Since by now even my mother knows that US stocks rally when Europe goes home, it only makes sense to rally well ahead of it? It has become too well known that this trend exists and as others have also mentioned, when those simple rules break, they often break ugly. I would be very careful betting that we get a rally when Europe goes home.
A few days ago we mocked Morgan Stanley's call that the G7 would proceed with a global easing episode over the weekend. We may have been slightly premature. From Reuters: "Group of Seven finance chiefs meeting in southern France are considering issuing a communique after their talks, a G7 source said on Friday. G7 chair France had said there would be no communique from the talks, but the source said the issue was now being debated and there was a 50 percent chance of a statement. The source said if there was a communique it would talk about the global economic slowdown, financial market turmoil and the policy tools different countries could use, but it would not make any reference to concerted interventions."
There is just one relevant data point in today's Wholesale Inventories report (which came at 0.8% in July, in line with expectations of a 0.7% increase), and up from 0.6% in June. And it is called "inventory stuffing" as the ratio of inventories to sales just hit 1.17, the highest since October 2010. All that hollow GDP growth is catching up with companies, and sooner or later, FIFO/LIFO liquidations follow.
Today, Jürgen Stark, Member of the Executive Board and Governing Council of the European Central Bank (ECB), informed President Jean-Claude Trichet that, for personal reasons, he will resign from his position prior to the end of his term of office on 31 May 2014. Mr Stark will stay on in his current position until a successor is appointed, which, according to the appointment procedure, will be by the end of this year. He has been a Member of the Executive Board and Governing Council since 1 June 2006.
Wondering what is next for Europe? Don't be. With Jurgen Stark, aka the last real hawk at the ECB, gone, here comes "the printing." SocGen's Dylan Grice explains.
We have been discussing the indications being sent by the credit markets and the turn in the credit cycle that appeared to be developing. Just to add to the pile of cyclical turn indicators, we note that the number of corporate bonds receiving S&P credit rating downgrades exceeded upgrades this quarter for the first time since Q1 2010. Obviously, this is led by the high-yield names but the withdrawal of liquidity often rapidly pushes crossover names closer to the edge and inevitably leads up the capital structure and quality spectrum.
This email is making the rounds and catching most traders' attention:
From colleague: trader friend just hit me with the following: There is “Chatter” in the market of a Greek Default this Weekend - and their CDS is over 400 wider… Soc Gen is off 7% on exposure - German CDS more expensive than UK;s - despite the ballooning in the CDS prices for Lloyds and RBS.
In other news, Reuters is reporting that Stark is about to retire; with announcement to come after the German market close according to sources. His potential departure is due to a conflict over ECB bond buying according to sources.
There is much talk of a gold margin hike this morning. For one thing this is not news: it happened early afternoon yesterday. Second, it impacts a relatively innocuous contract. But of course, in the footsteps of the Chairman, at this point it is not what one does, but what one promises to do. As such this move is seen as merely a telegraphing of what the CME will do to GC should gold spike over $1900. We say do it already, and make gold margin 100%. What will the CME do then when everyone moves to trade the contract in Asia, or is happy to trade with 100% cash collateral?
