The ECB may soon have to change its policy of keeping a 1.00% rate floor if JPM is correct.In a note just released by JPM's Greg Fuzesi, the JPM analysts says that "with the Euro area economy entering a potentially deep recession, we now think that the ECB will cut its main policy interest rate to just 0.5% by mid-2012. We expect the interest rate corridor to be narrowed to +/-25bp, so that the deposit facility rate will be 0.25%. We recognise that the ECB did not cut rates below 1% during the 2008/9 recession. It never fully explained why it did not, but we think that the two most likely reasons will be less important this time." And when the ECB does cut which it will have no choice considering Germany's stern reluctance to allow it to print outright, Hugh Hendry will make some serious cash. As a reminder, 'He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year." Lastly, and as fully expected, the EURUSD is tumbling on the news.
Continuing our coverage of our favorite European implosion derivative trade for entities which, unlike countries, are not too big to fail, namely Italian and German mega insurers loaded to the gills with Italian and other Euro sovereign debt, Generali (ASSGEN) and Pimco parent Allianz (ALZ), we find that their CDS continue to implode (or soar as the case may be), more or less as expected. We anticipate that more and more traders will proceed to switch basis trade hedges not with sovereigns (where the CDS is now clearly defunct) but with sovereign derivatives such as insurers which can certainly fail (at least for the time being). In the meantime, below is a refresh on how ASSGEN and ALZ has done since we suggested buying protection in the two companies.
Gold is lower in all major currencies today except euros with euro gold having risen 0.25% to EUR 1,263/oz. The euro came under pressure due to the surprise collapse in new Eurozone industrial orders which led to Germany failing to get bids for 35% of bunds offered. The German 10-year bund yield rose sharply from 1.92% to over 2.06%. This is one of Germany's worst auctions since the launch of the Euro with the Bundesbank having to pick up nearly 40% of the 6 billion euros on offer. The German auction in turn led to further weakness in European equity markets. Asian equity indices followed US equities lower after news of a new US bank stress test and then the poor Chinese manufacturing data. Gold will be supported at these levels as the euro zone debt crisis continues to degenerate with the periphery increasingly affecting the core – leading to contagion. The bond auction in Germany is a disaster. If Germany has to buy its own bonds, it is frightening to think how other European nations, including France, will fare at bond auctions in the coming weeks. Gold remains possibly the most under-owned asset in the world, and definitely the most infrequently and poorly covered in the mainstream media.
Presented with little comment (Belgium spreads +26bps) - but with Fitch worrying over France and Dexia becoming more of an anchor, perhaps the ECB is applying its own special type of pressure to get the deal done (or to force Rehn's austerity measures) - by not intervening.
Bad Economic News Trifecta Hits: Jobs And Core Durable Goods Worse, Savings Rate Higher As Consumers Hunker DownSubmitted by Tyler Durden on 11/23/2011 - 09:51
The economic data dump is here. In order of appearance, first we have jobless claims which rose from an upwardly revised (of course) 391,000 to 393,000, worse than expectations of 390,000. That is Seasonally Adjusted. Not Seasonally Adjusted claims exploded by 74,214: good thing nobody looks at the unfudged number. The bleeds from the 99 week cliff continued as a net of 7K people dropped from EUC and Extended Claims. Next we have durable goods which while on the surface were better than expected declining by just -0.7% on expectations of -1.2% (with the previous month revised massively lower from -0.8% to -1.5%), the orders ex volatile non-defense and air dropped by a whopping 1.8%, on expectations of -1.0%, and the revised September number collapsing from +2.4% to +0.9%. This means that not only will the final Q3 GDP be revised even lower, but that Q4 GDP rebound hopes have been all but dashed. Finally, in Personal Spending data, we learn that consumers spent less, with spending rising only 0.1% on expectations of 0.3%, while income increased (thank you Uncle Sam) from 0.1% to 0.4% on expectations of 0.3%. This was to be expected: after all the savings rate in September hit 3.3% - the lowest since August 2008. It had only one way to go, and so it did, with the October Savings Rate increasing to 3.5%. Expect this number to keep rising as consumer finally re-retrench yet again, in the process hitting the economy.
