Archive - Apr 2012 - Story

There is a lot of talk about IG9 these days.  We think the JPMorgan 'Iksil' story has a lot more to do with tranches than with outright selling of the index. Noone knows what exactly is going on, but we think selling tranches without delta explains far more than just selling the index, given the size and leverage. Critically, in the end it is all speculation as what (if any) trade they have on but if our belief on this being a tranche exposure (for the thesis reasons we explain) then the explanation is far less scary.

It sounds good when said and credible and positive but the problem is that it is one more absurd illusion. Spain, this morning, says the next round of budget cuts are going to come from Education and Health benefits which is all very nice except they do not totally come under the purview of the Spanish Federal government. The way that Spain is currently constructed these expenditures are mostly under the control of the regional governments and so that these kinds of promises by the current administration in Spain are wisps of cultivated air floating from Madrid to Berlin. Even if the Federal government could get the cuts accomplished it will take them months and perhaps months and months so that the headlines of what Spain is going to do has all of the substance of the milky froth atop some cup of coffee in Valencia that resembles a cappuccino.

Those hoping for a quick and painless resolution to the Iranian question may have just seen their hopes dashed, following the breaking news from Iranian Press TV, according to which not only is Iran not seeking to appease its Western counterparts, but is, in fact escalating. From Press TV: "Tehran has cut oil supply to Spain after stopping crude export to Greece as part of its countersanctions, unnamed sources confirmed on Tuesday. Tehran also mulls cutting oil supply to Germany and Italy." "Countersactions" - lovely: another Swiss watch plan by the insolvent developed world. Said otherwise, one can hardly threaten to do something to a country, which is already doing so voluntarily, in the process hurting Europe's already crippled economies even more by removing the cheapest source of energy for both. Which however begs the question: just how much more Iranian crude are China and India importing despite promises to the contrary, and open warnings from the US not to do so?

US data this week is relatively sparse (as usual in a post payroll week) leaving little evidence over the next few days to progress the seasonality debate but after a long weekend of derisking in mind and now in reality, Europe is front-and-center once again. Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality - most specifically for Spain - that we described in glorious must read detail here). Divergence and decoupling remain sidelined also as Deutsche Banks' Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we've just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we'd expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.

The following chart from Bank of America captures the past three years of American "recovery" quite starkly: the US economy, as measured by the ISM  has so far not double but triple dipped, and the result would have been far more pronounced had the Fed not stepped in after each of the prior two local maxima and injected trillions into the economy. Following peaks in mid 2010 and early 2011, we are "there" again - how long until the Fed has to jump in? And would it have already done so if it wasn't an election year? Which brings us to our question: third time is the charm? Or head and shoulders?

Bob Janjuah, who has been quiet lately (recall his last piece in which he quite honestly told everyone that "Markets Are So Rigged By Policy Makers That I Have No Meaningful Insights To Offer"), is out with his latest, in which he gives us not only his long-term preview, "ultimately I still fear and expect the S&P500 – as the global risk-on/risk-off proxy – to trade at 800, and the Dow/Gold ratio to hit parity (currently at 8, down from an all-time high of 45 in late 1999) before we can begin the next multi-decade bull cycle", but also his checklist of 8 things to look forward to in the short-term centrally-planned future.

UK and EU markets played catch up at the open this morning following Friday’s miss in the US non-farm payroll report. This coupled with on-going concerns over Spain has resulted in further aggressive widening in the 10yr government bond yield spreads in Europe with the Spanish 10yr yield edging ever closer to the 6% level. As a result the USD has strengthened in the FX market in a moderate flight to quality with EUR/USD trading back firmly below the 1.3100 and cable falling toward the 1.5800 mark. There was some unconfirmed market talk this morning about an imminent press conference from the SNB which raised a few eyebrows given the recent move in EUR/CHF below the well publicised floor at 1.2000, however, further colour suggested an announcement would be linked to the naming of Jordan as the full-time head of the central bank when they hold their regular weekly meeting this Wednesday. Elsewhere it’s worth noting that the BoJ refrained from any additional monetary easing overnight voting unanimously to keep rates on hold as widely expected. Meanwhile, over in China the latest trade balance data recorded a USD 5.35bln surplus in March as import growth eased back from a 13-month peak.

• With a 2 Year delay, both FT and WSJ start covering the shadow banking system. For our ongoing coverage for the past 2.5 years see here.
• Trouble in shipping turns ocean into scrapheap (Telegraph)
• First-Quarter Home Prices Down 20.7% in Capital (China Daily)
• Bernanke Says Banks Need Bigger Capital Buffer (Reuters)
• Monti’s Overhaul Can’t Stop Pain From Spain: Euro Credit (Bloomberg)
• Spain Confronts Crisis Threat as Rajoy Seeks Deficit Cuts (Bloomberg)
• Japan’s Noda Announces Anti-Deflation Talks as BOJ Sets Policy (Bloomberg)
• White House makes case for Buffett Rule (CNN)
• Cameron to Make Historic Myanmar Trip (FT)
• 'Time for Closer Ties' With India (China Daily)

So far futures are broadly unchanged, following the release of a Chinese trade report which while showing a resumption in the trade surplus, on expectations of further trade deficit in March, showed it was primarily due to a slide in imports, not so much a rise up in exports, a fact which impacted the Aussie dollar subsequently. We already noted that in conjunction with the BOJ, this means that Asia's central banks will likely hold off on further easing, and defer to the Chairman, especially with food inflation in China still prevalent. Aside from that the traditional European weakness is back, where April Sentic Investors Confidence slid to -14.7 on expectations of -9.1: to be expected from a meaningless market-coincident indicator. Keep a close eye on PIIGS bonds where whack a mole is now firmly back as the LTRO benefit is long forgotten, 3 month half life and all that.

Disappointing the liquidity-starved masses, the BoJ wholeheartedly believes that this time it's different and their economy remains more or less flat and shows signs of picking up leaving hope for another massive LSAP (and a disappointed SocGen) having to wait for the Fed to pick up the pieces of a global slowdown. The BoJ maintained the size of its asset-purchase fund, credit-loan program, and ZIRP noting that, via Bloomberg:

• *BOJ SAYS NO ONE PROPOSED EXPANSION OF STIMULUS AT MEETING

It seems the Japanese are following China's lead (since China's economy posted a trade surplus on expectations of a deficit and following the biggest import surge since 1989, this means that the hard landing is delayed as the PBOC is far more concerned about the pockets of food inflation noted yesterday and as such will be far less willing to proceed with the easing everyone demands) and deferring to the Fed for the next global liquidity pump (remember its flow not stock so this is bad news for risk-on - as can be seen in AUDJPY, Oil, and Copper). Gold is so far enjoying this as one by one global central banks check to the Fed's check-raise expectations.

No, seriously.

Here’s my question: if banks, themselves, do not believe that Too Big to Fail is over then why should we?