Archive - Aug 10, 2011 - Story

Update: Unicredit halted

As we predicted yesterday, the Italian market is hating its life right now, with traditional whipping boy Intesa Sanpaolo being halted half an hour ago, resuming trading, dropping 8.2%, and then getting halted again. Same thing with Banco Popolare which was halted down 6.02%, and we expect Unicredit is due for a halt next. The catalyst: a fresh new rumor that France is about to be downgraded, which would send all of Europe into a risk flaring tailspin as it would obviate the EFSF even before it has been launched. The rumor is also rattling the EURUSD, which has dropped about 50 pips from the highs. As a reminder, this is not the first time the French downgrade rumor has emerged, however it is the first time since a rumor about a major AAA-rated country downgrade was proven to be true (ref: last Friday).

• Global stocks rebound after Fed move (FT)
• Bernanke’s Interest-Rate Timeframe Draws Most Negative Votes in 18 Years (Bloomberg)
• Pass the Granade: BofA Sells Part of Mortgage Portfolio to Fannie Mae (WSJ)
• France Asserts Plans to Keep Triple-A (WSJ)
• S&P balks at SEC proposal to reveal rating errors (Reuters)
• Senate’s Baucus In Deficit Super Committee Trio (Reuters)
• SNB’s Franc Dilemma May Force Intervention Even After $36 Billion Losses (Bloomberg)
• Kan Moves Step Closer to Resignation After Japan agrees on Budget Funding (Bloomberg)
• Cracks in China Housing Push (WSJ)
• Australian Consumer Confidence Slumps to Lowest Since 2009 on Market Slump (Bloomberg)
• No exposure at all: none. Commerzbank Profit Drops 93% on Greek Debt (Bloomberg)

The Fed pledged yesterday to extend its near-zero interest rate by another two years, which together with weakness in the USD-Index provided support to WTI and Brent crude futures. Meanwhile, as the European session progressed, equities gathered strength partly on the back of a well-received T-Bill auction from Italy, which also witnessed tightening of the Italian/German 10-year government bond yield spread. The French/German spread also narrowed after comments from the French finance minister on potential measures to curb government spending further. Elsewhere, weakness was observed in CHF across the board after the SNB said that it has expanded measures against a strong CHF, which saw around 150 pips rise in EUR/CHF following the comments. In other forex news, GBP/USD traded under pressure leading up to the release of the BoE's inflation report, and declined further following the release of a downbeat report on UK's economy. However, some of the earlier losses were pared after BoE's King said that there is no reason for the MPC to commit to low rates. Also, USD/JPY traded below the latest BoJ's intervention level of 76.96, and made an approach towards its all time low of 76.24. Moving into the North American open, markets look ahead to economic data from the US in the form of wholesale inventories/sales, DOE inventories figures as well as the monthly budget statement. In fixed income USD 24bln 10-year Note auction is also scheduled for later in the session.

Back in May, when the market was once again trading purely on hopium and everyone's head was in the sand of denial, (or worse), Jeremy Grantham released his second quarter letter which was so bearish, it literally moved the market lower briefly (at which point visions of Ben Bernanke pushing CTRL-P repeatedly restored the levitation). Anyone who took his advice then, about 15% higher, to get out, has saved substantial capital: "whether [the market] will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it." Well, to anyone hoping that the latest letter from the GMO manager has anything more optimistic after an epic rout in the past week, we have bad news: "as for global equities, they range from unattractive (August 2) to very unattractive. The S&P 500, for example, is worth no more than 950 on our estimates. In general, risk avoidance looks like a good idea. Cash – despite its manipulated low rate, deliberately designed to make us reach for risk – should be seen as a safe haven replete with important optionality: dry powder to take advantage of possible opportunities." Grantham adds that it is recommended to "keep your head down" for the last two months of a President's third year, and to also "keep it down for the foreseeable future."He adds that GMO is modestly underweight equities in asset-allocation    accounts, partly due to "desperately unattractive" yields on fixed income. As for those who pray to the altar of St. Ben, he says that "the main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop, then the pattern of market behavior this time may be more historically typical." In other words, and in keeping with his previous letter, the time to continue fighting the Fed is now more than ever.

Several B-grade economic developments on the docket, as well as the first post-downgrade 10 Year bond issuance. Latest monthly QE Lite POMO schedule released today.