If the ECB will not take the hint, JPM will bring the mountain to Mohammed. Or something. In a note just released by JPM's Colun Fenton, the firm has downgraded the entire commodity complex to "underweight" (yes, that includes gold). The reasoning? It is all the Supercommittee's fault. It also likely has nothing to do with the fact that JPM was selling commodities to clients all through this run up, and is now in finally buying, in anticipation of ECB printing and Fed's LSAP. Full report attached.
First the EFSF had trouble raising money. Then EIB spreads widened. Then EXPT got crushed. And now Germany struggled to raise money. Is there a realization that all the quasi-sovereign debt and supranational debt is actually someone’s debt? Is relying on implicit or explicit guarantees as a way to raise money indirectly over? Guarantees do count. AIG never “owned” any mortgages, all it did was write insurance or CDS contracts on them. As investors get more concerned about sovereign credit and dig deeper, will some of these programs be tested?
So Whose Debt Am I?
This will come as no surprise to anyone, because as we noted previously it only took Goldman 2 days to Stolper its clients this time around. But just because the EURUSD apparently never actually "closed" below 1.35, Goldman formally kept the trade on for one more week subjecting clients to not only extra losses but much greater volatility. Today, everyone has had enough of this charade. "Closing long EUR/$ as risk sentiment failed to improve on new reform-friendly governments in Italy, Spain and Greece."
As expected, German CDS are soaring in the aftermath of the failed auction. And even UK CDS are now offered triple digits. What is ironic is that the UK is in far worse shape than Germany. That UK-Germany compression trade gets more attractive by the day.
Anyone who has not taken the pre-Thanksgiving day off may regret it as in addition to a Eurozone whose core is now officially imploding we have possibly one of the busiest economic days of the year to top it all of right into what will likely be the thinnest volume days. Expect massive manic depressive mood swings on the smallest of blocks.
- Barnier Panel to Study Break-Up of EU Banks (FT)
- Brussels Plans to Bring Eurozone to Heel (FT) - good luck with Germany
- China’s Manufacturing May Contract Most in Three Years as Housing Falters (Bloomberg)
- Merkel Backs ECB, Warns on Greek Aid Tranche (Reuters)
- Obama Reopens Debate on US Stimulus (FT)
- Germany Fails to Receive Bids for 35% of 10-Year Bunds Offered at Auction (Bloomberg)
- To the Eurozone: Advance or Risk Ruin (Martin Wolf - FT)
- Australia Lower House Passes Mining Tax (Bloomberg)
It just goes from bad to surreal in Europe where the latest moment of pure Greek "gods kill titans" tragicomedy, comes from French rating agency Fitch threatening to cut... France? Excerpts via Bloomberg:
- FITCH: FRANCE CAN'T ABSORB MORE SHOCKS WITHOUT UNDERMINING AAA
- FITCH: FRENCH AAA WOULD BE AT RISK IF CRISIS INTENSIFIES
- FITCH: ADDED MEASURES LIKELY NEEDED FOR FRANCE '13 DEFICIT GOAL
- FITCH PROJECTS FRANCE DEFICIT IN '13 ABOUT 4% OF GDP
Earlier today Germany tried to sell €6 billion of 10 Year bunds. It "sold" €3.644 at a 1.98% yield. Which meant the German debt agency had to retain, i.e., not sell, the 39% balance, or €2.356 billion. Said otherwise the offering was a complete disaster and as Reuters points out, one of Germany's worst bond sales since the launch of the euro, and that much higher Bund yields are coming very soon to a neighborhood near you. The sale "prompted concerns the debt crisis was even beginning to threaten Berlin on Wednesday, with the Bundesbank forced to buy large amounts of the bonds to ensure the auction did not fail. The low yields offered on the 10-year paper deterred investors from the auction, especially because of growing concerns over the cost to Germany of the escalating crisis." So what was otherwise formerly sacrosanct has just become reviled: welcome to fiat's greatest hits. The resulting 10 Year yield chart should surprise nobody. As for next steps: first the UK, then Japan, and finally the US...