Archive - Aug 4, 2014 - Story

But Banco Espirito Santo was bailed out... and Europe is fixed again?

AFP: Israeli Prime Minister Benjamin #Netanyahu says his country's campaign of strikes in #Gaza will go on until calm is restored to Israel

— Sky News Newsdesk (@SkyNewsBreak) August 4, 2014

Self-interest is intrinsically self-liquidating on a systemic level. This is how systems collapse: those who have offloaded risk (a.k.a. skin in the game) to the system itself and guaranteed their job, income, pension or rentier skim via the State will continue to support the Status Quo that has benefited them so handsomely even as the ship tumbles over the waterfall to its destruction.

With Netanyahu pulling troops back and claiming the Gaza tunnels operation will be over soon, it appears attention has been refocused on Jerusalem as two terrorist attacks have occurred this morning. The first, near Jerusalem's Hebrew University, saw gunmen riding a motorcycle open first at by-standers, seriously injuring one Israeli soldier. The second, caught on tape below, saw a young Palestinian man take control of a construction vehicle and use it to attack a bus, killing a pedestrian. The attacker was shot and killed by police. Police have not confirmed if the two attacks are related.

It has been a while since Russia flexed its military "drill" muscles along the Ukraine border as a reminder of just who would win a pissing contest that involves military intervention.  Which is probably why earlier today Russia announced new military exercises involving bombers and fighter jets in a show of strength near the border with Ukraine. As Reuters reported, "an air force spokesman was quoted by Interfax news agency as saying more than 100 planes and helicopters would take part in the manoeuvres from Monday until Friday in its central and western districts." Expect some very dramatic footage of Russian Su-34s and Mi-28Ns hitting YouTube later today.

Fearful of any impact to the Portuguese/European dream, EU commission leaders folded and bailed out Banco Espirito Santo. Bond and CDS traders are scrambling this morning to come to grips with the consequences of BES bail-out/bail-in. The $6.6 billion bailout's burden-sharing has wiped out shareholders and crushed subordinated debt holders (traded down to 16c on the dollar this morning) where "the likelihood of recovery for junior bondholders is minimal,” according to one trader; but leaves senior bond holders (+10pts to 100) and depositors unaffected. However, it is those 'smart' investors who bought insurance in the CDS market that are struggling this morning as the plan to transfer BES assets to a new company, Novo Banco, may constitute a so-called 'succession event' whereby all the contracts associated with CDS move to the new company (and this do not trigger the CDS to pay). CDS spreads ripped 350bps tighter.

Unlike last week's economic report deluge, this week has virtually no A-grade updates of note, with the key events being Factory Orders (exp. 0.6%), ISM non-mfg (exp. 56.5), Trade balance (Exp. -$44.9 bn), Unit Labor Costs (1.2%) and Wholesale Inventories (0.7%).

• New War Risk on Russia Fringes Amid Armenia-Azeri Clashes (BBG)
• Palestinians accuse Israel of breaking seven-hour Gaza truce (Reuters)
• Argentine Default Sours Outlook for Peso as Talks Ordered (BBG)
• Espírito Santo Saga Entangles Swiss Company (WSJ)
• Booming African Lion Economies Gear Up to Emulate Asians (BBG)
• CME Profit Falls as Trading Volume Declines (WSJ)
• Why Recalled Cars Stay on the Road (WSJ)
• London Renters Win in Billionaire Backyard as Prices Soar (BBG)
• Junk-Debt Liquidity Concerns Bring Sales (WSJ)
• Rescuers race to find survivors after 400 die in China quake (AFP)

Following a ghastly week for stocks, the momentum algos were desperate for something, anything to ignite some upward momentum and stop the collapse which last week pushed the DJIA into the red for the year: they got it overnight with the previously reported bailout of Portugal's Banco Espirito Santo, where the foreplay finally ended and after the Portuguese Central Bank finally realized that the bank is insolvent and that no more private investors will "recapitalize" it further, finally bailed it out, sticking the stock and the subs into a bad bank runoff entity, while preserving the senior bonds. So much for Europe's much vaunted bail in regime and spreading of pain across asset classes. At least the depositors did not get Cyprused, for now.