A note by JP Morgan released today contains the following gem: "The quite frankly frightening volatility in the Italian bond market this week together with the rapid pace of political developments (nascent new governments in Greece and Italy) confirms not only a new, more extreme phase in the European crisis, one in which the very irrevocability of the euro is now up for discussion, but also the disconnect that now exists with the currency markets. Yes EUR/USD dropped but the worst daily decline was a 3-sigma move compared to the 10 sigma surge in BTP yields Wednesday followed by the 6-sigma drop today. European developments are not only dominating all other idiosyncratic fundamentals in the currency markets and leading to an extreme lack of differentiation in currency performance (chart 1), they are generating volatility without meaningful or tradable direction. We have steered clear of any substantive cash positions in recent weeks and make no excuses for staying sidelined, especially as liquidity is likely to tail-off quicker into this year-end period than is normal in view of the degree of frustration many investors fell with their performance and the market’s volatility." So, aside from all the rearview mirror pros on twitter and various chatboards, if even JPM is staying out of this sad yoyo excuse for a market who is actually trading?
And so the two most "credible" investment banks have had their say on the EURUSD as a result of today's 250 pip surge in the EURUSD: while Goldman earlier said to buy, buy, buy (i.e., sell) every EURUSD pip until 1.40, here is Morgan Stanley with the mirror image call.
Today we entered a short EUR/USD trade at 1.3750. While Italian 10-year bond yields have tightened from the highs reached earlier this week, we believe yields still well above 6% are unsustainable for a debt market of 1.9tr EUR (third largest in the world). This means that Italy will need to spend nearly 10% of its annual GDP on interest payments alone. Meanwhile, political uncertainties add to concerns in the Eurozone, with new regimes in Greece and Italy. We remain fundamentally bearish on EUR, and believe it will retest 1.30 as Italy runs the risk of being “too big to save.”
Confused yet? Why bother. Maybe Goldman can just skip the foreplay, dump its entire EUR inventory to Morgan Stanley and spare everyone else the drama and paternity tests.
While the market is ripping today on absolutely nothing (earlier we noted the rotation of muppet X with muppet Y - this changes nothing but who cares), BTPs are soaring, and confusion is prevalent, one thing is certain: we now know who is not buying Italian bonds. As IFR reports, "European banks are planning to dump more of the €300bn they own in Italian government debt, as they seek to pre-empt a worsening of the region’s debt crisis and avoid crippling writedowns – a move that could scupper the European Central Bank’s efforts to bring down soaring yields. Still reeling from heavy losses on money they lent to Greece, lenders are keen not to make the same mistake twice.Then, under the pressure of governments and a hope that credit default swaps would protect them against heavy losses, they held on until it was too late to sell." And for our European readers who may be wondering who the dumb money will be as this tsellnami unleashes, we have one word: you. "With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some of Europe’s largest bank say now is the time to accelerate disposals. Many are also reversing long-standing policies of buying into new Italian bond issues, denying Rome an important base of support." And there you have your explanation for today's action - yet another headfake to get the idiot money foaming at the mouths while the insolvent banks quietly dump everything, sending the EURUSD once again higher as EUR repatriation resumes, this time with feeling.
While at a glance this may seem like a straightforward question with a simple and obvious answer, troubled Italian bank UniCredit has released a ponderous article comparing and contrasting the two heavily indebted, politically challenged, and growth-retarded nations. Comparing debt-to-GDP ratios and trajectories, GDP growth, and unemployment (as well as funding needs), the answer actually becomes a little less obvious and boils down to the central bank (as does every trading decision in the world currently). Furthermore, their (admittedly biased) perspective leaves one wondering whether to invest in a country that hopes things will miraculously improve on its own, or in a country that has realized that reforms are needed and that has shown the willingness to take the painful steps in the right direction? Or c) none of the above.
Guest Post: Austrian Central Bank Strikes Exotic Deal with PBoC While Entangled in Alleged Kickback ScandalSubmitted by Tyler Durden on 11/11/2011 - 14:10
Austria's central bank, Oesterreichische Nationalbank (OeNB) delivers headlines ranging from opaque to criminal these days.
Market observers scratch their heads about a secretive agreement between the OeNB and the People's Bank of China (PBoC) that makes Austria the first non-Asian country permitted to engage in Renminbi investments with its Chinese counterpart as the intermediary. Further media inquiries were stonewalled.
Given the hoped-for money printing and European sovereign bond monetization from the ECB would tend to reduce the value of the EUR, today's belief that a new government in Greece and Italy will somehow fix all that ills this vast economic region seems to have won. The EURUSD pair has performed a miraculous 650 pip roundtrip in the last two days as Bund yields rise, EFSF spreads deteriorate, and European funding remains blatantly stressed. Perhaps it is Ben's willingness to print vs Stark's that is playing out (among many other things) in this battle to the bottom.
