Archive - Dec 2011 - Story

Standard & Poor's Ratings Services today placed the 'AAA' long-term sovereign credit ratings on the Republic of Austria on CreditWatch with negative implications....weakening asset quality in Austrian banks' securities and loan portfolios, particularly in Central and Eastern European subsidiaries, could in our view increase the risk of the need for additional capital injections by the Austrian government, or similar interventions.

The CreditWatch placement is prompted by our concerns about the potential impact on France of what we view as deepening political, financial, and monetary problems within the eurozone. To the extent that these eurozone-wide issues permanently constrain the availability of credit to the economy, France's economic growth outlook--and therefore the prospects for a sustained reduction of its public debt ratio--could be affected. Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union. This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the eurozone's record of debt-crisis management and its implications for our view on the effectiveness of policymaking in France....If we change one or more scores, we could lower the long-term rating by up to two notches. Conversely, if the above concerns were mitigated by what we consider to be appropriate policy action, we could affirm the long-term rating at 'AAA'.

Standard & Poor's Ratings Services today placed its 'AAA' long-term unsolicited sovereign credit rating on the Federal Republic of Germany on CreditWatch with negative implications. At the same time we affirmed the 'A-1+' short-term unsolicited sovereign credit rating on Germany.... The CreditWatch placement is prompted by our concerns about the potential impact on Germany of what we view as deepening political, financial, and monetary problems within the eurozone. To the extent that these eurozone-wide issues permanently constrain the availability of credit to the economy, Germany's economic growth outlook--and therefore the prospects for a sustained reduction of its public debt ratio--could be affected. Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union. This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the eurozone's record of debt-crisis management and its implications for our view on the effectiveness of policymaking in Germany.

From S&P: "Standard & Poor's Ratings Services today placed its long-term sovereign ratings on 15 members of the European  Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications. .. We expect to conclude our review of eurozone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one  notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments.  [THIS MEANS FRANCE]"

High yield credit spreads were the first to show signs of disappointment this morning but this seemed more due to technical relationships in the CDS index market as HYG stormed ahead with stocks. Commodities had notably cracked early on this morning and were trending lower already as we broke the FT rumor of broad S&P downgrades in euro sovereigns. All markets reacted instantly, no questions asked, and while IG, HY, and the S&P dropped together, it was the drops in commodities as the USD strengthened that were optically of the highest magnitude. TSYs also instantly reacted and were another major outperformer - drastically beating Bunds on the day. ES (the e-mini S&P 500 futures contract) was much less volatile than broad risk assets overnight but as Europe opened markets started to move closely together in a positive risk mode. CONTEXT (the broad risk basket) was less positive that ES in the US morning session but as we sold off and closed they were closely in sync once again as every member of the basket was contributing to risk aversion. Financials outperformed but were well off their intraday highs as a sector with the majors closing mixed (e.g. BAC near lows and MS near highs) but we note that financials were the most net sold (especially the majors) in corporate bond land.

Some late day covering lifted 30Y TSY yields and EUR strengthened against the USD (European banks repatriating ahead of their open?) helping CONTEXT and elevating ES into the close. ES was on its own relative to credit though as it tore back up to try and regain VWAP.

S&P
AAA
SDR
IMF
ECB
Fed
CDS

The fact that the global financial system hinges on these 7 sets of 3 letters is appalling and amazing.

Just as we noted earlier from the leak to the FT, Bloomberg is now reporting further that

S&P Said to Place All 17 Euro Nations on Rating Downgrade Watch

The AAA aspect is probably the most critical still and the differentiation between Austria and France and the rest of the AAA European sovereigns has been plain to see for a while but the major direct impact of this move will be on EFSF bonds (and the entire support structure) which managed to rally back from just over 200bps to 148bps close today.

