Archive - Jun 13, 2012 - Story

Equity markets have traded with moderate volatility so far today as peripheral news concerning Spain and Italy continues to be keenly watched by market participants. Overnight the Italian PM Mario Monti said he does not see any need for a bailout either now or in the future with the Italian and Spanish 10yr yields seen off their highs yesterday, lower by 9.8bps and 7.6bps respectively. On a sector breakdown tobacco stocks saw some slight support after US firm Philip Morris announced a new USD 18bln 3yr share buyback program, however, industrials have lagged as a whole following a profit warning from Swedish firm SKF. In terms of fixed income, the bund has continued yesterday's slide with the Bundesbank coming to market with a July 2022 tap. In initial reaction to the results, bunds saw a 20 tick spike higher, off session lows, following what was perceived to have been a "smooth" auction despite some concerns about the eventual credit worthiness of Germany given the recent bailout of the peripheral nations. Meanwhile, the long end of the EUR curve steepened in early trade as reports from the Danish government who have agreed to change the discount rate that pension funds estimate liabilities being noted. In FX, EUR/USD trades higher into the N.American cross-over with an Asian sovereign name being a touted buyer this morning. In other news the AUD also caught a bid shortly after comments from the German central bank who said that they are considering buying the antipodean currency.

Yesterday, Austrian finance minister Maria Fekter ruffled the unelected Italian PM's feather by saying "forget Spain, Italy is next in the bailout line" - a statement which as expected was promptly loudly refuted, mocked, and scorned by everyone possible: the type of reaction that only the truth can possibly generate in Europe. So far so good: after all the typical European reaction to any instance of the truth is loud screams of "lies, lies" and promptly sticking your head deep in the sand. However, this time around Italy may not have the benefit of the doubt, nor the benefit of some sacrificial replacement of a prime minister: Silvio is long gone, and at this point switching one banker figurehead with another will do precisely nothing. Which is why this morning's assessment from Bloomberg economist David Powell is spot on: "Italy would probably be forced into receiving a bailout if it were to face another two weeks like the last seven days." But the punchline: "The bad news for Italy is the country’s stock of debt is already as large as Spain’s may become after years of fiscal turmoil. In other words, Italy already is where Spain may be heading."

It is really rather pathetic. The Prime Minister of Spain today called for a deposit guarantee fund, pleaded for the EU to take over the budget of Spain and said Spain would cede its sovereignty over its banks. This is all just one thing; a cry for money and money at any cost. The poor fellow has obviously lost whatever self-respect that he had and is behaving no differently than some street urchin begging for alms. What can be seen from this kind of behavior is the desperate state that Spain is in and it is reflected in his desperate pleas for help. I would speculate that so much has been hidden and so many balance sheets falsified that Spain has suddenly found itself in a sea of their own making which could be termed, “Dire Straits.” When Rajoy termed the bailout for Spain as a “Victory for Europe” I knew that he had left “sense and sensibility” behind and headed into the land of Don Quixote where windmills were imagined to be giants and fantasy had replaced reality. The problem is, unlike the creation of Miguel Cervantes, this guy is the Prime Minister of Spain and not some aged senior chasing after the Knights Templar in his later years.

Just because there aren't enough traumatizing events in the next week to look forward to, the market has already set its sights on the next "big" (let down) event in Europe - the EU summit on June 28/29, which will only benefit just one class - Belgian caterers. But for some odd reason there is hope that Europe will, miraculously and magically, after years of failing at this, come to some understanding over either Eurobonds, a fiscal union, a deposit insurance, banking union, or some or all of the above (expect many daily rumors regarding any of the above to incite small but violent EUR and ES short covering rallies). However, as we have been observing for the past 3 years, and as David Einhorn summarized visually, nothing will come out of this latest summit. JPM explains why the one thing that can save Europe is a non-starter, and will be for years.

• How original: Syria prints new money as deficit grows (Reuters)- America is not Syria
• Former SNB head Hildebrand to become BlackRock vice chairman (FT)
• Osborne says Greece may have to quit euro (Reuters)
• Osborne Risks the Wrath of Merkel (FT)
• China second-quarter GDP growth may dip below 7 percent - government adviser (Reuters)
• Italian Borrowing Costs Surge at Auction of 1-Year Bills (Bloomberg)
• Greeks withdraw cash ahead of cliffhanger vote (Reuters)
• Merkel’s Choice Pits European Fate Against German Voter Interest (Bloomberg)
• Italy Tax Increases Backfire as Monti Tightens Belts (Bloomberg)
• Dimon says JPMorgan failed to rein in traders (Reuters)

If yesterday was a repeat of the market action from that day three weeks ago before the last FinMin conference, when everyone expected Germany to announce it had agreed to a bank deposit guarantee, then today is, logically, day after. Because just like back then, so now, Germany has once again made it clear that it will first see the EUR crushed, and all off Europe begging for a bailout (as in the case of Spain - when presented with reality, they all will beg the one with the cash to come to the rescue). To wit from the German Finance Minister, via Stern magazine:

• Schaeuble Rejects European Redemption Fund: Stern Magazine
• German finance minister says redemption fund would violate EU treaties, in interview with Stern magazine