*STARK SAYS ECB WILL NEVER BECOME LENDER OF LAST RESORT: NZZ
A fascinating article by Reuters this morning really brings to bear the reality that Greece faces as lenders and trade creditors refuse to help (and why should they realistically) with energy needs. The harsh reality that Iran (yes that nuclearized Iran) is the main provider of Greek oil needs surely puts into perspective what seemingly unlikely events can occur when a person, corporation, country, gets desperate. Perhaps we should reflect the other way that while all the world's bankers and money-men refuse to lend Greece money, Iran has truly become the lender of last resort for Greek survival - as it strikes us that energy needs will/should trump a coupon payment any day.
The near paralysis of oil dealings with Greece, which has four refineries, shows how trade in Europe could stall due to a breakdown in trust caused by the euro zone debt crisis, which is threatening to spread to further countries.
"Companies like us cannot deal with them. There is too much risk. Maybe independent traders are more geared up for that," said a trader with a major international oil company.
"Our finance department just refuses to deal with them. Not that they didn't pay. It is just a precaution," said a trader with a major trading house.
UPDATED: Full Statement added
Headlines via Bloomberg for now:
*MF GLOBAL'S 1,066 EMPLOYEES HAVE BEEN FIRED, TRUSTEE SAYS
*MF GLOBAL EMPLOYEES LOSE JOBS AS BROKER LIQUIDATES :MFGLQ US
*MF GLOBAL TRUSTEE TO HIRE UP TO 200 PEOPLE TO AID LIQUIDATION
Presented with little comment - except a reminder that:
"every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year."
Time to sell the EURUSD with both hands and feet, not to mention with MF Global-type leverage: that uber-contrarian FX indicator, Goldman's Thomas Stolper, who has not had a notable call correct in the past 2 years, just came out with a long EURUSD call, calling for a 1.40 target and a 1.35 stop loss. Yes, this means Goldman is now selling EURUSD until 1.40 and will begin buying it at 1.35. As a reminder here is how Stolper's last EUR/$ recommendation ended.
The IMF has released the report it prepared for last week's futile G-20 session, which incidentally saw the IMF being shut out of bailing out the Eurozone: a development which was adverse at the time but now is largely irrelevant: after all Greece has a new parliament, if still no ink to print tax forms. So what did the IMF say? Here are some key soundbites.
With the market enjoying a 30% below average volume rally this morning, as European debt spreads pull back to where they were 2 days ago, the University of Michigan survey of Consumer Confidence Sentiment rose to 64.2 from 60.9 beating expectations of 61.5. The bond-less equity market managed a short-lived rally in this wonderful news until a few realities hit home. Contextually, this number remains 25% below its average of the last 33years, the 3 month change in the outlook (or 'hope') sub-index jumped the most since June 2009, and 5Y inflation expectations are as low as they were Q1 2009 (and the second lowest print ever). As always, regarding the headline figure is often misleading as the reality of these surveys is often far more interesting and realistic under the surface.
And there they go again with that word out of place. Just out of Reuters:
- SLOVAKIA'S PRIME MINISTER SAYS EURO ZONE SPLIT MAY BE NECESSARY, DE FACTO SPLIT ALREADY EXISTS
Expect Barroso and Van Stock Ramp to come out with denials and allegations of nuances lost in translation shortly.
With the buying frenzy resuming on the lack of "headlines" out of Europe, it bears reminding that while risk on and off will be the theme of the day for a while, the entire Eurozone rescue, with the ECB refusing to participate directly, continues to be predicated on the EFSF and its ability to purchase the hundreds of billions of bonds rolling in the next 12 months from PIIGS, but mostly Italy, and now France. Which is why we are surprised that the news that the EFSF has now officially been "haircut" has not been quite noted. As Reuters reports, "political turmoil in Italy and Greece is complicating efforts to increase the firepower of the euro zone's bailout vehicle to 1 trillion euros, an official at the European Financial Stability Facility said on Friday. Euro zone countries had hoped to increase the EFSF's lending capacity by December, combining bond insurance with investment vehicles. But after the government in Athens fell and bond markets pushed Rome to the brink of a bailout that the euro zone cannot afford to give, the Luxembourg-based EFSF thinks it may be more realistic to aim for less leverage." In other words: kiss the full capacity bailout goodbye. And as the chart below shows, kiss any hope that the EFSF will be able to participate meaningfully in any European "renaissance" - while BTPs and OATs have seen some modest tightening on this "risk on" day, the yield on the EFSF has done absolutely nothing and remaind glued to record wides.