While we will leave readers alone when reading what the GMO head has dubbed the "shortest quarterly letter ever", we want to emphasize one point, namely Grantham's projection of how the market will perform in the next 10 years. The squeamish may want to look away: "No Market for Young Men.” Historians would notice that all major equity bubbles (like those in the U.S. in 1929 and 1965 and in Japan in 1989) broke way below trend line values and stayed there for years. Greenspan, neurotic about slight economic declines while at the same time coasting on Volcker’s good work, introduced an era of effective overstimulation of markets that resulted in 20 years of overpriced markets and abnormally high profit margins. In this, Greenspan has been aided by Bernanke, his acolyte, who has continued his dangerous policy. The first of the two great bubbles that broke on their watch did not reach trend at all in 2002, and the second, in 2009 – known by us as the first truly global bubble – took only three months to recover to trend. This pattern is unique. Now, with wounded balance sheets, perhaps the arsenal is empty and the next bust may well be like the old days. GMO has looked at the 10 biggest bubbles of the pre-2000 era and has calculated that it typically takes 14 years to recover to the old trend. An important point here is that almost no current investors have experienced this more typical 1970’s-type market setback. When one of these old fashioned but typical declines occurs, professional investors, conditioned by our more recent ephemeral bear markets, will have a permanent built-in expectation of an imminent recovery that will not come. For the record, Exhibit 1 shows what the S&P 500 might look like from today if it followed the average fl ight path of the 10 burst bubbles described above. Not very pretty."

Apparently one taxcut for another is an equitable quid pro quo. Watch the president explain how expanding the payroll tax would be funded by millionaires. Which naturally means DOA.

As Deutsche Bank suggested earlier, the ECB needs a market plunge to justify an intervention. Hence, here is the ECB's very own Nowotny doing all he can do to precipitate a, you go it, market plunge:

• NOWOTNY FEARS MERKEL/SARKOZY PROGRAM WON'T BE ENOUGH
• NOWOTNY SAYS EUROPE CAN SOLVE CRISIS ITSELF
• NOWOTNY SAYS NOT NECESSARY THAT USA `HELP OUT' EUROPE
• NOWOTNY SAYS SMP CAN'T BE COMPARED TO FED, BOE PROGRAMS
• NOWOTNY SAYS SMP HAS TIME LIMIT
• NOWOTNY: DEBT CRISIS MUST NOT BECOME BANKING CRISIS AGAIN

For anyone who ignored the DB post earlier, we urge you reread it...

Here it comes. From the FT: "Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc. The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days. It warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question. With regard to Germany, S&P said it was worried about “the potential impact (...) of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.” Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc." How this critical news was leaked, we have no idea. However, what is important is that now may be a good time to panic, unless Allianz has another CDO Quadratic plan up its sleeve...

While the capital markets may be cheering that in the past month 120,000 people supposedly found jobs, even if these were largely temporary or part-time just in time for the year end shopping sprees, we wonder how they will react when learning that according to the latest update from the Supplemental Nutrition Assistance Program (SNAP), some 423,000 Americans found their way to minimum way subsistence, courtesy of Food Stamp handouts from Uncle Sam. Since the start of the Second Great Depression, food stamp participation has increased by 18.7 million, and is now at an all time higher 46.3 million. All Bush's fault, or something. At least the chart below appears to be plateauing... Actually, sorry, no isn't.

Short-dated TSY Bill yields have remained negative for almost two months now and even as the S&P 500 has roared 100 points higher in the last week signaling seeming risk appetite and optimism, other investors are so scared to hold money with banks that they are willing to pay the US Treasury (a veritable paragon of virtue) to hold their money and keep it safe. Of course there is likely year-end effects in the T-Bill but still it seems the bifurcation among market participants perceptions of risk remains extremely high.

As investors proceed happily through the forest that is this week's potentially epic fail, Nomura asks the question on every European is asking - What's in my wallet? Investors holding EUR-denominated assets and obligations face potential redenomination of contracts into new currencies. Based on the current misalignment of the real exchange rate and future inflation risk estimates, the fixed income group sees very material depreciation risks in most of the periphery and one surprise but critically the research enables risk-reward trade-offs on intra-European trades. This potential 'fungibility' issue is exactly what we described last week as a potential driver of stress and Nomura's work provides a framework for quantifying that relative stress. That said, Nomura adds the usual disclaimer: "For full disclosure, we are not regarding the break-up scenario as our central case." But... there is always a But. "But it has become a real risk over the last few months, and a possibility for which investors should now plan."