Archive - Dec 12, 2011 - Story

And just in case a brutal reminder that nothing is solved in Europe is not enough, here comes Iran:

IRAN MP SAYS MILITARY TO PRACTISE CLOSING STRAIT OF HORMUZ TO SHIPPING; IRANIAN MILITARY DECLINES TO COMMENT - RTRS

For anyone wondering why CDS pricing shifts to a points upfront methodology from running spread once said spread passes 1000 or so bps, look no further than the Greek 5 year today, where the 5 Year CDS is shown with a mid-price of 10,115 bps, being offered at 10,418. Now if there was a one to one equivalency on the CDS and bond curve, this would imply a bond price in cash terms that is negative. And since this would be quite impossible to be achieved, even for Greece, this is a perfect example of why spread in CDS terms becomes promptly irrelevant due to the shapeshift in the default curve past the 16% or so discount from par threshold. And while in practice this means that CDS could in theory go up without an upside limit, for all intents and purposes this is irrelevant as the DV01 in the 100% range approaches zero.

• Bundesbank Cools ECB Bond-Buying Talk (Bloomberg)
• Central banks fire the second barrel of QE (FT)
• Sarkozy Gets New Rival for the Presidency (WSJ)
• Wolfgang Münchau: Snags, diversions – and the crisis goes on (FT)
• Italy Sells EU7 Billion in Bills as Costs Decline (Bloomberg)
• McConnell, Graham Predict Congress Will Pass Extension of Payroll-Tax Cut (Bloomberg)
• Clegg Says Coalition Breakup Would be ‘Disaster’ as Cameron Faces Dissent (Bloomberg)
• Bank of England said to have overestimated QE boost (FT)

• Moody's said that the European crisis is still in a critical and volatile stage, adding that it will revisit ratings of all EU sovereigns in the first quarter of next year
• According to S&P, it wanted to send a strong signal that the Eurozone is facing risk of a major recession, and significant credit crunch
• The Italian/German 10-year government bond yield spread widened despite a successful T-Bill auction from Italy as well as market talk of the ECB buying Italian government paper
• Deutsche Bank cut its UK growth forecast for 2012 to zero, and said it now expects the BoE to buy a further GBP 75bln of Gilts in February, then a final GBP 50bln in May

The main weight on the EURUSD this morning is not only the virtual certainty of S&P cutting Europe's AAA club, after it called Europe's bluff and Europe revealed a 2-7 offsuit, but a report just released from Moody's which said that the rating agency looked at the European abyss, and did not like what it saw at all. As a result, Moody's has warned that it was review the ratings of all EU countries in Q1 as the summit has failed to produce "decisive policy measures" (we emphasize this for our friends at Bloomberg TV). It says: "As a result, the communiqué does not change our view that the crisis is in a critical, and volatile, stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain. While our central scenario remains that the euro area will be preserved without further widespread defaults, shocks likely to materialise even under this 'positive' scenario carry negative credit and rating implications in the coming months. And the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area." The result, as one can imagine, a surge in Italian and Spanish yields, and redness across the screen.

The metals space has had a rather disconcerting start to the week this evening with Silver and Copper dropping almost 2% from their opening levels and then Gold following suit. All this as the USD inches very gradually up tracking almost perfectly with Crude for now. These moves seem very liquidation-like in their velocity but have for now stabilized at the lows. The last few minutes saw some of the ugliest macro data we have seen in a while come out of India as it's Industrial Production growth missed expectations by a mile falling to levels only seen in the middle of the global economic shutdown in Q1 2009. So another leg in the EM-will-save-us-all stool just got kicked out and still we are to believe the US will decouple and 'muddle-through'?