Archive - Sep 23, 2011 - Story

The unerring belief that powers greater than mere mortals will vanquish the enemy of lack-of-bank-capital this weekend was enough to spur a significant turnaround in European stocks and spreads as they headed towards the close. While optically, the strength in senior financials spreads appears wondrous, we note that subordinated spreads are underperforming seniors significantly (when one would expect them to be outperforming if all was really well) and broad equity indices (and credit indices) only managed to get back to marginally unchanged. Sovereign risk remains notably wider still - which has the smell of a bailout/nationalization risk-transfer to it in our ever so humble opinion.

As predicted:

• SENATE HAS VOTES TO DEFEAT HOUSE SPENDING PLAN; VOTE CONTINUES - BBG

Next up: headline risk and a push for Bernanke to print more. Why? Because when all is said and done the market will have plunged (even more) on the realization there is no fiscal stimulus coming in the next two years, despite the Chairman's clever gambit.

Last night a GOP controlled Congress passed the Continuing Resolution bill which would provide funding for the government past the end of the Sept 30 fiscal year end. To pass it, Boehner invoked clauses which antagonized Democrats even more. Which is why now that the bill is in the Senate, it appears to have hit a dead end. As Goldman explains, today the bill will likely die, which means that with a one week recess coming up from the government next week, government is about to be well and truly shut down.

Ben Bernanke promised to sit, like an elephant, on short-term interest rates for another two years  - at least. What were US Money Market Funds (MMF) going to do? US Treasury yields are 0.09% for 12 months, 0.02% for 6 and negative 0.01% for 3 months. You can’t deliver negative yields to investors (that would empty the fund pretty quickly) and you still want to charge some management fees. Enter funding-hungry European banks. You might be surprised to learn the following: the world’s largest bank (by assets) is – French...

As rumors circulate regarding recaps, EuroTARPs, nationalizations, no-need-for-new-capital, no-NET-exposure-to-French-banks, we point out that Greek government bonds (GGBs) have quietly crept into the night with the 2Y price breaking below EUR40 for the first time and the long-end bond prices breaking below EUR30 for the first time. Given the 20% haircuts in the stress tests and the 60-70% haircuts the markets are expecting, we can only guess at banks need for capital - or will MtM suspension magically wipe all of those fears away? Meanwhile, away from the headline grabbing PIIGS, Germany CDS is +7bps at 113bps, Austria is 15bps wider at 185bps, and Belgium just broke 300bps.

Some much needed veteran trader perspective from the fermentation committee Chairman. "We’re going to adjust our usual format a bit to try and put yesterday in a little bit of perspective. Having done this over 50 years, I’ve seen a good deal of market history - the Cuban Missile Crisis, the Kennedy Assassination, the ’87 Crash, various wars, and much more - and perspective is essential to survival - at least financial survival."

Just hitting Dow Jones, another set of cold hard factual bricks for the bailout rumor brigade. From Germany's FinMin Wolfgang Schaeuble:

• GERMAN FINANCE MINISTER: MAY NEED TO REVISE 2ND GREEK BAILOUT - Dow Jones
• GERMAN FINANCE MINISTER: DOES NOT MAKE SENSE TO SPECULATE ABOUT NECESSITY FOR ADDITIONAL DECISIONS ON GREECE: RTRS
• GERMAN FINANCE MINISTER: THE RECAPITALIZATION OF EUROPEAN BANKS IS NOT A MATTER FOR THE ECB BUT FOR MEMBER STATES
  

It appears the euro is now soaring on expectations of a rumor to refute this latest fact.

Is this the beginning of the end of Obama, with impeachments and much more to follow? Today's pleading of the 5th amendment by Solyndra execs may be the starting point. Watch the live hearing below.

30Y rates move more than three standard deviations this week - the greatest move since Black Monday (1987) - as it drops 55bps - hhmm - stability.

Uh... did a member of the status quo just tell the truth? "It is clear now that the Fed cannot bail equity markets out any more and any interest rate cuts by the ECB may not have much of an impact on markets" Cue panic? 

As overnight hopes of global bailouts fade, the reality that the markets are on their own has started to sink in across every asset class but perhaps credit - the life-blood of everything we do economically - is hurting the most. Senior financials are 14bps wider at 317.5bps (record wides), Main is 11bps wider at 209bps, and XOver 36bps wider at 880bps. Yesterday saw sovereign selling focused in the majors but today it has spilled over into everyone else as commodity producers have maintained their relationship with oil and have snapped wider. While SovX is 'only' 11bps wider at 368bps, CEEMEA is 41bps wider at 390bps overtaking SovX for the first time since June back to its more 'normal' position cheap to Western Europe.

• Finance ministers and central bank governors of the G20 countries pledged for a strong and coordinated international response to boost global economic recovery
• ECB’s Coene said that the central bank may take action as soon as next month if the economic data continues to disappoint. However, he also said that giving EFSF bank license would not be a good idea. Meanwhile, ECB’s Knot said that a Greek default cannot be excluded
• Kathimerini wrote that several Greek MP’s are resisting a new round of austerity
• The Head of Finnish Parliament said that the use of new EFSF powers should always require parliament approval
• Handelsblatt quoted a German economic professor saying that Germany has EUR 5trl of hidden debt, while Deutsche Bank said co.’s write downs on Greek bonds could be higher than the 21% level foreseen in a July agreement

We can only imagine the frantic calls being place between Omaha and Washington this morning...

The first of what is likely many. "Due to technical disturbances, Oslo Børs' Equity and  Bonds markets are temporary halted. Members may  delete their orders in this state.  Further information will follow. "

Story yesterday of "helping" the weakest 16 banks in Europe to recapitalize was met with a strong rally, quickly followed by a sell-off to new lows.  The realization that the EU has gangrene and decided to deal with some warts brought back the fear the the governments are once again behind the curve and just don't get it. Then we rallied into the close because the G-20 would of course save us.  So far, not so much.  A wishy washy statement is just not enough for a market that has come to expect (if not depend) on more.   The BRIC's are supposed to ride to the rescue, but in Brazil, the currency has been getting crushed, Chinese CDS is hitting new wides.  Brazil is busy imposing tariffs on China.  Russia is complaining about Chinese dumping.  Hardly the signs of a co-ordinated effort to rescue the world.   So many people have been asking "What has changed?" in the past couple of days.  "How can we have gone from 1,220 to 1,120?"  The answer, to me is clear, a loss of faith in the ability and willingness of the governments to write checks to support the stock market.  I ask what happened to make stocks futures go from 1,120 on the 12th of September, to 1,210 by that Friday?  That to me is just as legitimate a question.  And the answer is clear - the market still believed that the governments were there to give the market whatever it whined for.  Every pop that week was directly a result of some government or quasi government action or rumor.  That rally occurred with Retail Sales disappointing, surprisingly bad Jobless Claims, weak Empire Manufacturing and Philly Fed.