- Obama in $450bn push for growth (FT)
- Strains rise in short-term eurozone lending (FT)
- Republicans Ask Geithner for Report on U.S. Rules Reductions (bloomberg)
- ECB Stark: Ready to step in if transmission mechanism impaired (Reuters)
- Sea radiation from Fukushima seen triple Tepco estimate (Reuters)
- Ghost of Lehman Haunts G-7 Amid Debt Crisis (Bloomberg)
- G7 faces grim outlook with resignation (FT)
- Bank of America Structured Notes Sales Drop as Buyers ‘Shy Away’ (Bloomberg)
- Swiss Cap Move Riles Officials in Norway, Canada (WSJ)
- Market participants noted a deadline for the Greek debt swap programme today, however its successful conclusion remained in doubt, which promoted risk-aversion
- French bank shares witnessed particular underperformance, and shares of Societe Generale ventured below the level at the time of Lehman crisis
- The IMF chief Lagarde said that some banks need additional capital and the risk of a liquidity crisis cannot be dismissed
- CHF came under pressure across the board after the Swiss economy minister said that CHF is still massively overvalued
Short dated Greek bonds remain weak. They have not bounced. You can buy the 2 year bond at 50. With a 4% coupon, that is 8% current yield with the chance to double in price in 2 years. Clearly the bond market is expecting a default or massive write-offs for Greek debt. I have heard the argument that equities must be pricing that in at this stage. That is possible, but I find more equity people believe that "something" will be done to avert default than credit people. Looking back at 2007 and 2008, it often seemed like equities had to be hit over the head with a stick before they would price in problems in credit. Stocks hit their high in October 2007 - after strong signs of problems in the credit markets had appeared. They also managed to shrug off the Bear Stearns problems after JPM bought them and rallied hard after that, completely missing the impending doom of FNMA, LEH, GM. I would not feel comfortable that stocks have "priced in" the problems in Europe. I think they have failed before on credit problems and with such a high percentage of daily volume just "churn" from traders and computers who go home flat every day and funds trying to avoid showing a monthly loss, the value of stocks as a pricing mechanism seems diminished.
It was a momentous week for markets and the ramifications of the German constitutional court decision and the SNB currency intervention have yet to be realized. The German constitutional court decision has effectively ruled out Eurobonds which has massive ramifications for the European monetary union and the euro. While promoters of Eurobonds suggest that Eurobonds may still be possible – most objective analysts believe they are now highly unlikely. The SNB decision to peg the Swiss franc to the beleaguered euro, thereby effectively devaluing the franc, stunned currency and wider financial markets. It is one of the most significant currency interventions in modern history and led to violent volatility the like of which have never been seen in foreign exchange markets. Incredibly and not widely reported the Swiss franc fell more than 7% against the euro, dollar and gold in just 15 minutes (putting gold’s relatively minor recent price fall into context). Such volatility in currency markets was not seen during 911, the Lehman’s collapse or for any other major macroeconomic or geopolitical event in modern history. The collapse of the Swiss franc in minutes greatly surpassed the collapse of sterling seen on “Black Wednesday” in 1992, when the British pound fell by 2.7% against the German mark on one day.
And so once again Greece, and Europe in general, reminds the markets it exists, and in doing so sends risk lower across the board. The most specific reason cited why the Euro is in multi-month freefall, and French and Italian banks are tumbling is that today is D-Day for the Greek bondholder debt swap, which expires later in the day. As a reminder, as part of the Greek Bailout #2, about 90% of holders of Greek bonds are expected to tender their bonds in order for the "bailout" to be successful. There is one problem: this is not happening, and now the backtracking begins. Adding fuel to the fire is another wolf in sheep's clothing report from Goldman which while saying the same banks will be ok at the end of the day, implies that many others will be locked out from capital markets, and will force many of the smaller banks to liquidate: to wit - "If the governments choose to impose haircuts on banks’ sovereign debt holdings, capital will need to be raised. We see banks that trade at reasonable valuations being able to do so in the market. However, those most likely to be effected (GIIPS domiciled) would need to source capital in the public sector; their low valuations would likely make this prohibitively expensive for existing shareholders." Read - bankruptcy... Not the word Europe needs to hear today.
Gold managed to get back to unchanged from last Friday's close and has now last over $50 in the last 45 minutes. Interestingly dropping like a stone to exactly the levels pre-spike on that day. Few rumors of margin calls out of Europe but nothing specific to drive this other than the levels and the opportunity for the QE3-hopers to cover their weak longs from Friday? Or perhaps the rumor that the ECB did not rule out using gold-backing for EuroBonds is off the table now that Greece looks unlikely to meet its necessary debt exchange participation rates?