It seems, as JPMorgan's CIO Michael Cembalest notes, that ahead of yet another EU Summit; everyone understands now why Europe matters (even the once-bloviating decoupling diehards). The summit is likely to focus on bank recapitalization, easier repayment timetables for Greece, bank deposit guarantees and an alleged “roadmap” for EU integration. The challenge, Cembalest confirms, is that Germany cannot afford a blank check given debt levels already over 80% of GDP. However, if policymakers don’t do something about growth in the Periphery (bailouts primarily designed to aid German and French banks don’t count), the North-South divide will continue to widen, putting pressure on the ECB and EU taxpayers. Sometimes there are no easy answers. Italy, Spain, Greece and Portugal are contracting at a 2%-5% annualized pace, and unemployment in Spain and Greece is sky-rocketing (1st chart). These levels are notable from an historical perspective. As shown in the 2nd chart, 20%+ unemployment was the level at which National Socialists in Germany began to take seats away from liberal democratic parties during the 1930’s. If the jobs picture does not improve, other EU policy decisions may not matter much (as we noted six months ago)!
With so much economic doom and gloom out there, it’s easy to forget that there are actually some bright spots in the world. I’ve spent the last few days in one of them– Georgia. Perhaps most famous for being continually stomped on by Russia, this place has suffered severe hardship practically since independence from the Soviet Union in the early 1990s. In 2005, Georgia was shut out of the Russian market, it’s largest trading partner. It happened again in 2006. Then, of course, you may remember the Russian military invading Georgia (do you see the theme here?) in August 2008 in support of the breakaway republic of Abkhazia in northwest Georgia. Russian forces rolled across the border, occupied several key areas in the country, and bombed the hell out of Tbilisi just for good measure. The damage is still visible to this day. Yet despite so many challenges, Georgia has finally turned the corner and become one seriously exciting economy with some seriously compelling opportunities.
This has to be a record:
GREEK FINANCE MINISTER RAPANOS RESIGNS; PRIME MINISTER ACCEPTS
This is the same guy who was appointed last week, and who fainted after seeking the official Greek numbers. In fact we are not sure he ever got an official appointment. And elsewhere:
CYPRUS REQUESTS EU AID
CYPRUS SEEKS EXTERNAL FINANCIAL ASSISTANCE FROM EURO AREA: China just said NEIN
Prepare the bath salt firehose.
With Facebook down over 3.5%, it appears the only real safe haven from Europe's catastrophe headline-fest is the precious metals complex. Gold and Silver are surgiung as Europe closes.
Equity, credit, and sovereigns all ugly. Merkel's unequivocal comment on her nation's unwillingness to 'share' burdens and slap the proverbial cheek of Monsieur Hollande, Italy's banking union looking for more 'aid', Spain actually asking for their bailout, Greece 'avoiding' reality, and Cyprus pulling the 'China rescue plan' last ditch retort to market angst; but apart from that, things are dismal in Europe. Italy down over 4% and Spain almost as bad on the day as every major equity index is well into the red. Italian banks monkey-hammered down 6/7.5% and halted a number of times. Investment grade credit outperformed (though was notably wider) as financials (subs and seniors), XOver, and stocks are plummeted to 11-day lows. After breaking below the pre-Spanish bailout levels on Friday, Spain and Italy 10Y are now 20-40bps wider with Italy and Spain 5Y CDS notably wider and well over 500bps. Notably the short-end of the Italian and Spanish curves underperformed significantly (curves flattened): 2Y BTPs +57bps vs 10Y +21bps; 2Y SPG +37bps vs 10Y +17bps. Europe's VIX snapped back above 27% (and we note that our EU-US Vol compression trade is moving well in our favor). EURUSD has been smacked lower by over 80pips ending under 1.25 once again.
Spain has finally made the “formal” request for aid (and Italy right behind them it seems this morning). There is another summit. Expectations for anything positive seem incredibly low. There seems to be a scramble to shoot down anything that is said out of Europe. It really doesn’t matter what is said, the negatives and potential negatives, and imagined negatives get the traction. Of all the things people want Europe to do, buying bonds on the secondary market seems the least effective (which ECB's Novotny has now written off) Any program that has a chance of working has to help both the sovereigns and the banks. If an action only helps the sovereign or the bank it is less likely to succeed. If it helps neither, than it is a total waste of limited capital. So don’t waste the money on secondary market purchases. The money barely helps the sovereign and does nothing for the banks. It may help some speculators who will buy ahead of the activity, but will be quick to get short again when the time comes.
As the following image from Spiegel summarizes, three things will happen simultaneously when the unthinkable finally occurs: i) economic output plummets, ii) unemployment rate soars, and iii) consumer prices explode. Of course, this is nothing but merely deferred consequences for Europe partying for over a decade under an unsustainable regime that borrowed from the future (sound familiar?). And now the inevitable hangover. In other words: payback is a bitch.
