Archive - May 15, 2012 - Story

Wonder why the EURUSD is suddenly sliding? Here's why:

• GREEK ANTI-BAILOUT CONSERVATIVE KAMMENOS SAYS THERE IS NO DEAL ON GOVERNMENT -BBG
• KAMMENOS SAYS "THEY PREFER CREDITORS TO NATIONAL SOLUTION"
• KAMMENOS SAYS NEW ELECTIONS WILL BE HELD

Which means Syriza will win the June re-elections, likely with a strong majority, and what happens then is anyone's guess.

We bring you "baffle with bullshit" Tuesday edition, where retail Sales ex-autos miss consensus modestly, but the Empire Manufacturing beats by a mile.

Germany's Bundesbank confirmed yesterday that the German gold reserves are held overseas by the Federal Reserve, the Bank of England and the Banque de France. The German parliament, the Bundestag, has been examining the accounting of German gold reserves at the Bundesbank. The parliament's Budget Committee, one of the most powerful committees in the German parliament, had requested a critical report by the Federal Audit Office. "The decision has been unanimous," the paper quoted the Christian Social Union budget expert Herbert Frankenhauser. The newspaper report alleged "account cheating" regarding the German gold reserves. According to a Bild report, the federal auditing office complained of "inadequate diligence of the accounting of the gold reserves, which are stored in some foreign countries. Repatriation of the gold reserves is encouraged.” The Bundesbank confirmed that it, like many central banks, keeps part of its reserves in vaults at foreign central banks and said some of its gold is held at the Federal Reserve Bank of New York, the Banque de France and the Bank of England. It declined to say how much gold in total is held overseas or how much gold is stored with the Federal Reserve, Bank of England and Banque de France. The Bundesbank statement said it had complete confidence in the integrity of the central banks where the gold is held. "From these central banks, the German Bundesbank annually gets confirmation of the gold holdings in troy ounces as a basis for its accounting," the Bundesbank’s statement said.

European bourses are trading in modest positive territory ahead of the US open with early trade seeing moves higher across equities as Germany printed an expectation-beating 0.5% growth in their flash Q1 GDP. Elsewhere, Eurozone growth surprised to the upside somewhat, coming in flat against the expected contraction of 0.2%. However, as time passed, Greece garnered the focus of markets once more as they face a EUR 435mln foreign-law bond redemption today. Government source comments have somewhat reassured markets that the payment will be made, but participants await official confirmation. Further assisting the moves off the highs was a lower-than expected ZEW survey from Germany, with economists noting that the French and German elections have knocked confidence in the country over the past month.

Lots of stuff happening today.

• JPMorgan Said to Weigh Bonus Clawbacks After Loss (Bloomberg)
• Obama Says JPMorgan Loss Shows Need for Tighter Rules (Bloomberg)
• Greeks Try New Tack, Seeking Technocrat Slate (WSJ)
• Euro zone finance ministers dismiss Greek exit "propaganda" (Reuters)
• Romney’s business record under fire (FT)
• Tide Turning in Japan Deflation Fight, BOJ’s Top Economist Says (BBG)
• Euro Chiefs May Offer Leniency to Greece (Bloomberg)
• Portugal's Progress Won't Guarantee Funding (WSJ)
• EU Bank-Liquidity Bill Proceeds; U.K. May Protest (WSJ)
• Cameron pressed to boost enterprise (FT)

Update: the expected next step: "GREEK 2023 BOND PRICE FALLS TO 14.51 PERCENT OF FACE VALUE" - but it was a "no brainer" trade... a "trade of the year" trade... Tough break for Greylock. As we said "Um, distressed bond expert guys - the bonds you should have bought are the old UK-law bonds which may return par...at least you had some covenant cover." Oh well - at least it is "other people's money."

Back on January 22, (Subordination 101), we advised readers that the one virtually sure way to make a killing in the bond market is to i) buy up a fulcrum Greek piece of debt, i.e., international/UK-law bond with strong covenant protection ahead of the country's restructuring, ii) refuse participation in the cramming down PSI, which was nothing but a GM-type exercise in covenant stripping, and iii) sit back and enjoy the money trickle in. Back than the €450 million bond of May 15, 2012 traded at ~75. Today, that same bond is about to generate a 31.26% cash on cash return, or 135% annualized, as it is Greece that has blinked, and according to the FT, has decided to make a full bond payment on this issue to avoid an out of control sovereign default, even though by doing so, it reduces its cash holdings by a third to just over €1 billion as discussed yesterday, and risks pushing both the PSI participants and its citizens into a murderous rage, as instead of complying with its mouthing off during and after the PSI, that not one bondholder would get a par repayment (nor apparently use the cash for public proceeds such as paying salaries), the one entity who ended up having all the leverage was those bondholders, who went against the grain, and held to their covenant rights. Just as we suggested. End result...

As already noted, one piece of good news out of Europe - German GDP (ignore the huge ZEW miss) - was enough to make everyone forget the Italian bank downgrade, and that Greece is one election away from unwinding the EMU. Yet perhaps it is good to have a modest bounce from a market, which however not even Goldman says is oversold: after all the central planners need a day or two to regroup, and consider what currency to crush next to buy the global nominal stock market a few months of breathing room.

There was little good news out of Europe overnight, when several key countries (Germany, France, Greece and Portugal) reported their Q1 GDP, but what good news did come, namely that Germany avoided a double dip, with Q1 GDP printing at 0.5% on expectations of a 0.1% move, has for now saved the EURUSD and the futures. Why the growth: according to the German statistics office, net trade drove 1Q growth (thank you weaker EUR); domestic consumption rose in 1Q while investment declined in 1Q. The sellside community was quick: "Germany’s 1Q numbers show how EMU’s biggest economy is weathering debt crisis", Newedge said in a note. Then there was everyone else: Italian GDP contracted by 0.8%, more than consensus of 0.7%, the most in 3 years. Broadly, the Eurozone GDP avoided a technical recession with GDP printing at 0.0% on estimates of -0.2%. But as the PMI vs GDP chart below shows, this razor thin escape will hardly be repeated in Q2. Greek GDP declined by 6.2%, Portugal down by 0.1%, Holland down -0.2%, and so on. The well known split in Europe between Germany and everyone else continues, and just as we pointed out yesterday for the US: any "decoupling" is always temporary, and eventually catches up with the decouplee. Finally, proving that not all is well even in Germany, the ZEW Investor Confidence for May printed at nearly half expectations of 19, or 10.8, and down from 23.4.