Archive - Oct 6, 2011 - Story

To all who can't wait for the next European bailout FT rumor that ramps the market 30 minutes before close (only to be completely refuted by Europe itself 30 minutes after that but by then nobody will care), which last night turned out to be speculation of a third and certainly not final version of the joke that is the stress test, here is your chance to run and execute your very own interactive European stress test and not have to wait for the conflicted European media to tell you the outcome. That said, we could argue that Reuters, which created this test, may have been a little optimistic, for the simple reason that assuming a scenario that sees 100% writedowns on all PIIGS bonds, and assuming a 2% Tier 1 capital target, sees just 46 banks failing the "test" with a €257 billion capital deficiency. So as cool as it is, Reuters failed the simplest sniff test, as somehow the apocalypse scenario of a complete pan-European wipeout sees just a quarter of a trillion in capital needed, when in reality every bank in Europe would be completely insolvent. Still, it is fun to play around with. For a few minutes...

The last few days have seen a veritable avalanche of to-ing and fro-ing among the various players in the Shakespearean melodrama that is Europe. While their quotes and headlines have all too often just run in circles, we thought the compare and contrast of Ms. Merkel and Mr. Juncker was particularly intriguing, to wit (via Bloomberg):

*MERKEL SAYS MAY BE NEED TO RECAPITALIZE BANKS, NOT YET SURE

*MERKEL SAYS EFSF CAN BE USED AS LAST LINE TO RECAPITALIZE BANKS

*MERKEL SAYS EFSF FOR USE ONLY WHEN EURO AS A WHOLE IN DANGER

But...

*JUNCKER SAYS EFSF COULDN'T HANDLE ANY ITALY RESCUE

*JUNCKER SAYS EFSF CEILING SHOULDN'T BE RAISED

*JUNCKER SAYS EU CRISIS RESPONSE IS LAGGING MARKETS

The T²OTUS (Televangelizing Teleprompter) or just T2, is taking center stage to talk more about his now failed jobs plan, supposedly without cheesy chanting of "pass this bill" this time (however, we won't put readers at risk of alcohol poisoning with another shots challenge - the last time that was the keyword, there were numerous casualties). While it is certain the speech will be filled with class warfare rhetoric, and the usual stuff about how many jobs Obama has "saved or created" we doubt much if anything relevant will be said. As for comedic content.... that's a different story.

As the title suggest, please find the Freudian slip:

• JUNCKER SAYS ECB REMAINS INDEPENDENT OF POLITICS
• JUNCKER SAYS EU MAY NEED TO REVIEW GREEK AID PROGRAM
• JUNCKER SAYS EFSF COULDN'T HANDLE ANY ITALY RESCUE
• JUNCKER OPPOSES FURTHER EXPANSION OF EFSF

Hint: it is bolded.

In a first for the Fed, 15 minutes ago the Fed started its first anti-POMO, or outright bond sale, this time for up to $9 billion in bonds due between 01/15/2012 – 07/31/2012. This is liquidity taken out of the market (think reverse repo) and money that can not be used to buy Netflix by the primary dealers. As a result, the recent (massively levered: thank you HFT in FX and 200x margin) surge in the EURUSD would make sense, as the last thing the market needs is for the robots to find a correlation between inverse POMO days and market drops, which would then be front run on any of the next anti-POMO days. The operation will conclude at 11 am EDT. Expect to see an end to the EURUSD rise as soon as the operation is concluded.

After the stock tumbled 20% on the day, and 45% in the past week, the life support plug appears to have been mercifully pulled. Next up: Dexia's website experiences a "bank of america" moment?

A rather cryptic message from Sarkozy advisor Henri Guaino who, quoted by Bloomberg while speaking at an interview in Yerevan, Armenia said that the French government "isn't planning to take stakes in banks" and adding that "this isn't envisaged at the moment." At the moment no, but after the moment? He concluded with the ominous: "maybe a recapitalization will be necessary." So who will be the next Dexia? An inquiring market wants to know. And did the market, in its latest manifestation of Korsakoff syndrome, already forget that yesterday it was announced that 'France Has Prepared An Emergency "Just In Case" Nationalization Plan For "2 Or 3" Banks." But when the next bank implodes, a multi-trillion French one to be sure, everyone will be stunned, stunned, as usual.

The daily dose of truth from the UBS veteran, as indispensable as morning coffee. Today, he covers Steve Jobs passing, the "Barroso" market, and the Occupy Wall Street movement in his unique and traditionally laconic way.

Out of the gate, credit and equity markets seemed happy that Trichet was offering CBPP2 and a Euro-TLGP II program in Oct/Dec but that quickly subsided (what no rate cut?) as rather surprisingly the market realized for itself - with little cajoling from us - that while short-term roll risk was reduced, capital still remains a 'problem' as the seemingly known (haircuts/exposures) unknowns and we assume unknown unknowns (contagion impact) remain tangible and this does nothing solve the underlying problem of insolvency. We were pleasantly taken aback by this reaction (and not in a Schadenfreude manner) but more simply that the market is 'getting it' - kicking the can by extending more and more credit (as Peter Tchir alluded to earlier) simply has its limits - and perhaps we are there.

Update: "a word out of line" - Trichet says not appropriate to leverage the EFSF... Not what the market wanted to hear.

