It is not often that we see an official admission by a company to its regulators that oops, 'it just may have embezzled' hundreds of millions of dollars from its clients. Today, courtesy of the WSJ, we do, namely that of MF Global advising the SEC that it has "discovered a significant shortfall in its segregated funds account." Expect to see this revalation in countless investor lawsuits against the company. Also, expect to see all bonuses paid to MFG's employees the day before the company filed to be clawed back in the form of fraudulent conveyance lawsuits, so to any former MF workers: our advice is don't spend all that client money just yet. Incidentally, the primary SEC supervisor for MF Global is Michael Macchiaroli at email@example.com - let's all take a minute to personally thank him for being on top of this whole bankruptcy like a hawk.
Whatever the European experiment once was, it has morphed almost beyond recognition. The policy responses have made the problem worse, not better, and it is becoming more complex. The contagion is spreading because every policy is linking the countries more closely, not in a controlled and thoughtful way but in a haphazard poorly thought out way. Making things more complex primarily in reaction to previous moves with limited understanding of what you are getting into is a recipe for disaster, and Europe has followed this policy for years now, it is a shame they don't see it before it is too late to fix.
- Trading volume remains thin as Veterans Day in the US and Armistice Day in Europe is being observed
- The new Greek government, led by ex-ECB vice president Papademos, is expected to be sworn in at 1400GMT today
- The Italian Senate approves budget measures. According to the PM’s office, Italy’s cabinet will meet on Saturday evening at around 1700GMT, after the lower house votes on a financial stability law
- Market talk that the ECB is buying the Italian and Spanish government debt
- Merkel's CDU party's general secretary said that the party is poised to back a motion at its annual party congress on November 13th-15th to offer states a "voluntary" means of leaving the Eurozone
The chart below is the perfect summary of the dilemma facing traders and investors: that primary marginal risk setter, the EURUSD (recall the all time record correlation between the 250x levered EURUSD and the ES), is trading inbetween the Italian-Bund spread, which following the massive ECB intervention in the past two days, is largely "fake" and thus irrelevant for price discovery purposes, and the French-Bund spread which is ineligible for ECB intervention as noted yesterday, and hence presents the real risk perspective in Europe. Naturally, with optimism and a bullish bias (bonds are closed today so momos and robots are in charge) ruling the day, the EURUSD is well bid toward the "fake" side of the spectrum. However, unless the key question at the heart of the European dilemma, the math of the Italian bailout is answered, expect the French spreads to continue slipping ever wider, and the EURUSD to eventually catch up once this latest bout of optimism expires. That is, unless of course, Sarko tips his hand and demands an ECB bailout, an action which will unleash the endgame as vigilantes put France in rearview mirror and head, from every possible direction, right for Frankfurt and the German spread (with itself) directly.
- ECB as Last-Resort Lender Will End Crisis: Silva (Bloomberg) just don't tell the ECB that
- Crude Futures Head for Longest Run of Weekly Gains in New York Since 2009 (Bloomberg) - QE X coming
- China central bank to legalise part of private loans (Reuters)
- Bini Smaghi’s Resignation From ECB Opens Board Seat for France (Bloomberg)
- Goldman Sachs in China: Best Investment Ever? (WSJ)
- Europe Rebuked Over Crisis by Asia-Pacific Nations Seeing Expansion Weaken (Bloomberg)
- China ‘Big Four’ Banks Lent CNY240 Bln Loans In Oct (MNI)
- Progress Amid the US Deficit-Cut Noise (Reuters)
With Italian bonds giddy at the prospect of changing one worthless political muppet with another, if only for a few hours, and especially with the stern and long overdue assistance of the ECB (we will find out how many bonds Mario Draghi bought this week to preserve the price stabeeleetee next Monday - we expect the SMP cumulative total to pass €200 billion, a number which will delight Germany), it is becoming increasingly clear that France needs to be urgently added to the list of countries eligible for ECB secondary market "sponsorship", because while Italy yields are gapping in, Franch Bund spreads have since blown out back to record levels, following some modest tightening earlier in the morning. And unlike yesterday, this time there are no downgrade rumors to be blamed. At least not yet.
Minutes ago the Italian Senate, in a vote that passed 156 to 12, approved a key budget bill, paving the way for final passage tomorrow in
the Chamber of Deputies that will lead to Prime Minister Silvio Berlusconi’s resignation. The market reaction as judged by the EURUSD has been oddly muted with just 15 pips the immediate move higher, implying this has been largely priced in. The question, is noted previously, is whether Mario Monti will be able to form a unity government or if the country will proceed with drawn out elections in which Silvio himself will participate as well.