Remember how the Troika said Greece has its "budget situation" under control, and as such is a worthy recipient of the second €120 billion bailout tranche? Then perhaps they can explain to us how the following makes sense: according to Bloomberg, Greece’s state budget deficit widened to €15.5 billion in the January to end-July period from €12.5 billion euros in the year earlier period, according to an e-mailed statement from the Athens-based Finance Ministry today. So.... after praising the Greek deficit cutting progress, the country comes out and tells everyone it was really only kidding, it kinda sort lied, about its deficit but was more than happy to take European and US capital, and as for collecting taxes, well, they can try it, or at least promise to do so, after bailout #3.

Risk update: today everyone is more blowy upy, both core and periphery

• MAIN -1    
• XO -10     
• SOVX 283/287 +8  
• SOVX CEEMEA 245/249  
• IT +16                                   
• SP  +12
• PORT +9
• IRE +5
• BELG +6
• FR +5
• UK +1
• DEUTSCHE  +.5

And a special bonus: Intesa Sanpaolo -4.6%, Societe Generale - 4%, Unicredit -3.8%.

In a letter sent out by Olli Rehn to the European parliament on August 9, Rehn, in attempting to defend the fact that the ECB has now become Europe's "bad bank" and is thus nothing but a political vehicle to be used and abused by Germany which is the only one that can fund the ECB's non-existent equity capital, said that this ongoing intervention is critical in "dysfunctional" markets. He also completely fabricated the claim that the bond buying program is compatible with the EU Treaty. Supposedly he was envisioning the no bailout clause in the EU treaty. And to punctuate his point, the ECB proceeded to buy Italian and Spanish bonds for the third day this week, earlier today. Yet all that is boring, bureaucratic rhetoric. Where you should prepare to have your frontal lobe turn to jelly is the following: in defending why the expanded SMP program, which may soon hit hundreds of billions in onboarded toxic bonds, Rehn said the central bank’s investments are safe because “the bonds are purchased in the secondary market at market price -- i.e. the credit risk is already factored in,” according to a response dated yesterday to a query by an EU lawmaker. We will repeat this.... because it bears repeating: there is no risk of loss to the ECB's loan portfolio because they are purchased in the open market. In other words, if you, or a central bank, or an alien from Uranus, buys something in the open market, it is a risk free transaction....

....

Yes, that thing gushing out of your nose is blood.

As expected, after the USDCHF and EURCHF has been reaching new all time lows again and again, day after day, the SNB, a week after its latest doomed intervention, intervened again, by doing more of the same, this time increasing banks’ sight deposits at the SNB from currently CHF 80 billion to CHF 120 billion. End result: a 150 pip spike... which was fully retraced in one hour. The trend is unmissable - every single intervention (that of the Fed included) has progressively little impact as these desperate measures, traditionally reserved for life or death situations, and which are supposed to bring the element of surprise with them, are now not only not surprising, but demanded every single day, and if absent, cause asset sell offs. Pretty soon the battlefield will be central planners vs HFTs, with the money printers issuing money at first on a monthly, then weekly, daily, hourly, then lastly millisecond-ly, and ultimately constant basis, at which point it will truly be too late to buy gold.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

While there is speculation whether today's historic announcement by the Fed in which it dated the beginning of the end of ZIRP, and in reality just the beginning of the beginning, is some form of shadow QE3, what is certain is that there is no Large Scale Asset Purchasing component to it yet. As such while the market immediately discounted the impact of 2 years of duration risk elimination (roughly 70 ES point equivalent), this has now been priced in, and the market must now look to mechanisms by which the it will have to absorb ~ $2.0 trillion in debt issuance over the next year without Fed help (and to those sticking to some modified version of MMT, keep in mind there is only $1.6 trillion in excess reserves so even a full recycling thereof would be insufficient to match demand of funds). Enter Goldman Sachs which puts the argument to bed: "We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012." Why? Because what was lost in the noise today is that the US economy is contracting and the unemployment rate is rising: i.e., we are reentering a recession. And what the Fed did today is absolutely powerless to change this even from the Fed's point of view. Quote Hatzius: "This would probably mean more QE if their forecast converged to our own modal view of a flat-to-higher unemployment rate through the end of 2012, let alone our downside risk case of a renewed recession." But what about the historic dissent? Ah, therein lies the rub: "We view Chairman Bernanke's willingness to live with the dissents as a strong signal that he and the rest of the Fed leadership view the need for renewed easing as more important than the institutional norm of consensus decisionmaking." So there you go. The market will wake up tomorrow with a hangover, and say the one word it always does: "More." Absent that, the slide will, as predicted, resume, and it is none other than Goldman Sachs who has once again, just like back in 2010, set the strawman up for the Fed doing simply more of the same which does nothing to actually fix the economy, but bring us all closer to that epic meltdown discussed by Andy Lees earlier, and by Zero Hedge over the past two and a half years.