Game Over. And in the meantime, we get the following report from a media source: "CME’s acting like the MF Global thing just happened. They’re haphazardly locking traders out who clear with MF, blocking access to the floor of not just MF Global employees but people who clear through them. As a result, nobody wants to leave the floor and nobody who still has access wants to trade just to get locked out."
Time to drag the recession talk back? After three months of the Chicago PMI (a key advance indicator for the ISM), bucking the trend of the other high frequency economic indicators and beating expectations consistently, it is the PMI itself that finally missed consensus, printing at 58.4 on expectations of 59.0, and down from a 60.4 in September. The strength in the report was in Employment, which was the highest in 6 months, while New Orders "erased half of Spetember's gains." Inventories dropped from 60.3 to 54.4, Production was down from 63.9 to 63.4, while inflation returns as Prices Paid rose from 62.3 to 66.0. Look for some cautious wording ahead of the Manfuacturing ISM now that everyone has hiked their Q4 GDP forecasts once again to accompany the S&P ramp, because the stock market is somehow representative of the economy.
Hidden among the detritus of last night's MF headlines and JPY Azumification, Moody's released their Weekly Credit Outlook. The report was rather unsurprisingly (given our perspective on the lack of real news last week) negative on the Euro Summit implications noting that while some positives remain, the negatives at a grossed-up level seem to outweigh the market's exuberance. In most scenarios they see the impact as neutral (for Ireland and Portugal, European banks and Insurers, and the EFSF itself) but they are most concerned at the impact the 'plan' will have on AAA-rated euro are countries and the considerably higher bank recap needs. We can only leave it to the market to decide how self-referencing CDS should be priced.
Don't Tell The Italian Banks They Got Bailed Out: 3 Out Of Top 4 Banks Trading Below "Bailout" PriceSubmitted by Tyler Durden on 10/31/2011 - 09:16
Remember the European summit that was supposed to not so much bail out Europe, as stop the contagion from spreading to Italy (but mostly to send the ES highest by 40 points intraday at one point)? Well, in the credit markets the summit has failed miserably as already noted previously. Now, we see that it has also spread to the equity of those all important Italian financial companies. As the chart below shows, 3 of the top 4 Italian banks (Intesa, UniCredit, Monte Pasci, And MedioBanca) are now trading below their levels at the time of the bailout. So: rescue half life is what - 48 hours? About in line with our expectations.
Greeks Set To Scream Bloody Murder As Pension Fund Threatens To Recoup €8 Billion In "Illegally" Paid Out ProceedsSubmitted by Tyler Durden on 10/31/2011 - 09:04
Just in case Greece needed one more reason to piss off the angry mob, just waiting to resume its Syntagma square festival, Ekathimerini reports that very soon Greeks will discover that not only are their pension funds about 50% underfunded funded courtesy of the first of many European 'bailouts', but that they will actually have to repay pension proceeds back. Granted, pensions paid out under illegal pretenses, but still, this is money that will have to make its way out of insolvent Greek families that, just like in America, never felt an urge to save, but merely to spend, spend, spend, with hopes of endless crony communism in perpetuity. "Up to eight billion euros have been paid in bogus pensions in the past decade, director of the Social Security Foundation (IKA), Rovertos Spyropoulos said on Monday. Under immense pressure to cut spending and replenish empty state coffers, the Greek government has found out that millions of euros have been paid to deceased claimants. The money is often claimed by fraudulent relatives or, in some cases, it remains idle in banks." What happens when all the other socialist countries in Europe discover the same has been happening there repeatedly and to far greater extents?
As the EUR trades at its lows of the day (having retraced over 60% of the Euro-Summit rally, we wonder how long before the broad European equity markets will take to fill the gap from that wondrous liquidating day. Equities are underperforming credit so far this morning but it is very clear that hedgers/shorts are back in lower cost credit positions as European sovereigns leak wider in yield (cash and CDS). We also note that EFSF is underperforming Bunds (by around 7bps so far this morning) making us wait for the Barroso-Van-Rompuy 'We're gonna need a bigger boat' speech.
Non-hedged Eurosov CDS may be banned, hedged Eurosov CDS may be irrelevant, but courtesy of tens of billions in capital caught up in basis trades which are all about to be Boaz Weinstein'ed very soon, moves wider in cash will drag CDS along with them.
Once again, Bill Gross proves he can think outside of the box better than most, with the following paragraph from his latest letter to clients: "the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier: As long as these policies generate growth."..."My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest." And that, dear readers, is the bottom line: put otherwise, we have experienced 30 years of deviation from the mean courtesy of the biggest, and most artificial in history, cheap debt-inspired period of global "growth." And we are due for the mother of all mean reversions when the central planners finally realize their methods to defeat this simplest of methemaical concepts, have failed.
