Earlier today, JPMorgan made waves by claiming, some would say rather uncouthly, that Portugal's government is about to keel over and die (even if it is undisputed- after all, on Wall Street no one can hear you speak the truth). Never one to be left wanting, here comes Citi with some charts of "parabolic" moves in the Irish 2 Year bond, and some even scarier claims. As expected any research report that starts with the words: "Oh dear...The picture on Irish interest rate markets is taking a very grim turn" - well, it is clear where it is going from there. In summary, Citi now believes that Ireland is essentially done for, or as Tom Fitzpatrick ever so more diplomatically puts it "things are about to get ugly", and recommends going long CDS since the entire short end of the curve has gone parabolic, now that Europe seems set to watch the island country explode, 2s10s has inverted in the past few days, and overall the Emerald Isle is now a dead man walking in the dumbest game of chicken since the creation of the euro. Too bad neither side is willing to back out, which will ultimately end with the eventual destruction of the eurozone and the euro.
The backdrop per Citi:
Irish bank stress tests are due at th end of this month. The Government is thought to likely have a good idea of the results heading in to the EU summit later this week
Irish bank shares remain under pressure
Increasing talk in press about possible debt “haircuts”
Total opposition in Ireland to compromise on Corporate tax rate.
Total opposition in Europe to compromise on Corporate tax rate
ECB set to raise rates (Repeat of policy mistake of 2008? They raised rates on July 3rd 2008 and EURUSD began a rapid descent 2 weeks later)
80% of Irish mortgages are variable/ECB trackers NAMA has begun to sell assets
This has all the hallmarks of something that might start to get ugly. It is “obvious to a blind man” that Ireland does not have the ability to meet the present requirements (Almost certainly neither on the level of interest rates or level of debt).
In addition Europe does have a track record of “snatching defeat from the jaws of victory” How ironic if having come to an agreement on the ESM (European Stability Mechanism) that taking too hard a line with Ireland, when the cost of supporting them is so small in the overall scheme of things, together with a pre-emptive policy decision by the ECB could derail all that work in the coming weeks.
Given this back drop and given that the set up on EURUSD is similar to that seen in July 2008 (U.S. credit crisis) and again in November 2010- EURO sovereign crisis (16 months later and 16 months prior to today) as per our note of today we have to admit that we are getting increasingly nervous about this back drop.
And the promised scary charts:
The parabolic move in 2 Year bonds, aka the Nightmare on Kildare Street:
Next, the upcoming breakout move in 10 Year bonds:
The bond inversion that just took place:
and lastly, why Irish 5 yr CDS will be the next big trade pre-open tomorrow.
Those who have enjoyed the euros unprecedented spurt to unbelievable heights may soon find themselves reacquainted with reality. Then again, in bizarro world nothing is ever quite what it seems, and if China is indeed the main actor behind the scenes in an attempt to keep the CNY weak relative to the EUR, then all bets are off.