On one hand, the ECB keeps Germany happy with no rate cut, on the other, he promises as much liquidity as possible (but probably not enough - see below) and paints a very bleak picture of the economy in the period ahead.  Bottom line: no recapitalization from the ECB, but the central bank will make rolling of existing debt as easy as possible, and allow insolvent European banks to pledge any assets they have for cool cash.

Europe is in the midst of doubling down again.  In May 2010, Europe was going to save Greece to prevent the "problems" from spreading into Ireland and Portugal.  In August 2010, Europe decided to save Ireland, Portugal, and provide more to Greece to stop the problem from spreading.  In early 2011, Europe starting buying Italian and Spanish bonds in addition to Portuguese, Irish, and Greek bonds to stop the spread of the "problem" into Italy and Spain.  In July, they increased the effort to save Italy, Spain, Portugal, Ireland, and Greece so the "problem" wouldn't spread to the banks.  Now, in October, they are going to save Dexia and the banks and Italy, Spain, Ireland, and Greece, to save the world. It is not too late for Europe to stop the madness.  Let Greece default.  Let Portugal and Ireland negotiate real haircuts on their debt.  Let some weak banks (even large weak banks) fail. Then provide support.  Support the best of the rest.  Provide infusions.  Create new institutions where necessary.  Stocks will be lower, but a floor can be provided.

Somehow the robotic knee jerk reaction to claims surging back to over 400k, which means the economy is not creating jobs, was enough to generate a jump higher in futures, confirming the market is now only and all about wild momentum swings and attempts to sucker other suckers in. And another way to spin at the data: this is the 26th consecutive week of claims of 395,000. In summary: In the week ending October 1, the advance figure for seasonally adjusted initial claims was 401,000, an increase of 6,000 from the previous week's revised figure of 395,000. The 4-week moving average was 414,000, a decrease of 4,000 from the previous week's revised average of 418,000. The advance seasonally adjusted insured unemployment rate was 2.9 percent for the week ending September 24, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 24 was 3,700,000, a decrease of 52,000 from the preceding week's revised level of 3,752,000. The 4-week moving average was 3,739,000, a decrease of 9,750 from the preceding week's revised average of 3,748,750. Americans on EUCs and extended claims tumble once again as more and more people formerly sponsored by the US government hit the 99 week cliff - 1.6 million people have now dropped from extended benefit rolls in one year - these are people who have virtually no hope of finding any remotely competitive job having been out of the work force for 2 years. But yes, take futures higher: nothing but good news here.

Update: Trichet announces two fixed rate LTRO tender operations, one 12 month in October, and one 13 month in December, very much as expected. In other words, the ECB will repo even more crap than it has already.

Update 2: Trichet announces CBPP2 - a new €40 billion Covered Bond Purchase Program, i.e. a new €40 billion QE program as the ECB will purhcase covered bonds in primary and secondary markets.

A historic press conference is about to unfold, in which the current ECB president, in a state of complete denial about the imminent implosion of his continent, will mumble for 45 minutes one last time and attempt to preserve his "legacy" after which he will hand over the "printer" briefcase and secret codes to none other than Goldman's Mario Draghi. And Goldman, as is well known to Zero Hedge readers, is certainly not nearly as shy as ole' Tricky to print when needed. Expect some vague promises of more liquidity, possibly the reopening of a 1 or 2 year repo line in which the ECB will accept even more used banana peels and sexual prophylactics in exchange for euros, and an overall deflationary bias. It doesn't matter. It is too late. More importantly, today's "shot rules" are a shot of Jager every time the words "price stabeeleetee" are uttered. Trichet's full prepared remarks transcript can be found here.

In early European trade risk appetite was again the dominant theme following the higher equity closes in Asia overnight. Particular focus came upon comments from EU’s Barroso who said the EU Commission is proposing coordinated action by member states to recapitalise banks. This comment was also followed the European Banking Authority who said that they were reviewing bank capital positions with no new round of stress tests scheduled. This spurred the equity markets across Europe with financial stocks gaining an immediate boost alongside the EUR currency which climbed against the USD sharply. Bunds have been weighed by the general risk-on sentiment, with additional pressure observed following successful bond auctions from both Spain and Italy with lower yields across all six taps today. The Spanish 10-year cash bond yield trading below the key 5.00% mark. In the forex markets the CHF weakened dramatically across the board following the release of the SNB forex reserves data which showed an increase on the previous month, before the fast money move quickly reversed. Elsewhere, all attention focused on the Bank of England key rate decision in which the benchmark rate was kept unchanged, however the Bank announced a further GBP 75bln of QE. This caused extravagant moves in UK related assets with Gilts spiking higher by 100 ticks and GBP/USD falling 150pips. Looking forward Trichet’s last press conference looms large following the ECB keeping its rate unchanged. In terms of economic data there will be the weekly unemployment claims data from the US with Operation Twist conducting its first selling of securities.

Just out from the ECB:

6 October 2011 - Monetary policy decisions

 

At today’s meeting, which was held in Berlin, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.50%, 2.25% and 0.75% respectively.

 

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

EURUSD, ironically, not too happy about lack of 50 bps cut. Now the market looks for JCT to say something at the press conference at 45 minutes although it may be quite disappointed.