Those hoping for supreme court to overturn socialism today will have to wait a few more days:
- HEALTH-CARE CASE ISN’T AMONG TODAY’S U.S. SUPREME COURT RULINGS
But SCOTUS did slap Obama in the face nonetheless:
- ARIZONA ILLEGAL-IMMIGRATION LAW GETS MIXED TOP COURT DECISION
- U.S. SUPREME COURT UPHOLDS KEY PART OF TOUGH ARIZONA IMMIGRATION LAW, IN DEFEAT FOR OBAMA - RTRS
Today, new home sales came in at 369K, a "big beat" to expectations of a 347K print and up from the 343K previously. What does this mean? The chart below sums it up.
S&P 500 e-mini futures are over 20pts below their day-session closing highs on Friday as energy and financials lead the plunge. The major financials appear to have finally woken up to the hypothecated reality of huge collateral calls on the back of their downgrades, the lack of a simple debt mutualization burden-sharing pile-on to Germany, and now Italian banks asking for a bailout from the ECB; with Citi and BofA down almost 7% from pre-downgrades and JPM/MS/GS all down around 5%. VIX has extended its after-hours spike in futures from Friday and trades back above 21% (up almost 3 vols from day-session close). With oil tumbling once again and Treasury yields giving all of Friday's rise back, risk assets in general are leading stocks lower and as we opened this morning, ES snapped down to converge with CONTEXT. Gold and Silver are sideways as Copper and Oil fall while USD pushes higher still on EUR weakness below 1.25 (and only JPY stronger among the majors as carry gets unwound in a hurry). Not pretty. Spanish and Italian bank stocks (and credit) are being crushed/halted and Spanish 10Y yields are back over 6.50% (and spreads over 500bps).
6 days... and counting.
“Greece is like a Rice Crispies Square. She’s snapped, crackled and now I am waiting for the final pop.”
The new Greek Prime Minister had an eye surgery and cannot attend the EU summit meeting. The new Greek Finance Minister became ill and cannot attend the EU summit meeting. Both a tragic turns of events; we are sure. Both coincidental you may think; but not us. Perhaps upon ascending to power and examining the books they have found that everything was not exactly, how shall we say this; Kosher comes to mind. Perhaps the records indicated a far more serious excursion from the facts than previously thought. The Germany Finance Minister came just about right out and said, “no more money.” Nothing of significance will happen in the European Union unless Germany approves it. (Please repeat this five times and write it on your whiteboard if necessary.)
In about an hour, the US Supreme Court, three years after Chrysler, is about to have a profound impact on Wall Street one more time. As Goldman explains, the court is expected to release some of the final opinions of the current session, which ends this week. Rulings on the Affordable Care Act (ACA) as well as the Arizona immigration law are likely to capture the greatest amount of attention. With a number of opinions to get out, it is possible the court could wait until later this week (possibly Thursday, June 28) to release some of the remaining rulings for this term, though the court has not yet announced any additional dates for the release of opinions. Trading in the online prediction market intrade.com implies a 74% probability that the court will find the mandate unconstitutional; prior to the oral arguments in March, it implied only around a 35% probability the court would rule against the mandate. Goldman believes that the outcome is fairly unpredictable and that many market participants probably are relying too heavily on the oral arguments in trying to predict the outcome of the case.
UPDATE: Nowotny just confirmed ECB's lack of confidence in the EU Summit and stomped on Greece's hopes for negotiation.
*NOWOTNY SAYS GREEK TALKS CAN'T START WITH WISH FOR MORE TIME
As we noted over the weekend, there really is only one voice on which to act in Europe (and plenty of noise that should be ignored) and that is Germany. This morning we already heard from Herr Schaeuble and Herr Siebert, but Frau Merkel has just come over the top with her hope-crushing reality all over again.
It would appear that for once just talking about a potential solution and throwing larger and larger completely unfounded and intangible numbers around as evidence of a 'grand plan' is not going to work as Spain officially requests its bailout. However, just as we noted last week (and suggested as the next macro trade to watch), the bailout will come with strings attached; and perhaps, just perhaps, that is why Spanish bank subordinated credit spreads are deteriorating so rapidly this morning. Our call for a 'bail-in' type solution that crams sub and some senior debt is not only causing Spanish banks to blow wider but also spreading into the Subordinated debt of Italian banks as traders scramble to protect those 'juicy' yields which now seem a little more worrisome given their position on the capital structure. The more liquid Senior and Subordinated credit indices have decompressed around 6bps this morning to a 177bps spread differential (as Subs trade 15bps wider at 465bps on average) and remains the 'easiest' way to position for a 'bail-in'. We also note that the LTRO Stigma (the spread between LTRO-encumbered and non-encumbered bank spreads) has blown back to near-record wides in the last few days.