Archive - Nov 23, 2011 - Story

First the EFSF had trouble raising money.  Then EIB spreads widened.  Then EXPT got crushed.  And now Germany struggled to raise money. Is there a realization that all the quasi-sovereign debt and supranational debt is actually someone’s debt?  Is relying on implicit or explicit guarantees as a way to raise money indirectly over?  Guarantees do count.  AIG never “owned” any mortgages, all it did was write insurance or CDS contracts on them.  As investors get more concerned about sovereign credit and dig deeper, will some of these programs be tested?

So Whose Debt Am I?

This will come as no surprise to anyone, because as we noted previously it only took Goldman 2 days to Stolper its clients this time around. But just because the EURUSD apparently never actually "closed" below 1.35, Goldman formally kept the trade on for one more week subjecting clients to not only extra losses but much greater volatility. Today, everyone has had enough of this charade. "Closing long EUR/$ as risk sentiment failed to improve on new reform-friendly governments in Italy, Spain and Greece."

As expected, German CDS are soaring in the aftermath of the failed auction. And even UK CDS are now offered triple digits. What is ironic is that the UK is in far worse shape than Germany. That UK-Germany compression trade gets more attractive by the day.

Anyone who has not taken the pre-Thanksgiving day off may regret it as in addition to a Eurozone whose core is now officially imploding we have possibly one of the busiest economic days of the year to top it all of right into what will likely be the thinnest volume days. Expect massive manic depressive mood swings on the smallest of blocks.

• Barnier Panel to Study Break-Up of EU Banks (FT)
• Brussels Plans to Bring Eurozone to Heel (FT) - good luck with Germany
• China’s Manufacturing May Contract Most in Three Years as Housing Falters (Bloomberg)
• Merkel Backs ECB, Warns on Greek Aid Tranche (Reuters)
• Obama Reopens Debate on US Stimulus (FT)
• Germany Fails to Receive Bids for 35% of 10-Year Bunds Offered at Auction (Bloomberg)
• To the Eurozone: Advance or Risk Ruin (Martin Wolf - FT)
• Australia Lower House Passes Mining Tax (Bloomberg)

It just goes from bad to surreal in Europe where the latest moment of pure Greek "gods kill titans" tragicomedy, comes from French rating agency Fitch threatening to cut... France? Excerpts via Bloomberg:

• FITCH: FRANCE CAN'T ABSORB MORE SHOCKS WITHOUT UNDERMINING AAA
• FITCH: FRENCH AAA WOULD BE AT RISK IF CRISIS INTENSIFIES
• FITCH: ADDED MEASURES LIKELY NEEDED FOR FRANCE '13 DEFICIT GOAL
• FITCH PROJECTS FRANCE DEFICIT IN '13 ABOUT 4% OF GDP

Earlier today Germany tried to sell €6 billion of 10 Year bunds. It "sold" €3.644 at a 1.98% yield. Which meant the German debt agency had to retain, i.e., not sell,  the 39% balance, or €2.356 billion. Said otherwise the offering was a complete disaster and as Reuters points out, one of Germany's worst bond sales since the launch of the euro, and that much higher Bund yields are coming very soon to a neighborhood near you. The sale "prompted concerns the debt crisis was even beginning to threaten Berlin on Wednesday, with the Bundesbank forced to buy large amounts of the bonds to ensure the auction did not fail. The low yields offered on the 10-year paper deterred investors from the auction, especially because of growing concerns over the cost to Germany of the escalating crisis." So what was otherwise formerly sacrosanct has just become reviled: welcome to fiat's greatest hits. The resulting 10 Year yield chart should surprise nobody. As for next steps: first the UK, then Japan, and finally the US...

The overnight news of worries over Dexia's bailout deal and the weak Chinese PMI print did nothing to help the generally poor sentiment as the US closed on the stress test news. Equity and Treasury Futures (as cash was closed in Tokyo) were in risk off mode but stabilized with ES around 1170 (-1% from US close). With Europe opening and TSYs trading once again, CONTEXT shows that the sell-off is broad based and supports equity weakness for now. European sovereigns are opening generally higher in yield and spread across the board with Ireland the stand-out currently. France and Belgium are also weak performers (Dexia?) followed by Italy and Spain. European credit has gapped down on the open with senior and sub financials worst performers (+7bps and +14bps respectively) followed by XOver and Main (+11bps and +3.5bps) - in line with US underperformance for now. Bloomberg's BE500 equity index just opened gap down around 1% but is outperforming credit for now as EURUSD touches 1.3440 again.

From IceCap Asset Management: "Before we go any further, we feel it is important to share our long-term view of the USD. In short, it’s going to stink. Just as Europe is facing an enormous debt problem, the US is also facing a difficult fiscal squeeze with no easy way out. However, unlike the Europeans the Americans do have a plan to get out of their debt crisis – after all, they didn’t develop into the World’s sole superpower without one. Forget about trying to be like the Europeans and creating some sort of confusing bailout fund – the Americans already have their bailout fund in the form of the US Federal Reserve. Plain and simple. While others often say the US will default on its debt at some point, we have a somewhat different view. Yes we believe a default will occur, however it won’t be the typical default whereby the US simply stops making interest & principal payments. The US Federal Reserve has the capacity to print unlimited amounts of USDs and they will use this capability to eventually make the USD considerably less than it is today. After all, a cheaper USD means America’s products are cheaper for foreigners to purchase, and these cheaper goods means more jobs in the long run – and who doesn’t want to work? The alternative is to watch (in horror) as long-term interest rates rise which is a sure economy killer if there ever was one. You can bet a box of Krispy Kremes that the Federal Reserve will do everything possible to prevent that from happening. In the end, the Federal Reserve has been very clear with their strategy – expect plenty more USD weakening policy moves. When you consider the American’s debt crisis (above Chart 1) and the condition of their banks (above Chart 2) the outlook for financial stability and economic growth is low. At the end of the day, we see the US Federal Reserve continuing with USD devaluing policies – in their eyes, it’s their only way out of this mess."