Archive - May 30, 2012 - Story

You know its bad when... two of the largest and best-known 'familia' in Europe and the US come together. As the FT reports, The Rockefellers and The Rothschilds are uniting under a common group as Rothschild Investment Trust and Rockefeller Financial Services become one. The patriarchs (David Rockefeller 96, and Lord Rothschild 76) have been 'connected' for five decades. Between the Rothschild's 'sprawling' multi-century banking empire across Europe and the Rockefeller's roots in 1882 Oil-money, we can only imagine the Illuminati, Freemasons, Templars, and Central Bankers of the world are quaking in their boots at this new global force for change - The Rothsellers or is it The Rockchilds. What next? It seems only Soros is left to complete the holy trinity...

10Y Treasury yields just broke to new all-time record low yields (marginally lower than the 9/23 1.6714% previous lows) and while the 'rates-can't-go-any-lower' crowd perhaps have not looked at JGBs recently (as in the last decade) in price terms, 10Y Treasury Futures have gained 4.6% since 3/20 swing lows while the S&P 500 has lost 6.0%. On the bright side, at least the front-end isn't inverted yet...yet.

And to think it was not even 2 hours ago that a regurgitated and largely impotent news story hit the WSJ (following up on an identical Reuters story yesterday, as ZH noted), sending the EURUSD higher by 50 pips. As we said, expect Germany to come out with a prompt refutation in minutes. The minutes in question were 90. The official denial to Gollum's lie panderings has arrived courtesy of Market News: "Government spokesman Steffen Seibert said at a regular press conference here that the German rejection of the idea of any direct recapitalisation of banks by the ESM "is well known." Summary: B+ for effort, C for execution, C- for market reaction halflife, and F for content, as usual.

So the EC wants the ECB to bypass the EFSF and use the ESM to recap EU banks?  That was the rumor that shifted global stock markets by 1% in a matter of minutes? It has been awhile see we looked at the EFSF Flowchart or had a detailed look at the EFSF Guidelines but it looks like it is time to dig a bit deeper into what is possible and what is not. The ESM is not yet up and running.  There was talk that it would be done by June or July of this year, but in typical EU fashion I don’t think much progress has been made towards that promise.  So right now the EU is stuck with EFSF and the potential to set up the ESM. The market got carried away with the promise of LTRO as a sovereign debt savior, instead it created a potential death spiral. Spanish and Italian bonds are definitely getting crushed today, but with Spanish 10 years above 6.5% and Italian 10 year bonds nearing 6%, the potential for intervention rises.  The secondary market is affecting the primary market, which is driving up the cost of funds, creating more pressure on the budget deficits.  The countries are painfully aware of that, as is the ECB. 

You know the something is really, really wrong when the best rapper is a white guy, the best golfer is a black guy, the tallest guy in the NBA is Chinese, the Swiss hold the America's Cup, the Pope is German, Europe's central banker is Italian, France is accusing the U.S. of arrogance and Germany doesn't want to go to war.

Risk-averse sentiment dominated the session yet again as market participants continued to focus on Spain and speculated whether the country will soon be forced to seek some sort of monetary assistance. As a result, credit markets continued to deteriorate, with the EURUSD cross-currency basis-swaps under pressure, while the spread between Spanish and German benchmark bonds widened to a fresh Euro-era wide level. Less than impressive demand for the latest Italian debt issuance where 2017 was underbid by EUR 0.20, while the 2022 issue was underbid by EUR 0.30 also resulted in aggressive bond yield spread widening. However, as we head into the North American open, reports that the EU is willing to envisage direct ESM bank recapitalizations saw Bunds spike lower by around 33ticks and EUR/USD by 44pips to the upside. EU stocks made an impressive recovery, but remain in negative territory. Going forward, the second half of the session will see the release of latest housing data (pending home sales), as well as the weekly API report.

• Finally, even the NYT gets it: Most Aid to Athens Circles Back to Europe (NYT)... compare to ZH from February
• It took less than 2 weeks: Zuckerberg Drops Off Billionaires Index as Facebook Falls (Bloomberg)
• Morgan Stanley derivatives switch hits hold-up (FT)... MS prevented from having non-existant deposits backsto $52 trillion in derivatives
• Solyndra goes global: Spain Ejects Clean-Power Industry With Europe Precedent (Bloomberg)
• Investors may be stoking the volatility they fear (Reuters)... Zombie Catch 22
• Facebook shares plumb new depths, valuation questioned (Reuters) shouldnt this have been questioned before?
• Italian auction reinforces eurozone woes (FT)
• Visa Beats JPMorgan as Cards Wage War on Cash (Bloomberg)
• Sweden Escapes Recession as Growth Returned in First Quarter (Bloomberg)

Moving away from baseless (or is that faceless?) European bailout rumors, and moving into cold hard math territory, we hear from JPM's David Mackie that "If a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." This may be a problem since as pointed out on Tuesday, the Spanish Fund for Orderly Bank Restructuring (FROB) is down to... €5.3 billion.

Update: sure enough "EU says accommodative ECB has little scope for more stimulus"

In a headline that is far less than meets the eye, we read the following:

• EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS
• EURO ZONE SHOULD MOVE TOWARDS BANKING UNION

As a reminder, this is the EU... not the ECB... and not Germany. The same EU which has for a while now been pushing for Germany to foot the bill. The same EU which without Germany's funding agreement, is a faceless zombie. Recall yesterday's Reuters story that made the rounds: EU proposes cross-border bank rescues. and which as Reuters admitted is "likely to upset some members, particularly Germany." Same here. As expected the record number of EUR shorts send the currency into the sky, but we expect it to come right back down once it is understood that Germany has yet to say anything on this plan.

... Which is not to say that the other usual suspects are fine, they aren't: Spain's 10 year just hit a record 6.72%, a spike of nearly 30 bps on the day, and just shy of the apocalyptic 7.00%, at which point everyone will quietly move to the bomb shelter (and JPM is not helping things, saying the total Spanish bank bailout may hit €350 billion even as the Spanish bailout fund has just €4 billion left in it...), even as the 2 Year rises above 5% for the first time since December 2011 on some rapid curve inversion moves. No: today the market simply had one of those epiphanies where it sat in front of a map, and finally remembered that last year as part of the continental contagion spread that forced the November 30 coordinated global central bank intervention, Italy was at the forefront. Sure enough, 2011 is once again becoming 2012. Today's catalyst was an Italian sale of €5.73 billion in 5 and 10 year bonds, less than the maximum €6.25, where €3.391 billion of the 5 Year was sold at a 5.66% yield, compared to 4.86% on April 27, and the BTC of 1.35 vs 1.34. But the optical killer was the €2.341 billion in 10 Years which priced above 6% for the first time in a long while, coming at 6.03% compared to 5.84% in April, and a dropping BTC of 1.40 compared to 1.48 before. The result is a blow out in the entire Italian curve, with the 10 Year point widening by 28 bps, and sending Italian CDS wider by 21 bps to 543 bps. In other words: welcome to the party Italy. You have been missed.