Archive - Sep 9, 2011 - Story

The global financial system is experiencing great stress as it adapts to the new, post-crisis rules of the game.  Those new rules are both explicit and implicit.  They call for more capital, reduced leverage, lower risk appetites, more thorough supervision, and stronger regulation, at both the systemic and individual institution levels.  In this environment, open dialog is all the more important as we collectively reach a common understanding of how the new rules should work in practice.

Timber time. Next up: another round of hopeless and very much helpless BOJ intervention. Because after the FX wars come the trade wars, and after the trade wars come the shooting wars.

I can't take credit for finding this graph of Eur Basis Swap [the cross currency basis swap between 3M EURIBOR and 3M LIBOR], but it seems to be a decent indicator of European banks having difficulty funding their USD business.  Maybe I'm reading more into the chart than there is, but that is what I see going on. It makes sense with all the other data that is out there and the anecdotal evidence that US banks are pulling back their lending to European banks.

Literally seconds after the Greek finance ministry announce that any rumors of a Greek default over the weekend are absolute rubbish (we wonder who would admit such rumors?), we get the following from Bloomberg: "Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said. The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress." Looks like at least one very "naive" government is not buying the latest batch of lies from Greece.

While it is not all too surprising in light of news that Greece may be insolvent in 48 hours, that the ECB is about to commence printing with the abandon of a drunken chairsatan, and that New York has a "credible threat" of another terrorist attack, it is a fact that liquidity across virtually every European vertical is now at its worst levels in years, starting with the EURIBOR-OIS (or interbank/central bank funding spread), which soared by 6 bps to 81.2, or the most since March 2009, the 3M USD LIBOR rising for the 34th day in a row to 0.338% at multi-year highs, and with deposit facility usage at the ECB rising to a new one year high of €172.9 billion, an increase of €7 billion overnight. Of particular note is the dramatic deterioration at Credit Agricole overnight which hit 0.4% in the 3M USD Libor, far worse than the "self-reported" dollar funding at Barclays and RBS which as we reported earlier, are perceived as the riskiest European banks should the inevitable bond haircut take place. Just as Dexia long-CDS was the slam dunk trade of H1, is CA poised to be the H2 one?

Since by now even my mother knows that US stocks rally when Europe goes home, it only makes sense to rally well ahead of it?  It has become too well known that this trend exists and as others have also mentioned, when those simple rules break, they often break ugly.  I would be very careful betting that we get a rally when Europe goes home. 

A few days ago we mocked Morgan Stanley's call that the G7 would proceed with a global easing episode over the weekend. We may have been slightly premature. From Reuters: "Group of Seven finance chiefs meeting in southern France are considering issuing a communique after their talks, a G7 source said on Friday.  G7 chair France had said there would be no communique from the talks, but the source said the issue was now being debated and there was a 50 percent chance of a statement.  The source said if there was a communique it would talk about the global economic slowdown, financial market turmoil and the policy tools different countries could use, but it would not make any reference to concerted interventions."

There is just one relevant data point in today's Wholesale Inventories report (which came at 0.8% in July, in line with expectations of a 0.7% increase), and up from 0.6% in June. And it is called "inventory stuffing" as the ratio of inventories to sales just hit 1.17, the highest since October 2010. All that hollow GDP growth is catching up with companies, and sooner or later, FIFO/LIFO liquidations follow.

Today, Jürgen Stark, Member of the Executive Board and Governing Council of the European Central Bank (ECB), informed President Jean-Claude Trichet that, for personal reasons, he will resign from his position prior to the end of his term of office on 31 May 2014. Mr Stark will stay on in his current position until a successor is appointed, which, according to the appointment procedure, will be by the end of this year. He has been a Member of the Executive Board and Governing Council since 1 June 2006.

Wondering what is next for Europe? Don't be. With Jurgen Stark, aka the last real hawk at the ECB, gone, here comes "the printing." SocGen's Dylan Grice explains.

We have been discussing the indications being sent by the credit markets and the turn in the credit cycle that appeared to be developing. Just to add to the pile of cyclical turn indicators, we note that the number of corporate bonds receiving S&P credit rating downgrades exceeded upgrades this quarter for the first time since Q1 2010. Obviously, this is led by the high-yield names but the withdrawal of liquidity often rapidly pushes crossover names closer to the edge and inevitably leads up the capital structure and quality spectrum.

This email is making the rounds and catching most traders' attention:

From colleague: trader friend just hit me with the following: There is “Chatter” in the market of a Greek Default this Weekend - and their CDS is over 400 wider…  Soc Gen is off 7% on exposure - German CDS more expensive than UK;s - despite the ballooning in the CDS prices for Lloyds and RBS.

In other news, Reuters is reporting that Stark is about to retire; with announcement to come after the German market close according to sources. His potential departure is due to a conflict over ECB bond buying according to sources.

There is much talk of a gold margin hike this morning. For one thing this is not news: it happened early afternoon yesterday. Second, it impacts a relatively innocuous contract. But of course, in the footsteps of the Chairman, at this point it is not what one does, but what one promises to do. As such this move is seen as merely a telegraphing of what the CME will do to GC should gold spike over $1900. We say do it already, and make gold margin 100%. What will the CME do then when everyone moves to trade the contract in Asia, or is happy to trade with 100% cash collateral?

• Obama in $450bn push for growth (FT)
• Strains rise in short-term eurozone lending (FT)
• Republicans Ask Geithner for Report on U.S. Rules Reductions (bloomberg)
• ECB Stark: Ready to step in if transmission mechanism impaired (Reuters)
• Sea radiation from Fukushima seen triple Tepco estimate (Reuters)
• Ghost of Lehman Haunts G-7 Amid Debt Crisis (Bloomberg)
• G7 faces grim outlook with resignation (FT)
• Bank of America Structured Notes Sales Drop as Buyers ‘Shy Away’ (Bloomberg)
• Swiss Cap Move Riles Officials in Norway, Canada (WSJ)

• Market participants noted a deadline for the Greek debt swap programme today, however its successful conclusion remained in doubt, which promoted risk-aversion
• French bank shares witnessed particular underperformance, and shares of Societe Generale ventured below the level at the time of Lehman crisis
• The IMF chief Lagarde said that some banks need additional capital and the risk of a liquidity crisis cannot be dismissed
• CHF came under pressure across the board after the Swiss economy minister said that CHF is still massively overvalued