- Azumi Pledges More Action After Yen Intervention (Bloomberg)
- Japan to buy more EFSF bonds-Europe fund chief (Reuters)
- Draghi in Battle Mode From Day One at ECB (Bloomberg)
- Berlusconi Stays Defiant as Europe’s Crisis Focuses on Italy Reform Effort (Bloomberg)
- Hu starts key trip to Europe (China Daily)
- Europe will not offer China concessions for aid: Juncker (Reuters)
- Europe Might Have Blown Last Chance to End Its Crisis (Bloomberg)
- Schäuble calls for EU lead on Tobin tax (FT)
- UK faces "economic suicide" if on EU margins – Clegg (Reuters)
Statement Regarding MF Global Inc.
The Federal Reserve Bank of New York has informed MF Global Inc. that it has been suspended from conducting new business with the New York Fed. This suspension will continue until MF Global establishes, to the satisfaction of the New York Fed, that MF Global is fully capable of discharging the responsibilities set out in the New York Fed’s policy, “Administration of Relationships with Primary Dealers,” or until the New York Fed decides to terminate MF Global’s status as a primary dealer.
Despite measures to tackle the Eurozone debt crisis from last week's EU leaders' summit, the implementation details remained unclear and there remained uncertainty about the Chinese contribution in solving the crisis, which dented the appetite for risk. Furthermore, the OECD and UBS cut their respective growth forecast for the Euroarea, which also weighed on the sentiment, and led European equities to trade lower, with underperformance seen in the Italian FTSE MIB and Spanish IBEX 35 indices. Weakness in equities provided support to Bunds, whereas the Eurozone 10-year government bond yield spreads widened across the board, with particular widening seen in the Italian/German spread on the back of debt and political concerns surrounding Italy. In the forex market, Japan intervened in the FX market overnight, which resulted in the weakening of JPY across the board. In other news, strength in the USD-Index weighed on EUR/USD, GBP/USD and commodity-linked currencies. Moving into the North American open, markets look ahead to economic data from the US in the form of Chicago PMI, and NAPM-Milwaukee, together with the Canadian GDP figures.
Is this the way MG Global ends, not with a bang, but a T.1 trading halt (although not in Europe, where shares are down 60%)? Stay tuned as we find out if, as we expect, we are about to see a prepack MF bankruptcy, with Interactive Brokers as a lowball stalking horse bidder, ala what Barclays was to Lehman when that bank filed. We will also find out if indeed all the contagion risk from a MF filing is non-existant, very much like Paulson thought when, yes, Lehman filed. In other news, can Jon Corzine become CEO of Bank of America next please? Or at least America's next president? It's not like Goldman does not need a few more competitors taken out...
So the EU finally reached a debt deal and hell (or at least New York City) froze over. Thursday's meteoric rise was followed by a relatively calm Friday but is losing steam as more and more nagging doubts set in. Italian and Spanish bond yields have failed to participate in the rally and in fact Italian yields are reaching yields not seen in decades. The EFSF has morphed into an incredibly complex entity and there is no indication that Regling is up to the task of running their various programs optimally. The Asian trip seems ill advised at best and a debacle at worst. What is he asking China to invest in? China has money, and I don't doubt that under the right terms will invest in Europe. But they need terms. What terms is the EFSF getting on the bank recap portion? Do they even know or have they even thought about it? Are they even willing to let China invest in banks on a big scale? What about buying bonds? Since there are no details on the new first loss protected bonds, what can Regling be asking them to invest in? At some point China has accumulated these reserves because they understood it matters what you invest in. I wonder if not only did this trip annoy China but has actually increased their concern that European leaders are way in over their heads on this financial crisis. Even Japan was only willing to say they would take some more of the German/French backed good EFSF bonds, albeit at a slower rate of purchase. Does anyone really doubt the AAA bonds backed by the 6 AAA countries still have a bid?
The duration of the European bailout was 48 hours give or take. And now reality is back in the form of the following headlines:
- Italian 10 Year BTP Yield surges to all time high 6.153% before ECB intervention takes it back to ... 6 122%
- Expressed in price, they have dropped to a record 90.697
- Italian-German 10 year yield passes 400 bps
- Italy CDS soar 22 bps to 427 bps
- Italy 5 Year yields bonds join drop, yield rises to over record 5.91%
See a trend? The one thing Europe was trying to avoid, contagion spreading to Italy, has happened.