heating up again in Greece. Literally. After a firebomb at a Marfin branch earlier today was the cause of three tragic deaths, the latest building to succumb to rioting pyrotechnics is a branch of the Greek ministry of finance, reports Market News. We eagerly await for the Greek FinMin to announce that the docs burned down were the only copies of all sovereign lending agreements with foreign entities... all $300 billion of them. Perhaps now that Greece has lost all control is why the Greek president Karolos Papoulias just said that "The country is at the edge of the abyss." Luckily for the country, its riot police is not striking just yet. Which is more than one can say about Greek journalists: "Even Greek journalists were on strike, but they later went back to work in order to cover the riots." And that about explains all you need to know about Greece.

Some comprehensive market insights from and on the mostly forgotten I in BRIC.

Many market participants expect the European Central Bank to renew its 1Y LTOR liquidity operation maturing in June to calm the markets. However I would argue at this point that while it will help liquidity, it won't solve all the problems. Europe has allowed the situation to deteriorate so badly that right now short of printing money and buying local sovereign debt, the ECB won't really provide much of a fix to the crisis. Whether it is desired or they should cut their losses and disband the Euro is another topic of conversation. Since an entire generation of European politicians view the Eurozone as their baby they are unlikely to give up that quickly. By the same token Weber who is simply a raging maniac and Trichet (he did run a bank into the ground already, can he do it with a central bank???) are VERY VERY reluctant to the idea of quantitative easing. We should therefore expect more drama until they finally pull the trigger. The markets are geared up for some announcements tomorrow: let's see if European politicians have learned the lessons of bailout voted down in Congress or the refusal to bail Lehman against market expectations. - Nic Lenoir

Alan Grayson storms back to the stage by asking just why is Tim Geithner, who has the biggest conflict of interest when it comes to Fed matters, even be allowed to have an opinion on Fed transparency issues. In today's ABC Top Line, Alan noted, “when Tim Geithner says that he doesn't want to see the Fed audited, what he's really saying is he doesn't want to see Tim Geithner audited,” Grayson said. “He was the head of the New York Fed for years and years. This audit would apply to him. And the actions he took -- which he can now take in secret and, when this bill passes, will no longer be secret -- we'll be able to see and understand the decisions that he made that among other things put huge amounts of bailout money into the hands of private interests.” Grayson added: “It's one of the biggest conflicts of interest I've ever seen.” Keep in mind that this is the same Fed that when it took over Bear via ML1 said it would have no losses on the collateral it assumed, only to see its Red Roof Inn holdings be foreclosed upon last week as Zero Hedge first discussed. How the Fed's opacity is still a topic of discussion simply does not compute. And that Obama is doing all he can to prevent the Fed transparency initiatives by Paul and Grayson from passing at this point certainly means that should the Fed's dirty laundry be made public that the administration would certainly collapse in a smoldering heap of 0% approval.

L: Doug, I'm in Belarus this week, a pit stop to help
some of my students with their various business ideas. I'm struggling
with my Russian, but getting along. And that has me thinking about
Russia's role on the global economic stage. I know this is something
you've given some thought to… What do you think? Is Putin out to take
over the world? What do investors need to keep in mind?

Doug: Well, the first thing to keep in mind is that
any time you're talking about a large group of people, I think it's
about 150 million in Russia's case, it's hard to generalize. Russia
makes headlines, being one of the BRIC countries (Brazil, Russia,
India, China), which are "emerging" economies seen as a sort of wave of
the future. But I have to say that Russia doesn't really belong in this
group. We may lose some Russian readers by my saying this, but while
Russia has a lot of resources and should have a bright future, I don't
think it will.

• Final step towards bilateral loans and IMF stand-by agreement taken
• The aid package limits the near-term liquidity risk and buys more time
• But the long-term issue of debt sustainability (i.e., solvency) remains
• Debt restructuring unlikely in the near term, but possible longer term
• Financial market reaction to the package will determine whether it works
• Key factors are additional austerity measures the IMF/EU are asking for
• Near-term event risk: last political or legal hurdles
• Contagion: Focus back on other peripheral countries (Portugal, Spain)
• Portugal may be too small to matter; Spain would raise capacity issues.
• Periphery needs to act now, in our view, and propose additional austerity measures

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 05/05/10

Looks as if the dollar bears and bond bears finally threw in the towel after suffering from horrific losses, but the dip buying mo-mo monkeys arrived en masse like a swarm of locusts, hoping to capitalize on another huge run in equities.

From a reader: In the last week I have been hearing things from pals regarding funding crises in money markets and among banks, both within europe and across us/europe (fits with Fed relaunching EU swap lines). Attached chart will scare you guys.  This is a little more subtle but look at the second chart, the one on the right... EU libor vs repo is widening (pink line) in last 2 days, and also dollar libor is rising faster than euribor (decline in blue line in right chart), ie dollars are harder to come by vs euros in the eu interbank market.  expected.  but most strikingly, the spread between 3m and o/n repo in europe is skyrocketing (yellow line), which means it is getting harder to secure funding on a 3 month basis using ECB collateral vs going to the window overnight.  bad bad bad.  means players are less inclined to lend collateralized money out at 3mths.  We are watching an insolvency crisis become a liquidity crisis in real-time. 

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/05/10

Like clockwork: Europe closes, volume flattens, and the market rips. With Greece's revolution now "certainly" resolved even as European markets closed at the lows (someone forgot to tell the Greek people who have now locked down the country in a persistent striking state), nobody can bother the US algos, who only look at themselves as a referential point, and at low volume as reinforcement. And with the US algos out of the barn, the carry traders resume, the AUD now back to 0.91 and the EURUSD back to 1.2900. Credit is ignoring the mini melt up as both IG and HY are wider for the day (+4 and +25 bps, respectively). But at least Getco and SigmaX's no-volume algos can give the impression that all is well with the world, even as Greece and now Portugal are shut out from the funding markets, and the IMF and the ECB's credibility is blown to smithereens. The astrophysicists in charge of the US capital markets are unperturbed.