Spreads across Europe are tighter today, and stocks higher, as investors hope that a power shuffle at the top in Greece and Italy, where the placement of two Fed and ECB puppet rulers, would change decades of flawed fiscal planning and destructive habits. Of note, the catalysts inducing a substantial rise in French, Italian, Belgian and Irish bonds, is the expectation of a new Greek government as well as the Italian Senate voting on approving the 2012 budget and passing austerity measures (which it has already done before, and nothing happened) such as increasing the retirement age by 2 years in 15 years. The vote itself is a symbolic ouster to Berlusconi who has previously said he would retire the second the budget is passed. The question remains what happens after Berlusconi falls: elections or a new technocratic consensus government, headed by Mario Monti, and whether the ECB will support whatever course Italy takes. So needless to say prepare for vicious 50-100 pip moves in the EURUSD, and with every pip amounting to 1-3 DJIA point, the volatility in the market today will be significant. Buckle in. In other news, the one fundamental question that needs some answer before all this is over, namely how Italy will fund €300 billion in debt maturities and interest payments over the next year, with the EFSF now a formal dud, remains unanswered, and will, as there is no answer.
Unlike their French counterparts, it appears the hapless (or sensible) Italian demagogues have decided not to extend the short-sale ban that was enacted three months ago. With the US Treasury market closed and volumes likely thin elsewhere, we wonder what outlet the flight-to-safety flow will take as Italian bank equity reality is unleashed. In general the CDS market took the systemic brunt of the hedging and protection-seeking since the 8/11 ban and it seems likely that Intesa Sanpaolo and Mediobanca have the most to fall to catch up with peers in equity while UniCredit seems to have the most to lose in equity to catch up to CDS performance.
About a year ago, a rather outspoken Irishman told the world what he thinks about what then seemed like a groundbreaking event (and is now a daily occurence): the Irish bailout. A year later, the Financial News has caught up with the same gentleman, and we are delighted to share his latest somewhat politically incorrect thoughts on all aspects Wall Street, with our readers. The language in the video may resemble that encountered at a trading desk a little too vividly - you have been warned.
To print or not to print: the choice of whether to open the European Pandora's box, which as we suggested two months ago is an interesting but ultimately moot thought experiment, has suddenly become the only talking point for TV pundits desperate for eyeballs and suckers to buy their books, who are now experts not only on monetary policy but European monetary policy. And while 99% of these empty chatterboxes should be promptly muted, one person whose opinion we value in any regard is that of Jim Grant. Earlier today, with Bloomberg TV's Deirdre Bolton, he discussed not only the expected ECB response to the ever worsening contagion (while the ECB bought Italian bonds in the open market, and potentially primary against its charter, it is prohibited from buying French bonds which is why the OAT-Bund spread closed at record wides), but all the other developments in the insolvent continent. Here are some of the key sounbdbites, and, of course, the full clip.
Today, for the first time in months, the New York Fed disclosed that in addition to its outstanding $1.9 billion in swap lines with the ECB, it had opened for the first time since the swap line reopening, two new USD liquidity lines with the Bank of Japan, a 7 day and an 83 day one, for 1.1%, or just modestly more than what the 7 Day Drawn line with the ECB costs. The combined is for $102 million which brings up two questions: how much longer will the BBA pretend its LIBOR quotations are even remotely useful: after all today, according to the daily bank matrix, the most expensive 3 Month unsecured USD loan in the interbank market was 0.575% (courtesy of Credit Agricole). Yet the BOJ had to borrow from the 100x levered FRBNY at double that? Amusing. And also, just what the hell is the BOJ doing: after all in the past week the bank supposedly bought over $200 billion worth of dollars (and sold Yen) in order to weaken its currency. Where did all this money go if the bank was forced to serve as a conduit for a meager $102 million. We are sure the explanations will be fast and furious, and none of them will be right.
The inter-relationships between various credit market and equity market instruments is a regular part of what we discuss, and most importantly, using these potential dislocations to our advantage. The last few weeks have been awash with notes where we have pointed to divergences and convergences both within credit as well as across credit and equity - most recently today's credit-equity divergence. Peter Tchir, of TF Market Advisors, takes a deeper dive to address some of the reasons for the dislocations and why following the relationships we so vociferously highlight can be highly profitable.
We launch into our traditional Friday afternoon comedy post one day early courtesy of Iron Mike.