Archive - Nov 2011 - Story

Well what do you know: you can beat them, you can trash them, you can make them illegal, you can even leave them for dead. But at the end of the day all Credit Default Swaps do is tell the truth better than any career politician.

• Political and debt concerns pertaining to Italy remained the main focus in the market today. News that the Italian PM Berlusconi may resign soon strengthened appetite for risk, however the news was later denied by Berlusconi
• ECB's Mersch said that the ECB constantly discusses the possibility of ending bond-buys if Italy does not meet reform pledges
• Market talk of the ECB buying the Italian government debt helped the Italian/German 10-year government bond yield spread to come off its widest levels
• CHF came under pressure across the board following dovish comments from SNB's Hildebrand allied with an unexpected decline in the Swiss CPI data

Germany has rejected proposals by France, Britain and the US to have German gold reserves used as collateral for the Eurozone bailout fund. Germany Economy Minister Philipp Roesler said on Monday that the German people's gold reserves cannot be touched and “must remain off limits." "German gold reserves must remain untouchable," said Roesler, who is head of the Free Democrats (FDP), a partner in Chancellor Angela Merkel's coalition. Roesler added his voice to opposition to an idea proposed at the G20 summit of using reserves including gold as collateral for the euro zone bailout funds. The Bundesbank and Mr. Seibert, spokesman for Merkel, said Sunday that they too ruled out the idea discussed at the summit of Group of 20 leading economies last week. Mr. Seibert dismissed media reports yesterday that the plan to boost bailout funds, to aid Italy or another large euro zone country, would require Germany to sell off part of its gold and foreign exchange reserves. “Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” he said.

• China Stocks Drop Most in Two Weeks on Slumping Auto Sales, Property Curbs (Bloomberg)
• Berlusconi’s Majority Unravel as Allies Turning (Bloomberg)
• Greece to form coalition government (FT)
• Wen Pledges Property Tightening Resolve (WSJ)
• G20 seeks more talks on eurozone crisis (FT)
• ECB Free to Stop Buying Italian Bonds, Mersch Tells La Stampa (Bloomberg)
• Unloved Treasury Notes Becoming Investor Favorite in Fed’s Operation Twist (Bloomberg)

Perhaps when the fate of the $60 trillion bond market rest on one Facebook status update, it is time to officially call it a day?

Here is what is happening in the world's melting pot of rumors and confusion as of this moment.

That didn't take long.

• BERLUSCONI DENIES RESIGNATION RUMOR, ANSA REPORTS

Ita-Bund 8 wider on the news. We expect it to retrace the entire gain to 490 within seconds. In other news, we are all so lucky the market trades on fundamentals.

When all else fails, and with the Italian 10 Year hitting a new all time record of 6.6% and sending the Bund-Italian spread to the nausea-inducing 500 bps, all else has failed, spread wishful rumors of resignations. Sure enough, the Italian 10 year notes have pared dramatic losses amid reports of an imminent Berlusconi resignation. Italian PM Silvio Berlusconi may step down within “hours,” according to an article written by former minister Giuliano Ferrara in the online edition of Il Foglio, news agency Ansa reported. "Some people say it could be minutes,” Ferrara wrote on the website, according to Ansa. This, coupled with yet another round of ECB intervention has managed to bring the spread inside by... a meager 17 bps, keeping the Italy Bund spread still a well over 470 bps.

Based on the detailed exposures and DV01s thet Jefferies released on Friday, which we discussed as evidence of an implicit 2s10s (approximate maturities) curve steepener, it would seem that the dramatic shift flatter in the Italian bond curve this morning could be problematic. The huge 35-40bps compression in the spread between 2Y and 10Y BTPs is the second largest ever (largest being 4/8/11) and represents an 8 standard deviation drop compared to the last 8 years. This could mean a significant loss for the JEF book - unless they are perfectly hedged through BTP futures - which it does not seem is clear from the exposure sheet. The Italian yield curve has flattened over 100bps since the end of the EU Summit - inching perilously close to inversion which hasn't been seen since 1994.

UPDATE 1: ES -1%, EUR -0.5%, CHF -1.5%, Gold +0.9%, 10Y TSY -2bps, Bund -4bps, BTP spread +25bps at 479bps!

UPDATE 2: BTP spread widest since Jan1996, BTP 2s10s flattest since Sep2008, and BTP yield highest since Aug1997.

With EURUSD trading back to overnight lows at 1.3740 (100pips off its overnight highs), BTPs just opened 8bps wider to Bunds at +465bps. Gold is clinging to $1770 as Silver, Oil, and Copper drop notably thanks to USD strength. S&P futures are 16pts off overnight highs now having retraced almost 75% of Friday's late swing higher. US TSY yields are compressing but relatively parallel for now and in line with Bunds.

If you are a former MF Global account and you have your account transferred over to RJ O'Brien, or many others, you will have no choice but to fork out a bunch of cash to keep positions on, according to a statement awaiting all such accounts on the RJO website, or else be next in line for broad liquidations. To wit: "Former MF Global customers transferred to R.J. O’Brien were delivered with approximately 75% of the maintenance margin requirement related to their accounts. As a result, every former MF Global account faces a margin call. No excess equity was transferred." Naturally the next question is "Why are we not getting 100% of our MMR (Maintenance Margin) from the exchange?" And the answer: "This is an agreement between the trustee and CME Group. Please visit www.mfglobaltrustee.com for further information or questions." So, in addition to lowering initial margin for everyone, not just MF Global clients, did the CME iron out preferential terms over other exchanges and get larger equity of the account transfer than most? Because somehow we doubt that RJ O'Brien is the only exchange that is greeting their clients with this particular notice.

Having retraced almost 61.8% of the September drop, Gold's recent run up - as the USD strengthens no less (from 10/28) - suggests some demand for safety is back (or more simply is the demand for German Gold making the German's hoard a little more?). Silver is actually outperforming from Friday's close but remains below Friday's highs for now.

As China 'threatens/promises' liquidity injections to its banks, Greek politicians argue over premium parking spaces, US brokers/exchanges squabble over the MF capital leftovers, and global liquidity goes from bad to worse - perhaps it is time to take a step back and focus on what really hasn't seemed to matter - the economy. Ray Dalio published his Template For Understanding back in October of 2008 and has recently updated it (as of October 2011). For your Sunday evening reading pleasure - "How the Economic Machine Works and How It Is Reflected Now". Critically, the hedge fund manager provides a framework for considering what he believes are the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle.

Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the "next steps" for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress' court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe's latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis...