European equity markets began to rally around 830ET on Friday. Credit bottomed around 1130ET Friday with XOver and Sub financials the worst performers. Since then, equities have soared - almost entirely recovering last week's loss on the back of officially denied bazookas among other failed rumors. Corporate credit markets are outperforming financials (which are only back to Thursday levels) but the credit markets in general are massively less sanguine than the over-excited equity market for now.
Reuters reports the first shipment of gold bars arrived home in Venezuela on Friday “amid wild celebrations.” Excited crowds lined the roadside waving big Venezuelan flags and chanting "It's returned! It's returned!" as a convoy of soldiers and armored cars carried the gold ingots from Maiquetia airport to the central bank in Caracas. The President of the central bank, Nelson Merentes traveled into the city at the head of the convoy. He did not say how much gold bullion was brought back in Friday's shipment but said the bullion came from several European countries. "Our gold is being stored in the vaults," Merentes told the cheering crowds, sporting a baseball cap that read "The Central Bank of Venezuela with the People." "It has historic value. It has symbolic value. And it has financial value," bank chief Merentes said about the first shipment. "Each box of gold weighs 500 kilograms and is worth about $30 million,” Merentes said before cheering crowds. “We’ll bring the rest back little by little.” Merentes is in favor of the move and said, "The country's finances will be backed by autonomous wealth, so we are not subject to pressure from anyone," UPI reported. “This guarantees that if there are financial problems in the international markets our gold will be safe here at home,” Merentes said. Drums and sirens sounded out across the square as many in the crowd sang "Forward comandante!" in support of the president. Some waved homemade signs that said: "The gold has returned thanks to Chavez!" and "Long live our sovereignty!"
On October 27th we rallied 40 points in SPX and hit 1285. So far today we are up 32 points and are at 1185. About the only positive thing I have to say is that 1185 is cheaper than 1285. The reasons for the rally are largely based on headlines and rumors out of Europe and being too pessimistic about what happens if there is no “solution”. The IMF bazooka does not seem to be there (offically denied), the EFSF is nothing like what was promised, Euro-bonds seem practically impossible in any time-frame and 'fast-treaty-ing' remains a pipe-dream, Greece is closer to actual restructuring as it starts direct negotiating, and while Thanksgiving Sales were up it seems the main reason for a market rally is the amrageddon-like scenario of the break-up and the typical belief that 'the-worse-it-gets, the-better-it-will-be-in-the-end', so buy.
If all it takes for the ES to soar by over 30 points is some propaganda about US consumer spending (pretty much ridiculed by all at this point), and two outright lies about Europe being fixed, the following factual statement by Moody's should certainly send risk soaring now that bizarro mode is fully on: "over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area. The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise." Oddly enough, for once Moody's is not alone.
Wonder why futures are up over 2%? It appears all it takes is two strategically placed and false rumors, since denied. That and of course the fact that US consumers are literally spending as if there was no tomorrow. Because for a whole lot of consumer there may not be once the bill comes in. Ironically, the same can be said about European banks, only they never even got a 10% of iPad. Because while stocks may be doing their usual oversold Manic Monday thing which surprises no one at this point, European liquidity is as bad as it ever was. As the ECB reported, cash deposited by risk averse banks soared by €19 billion overnight to a December 7 3M ECB USD repo pre-reset high €256 billion. And what is worse, that all important metric of the 3 month EUR/USD basis swap not only did not improve but has continued to deteriorate, dropping 1.9 bps to -148, the worst since October 10, 2008. What is ironic is that while we know banks have a USD funding problem, they also seem to be having a EUR sourcing issue, despite being able to pull as much cash from the ECB as they want. That is of course assuming they have sufficient collateral for the repo market. Which then begs the question: is the European liquidity crisis shifting to one of evaporating repoable assets? And if the repo market is drying up, that means that the ECB will soon be forced to accept staplers are worthwhile collateral before it all falls apart.
- According to La Stampa, the IMF is preparing a EUR 600bln loan for Italy, in case its debt crisis worsens, although the report was swiftly denied by IMF officials
- Several papers reported that Germany is considering the option of joining the five other AAA-rated Eurozone member states to issue common bonds. However, the German finance ministry dismissed the report later in the session
- Particular narrowing was observed in the Belgian/German 10-year government bond yield spread partly after Belgian negotiators reached an accord on the country's 2012 budget during the weekend, together with well received OLO bond auctions from Belgium
- Welcome LSAP: Dealers See Fed Buying $545B Mortgage Bonds (Bloomberg)
- And more central planning: Central Banks Ease Most Since 2009 to Avert Contagion (Bloomberg)
- Italy’s PM in austerity race, IMF denies in aid talks (Reuters)
- OECD Cuts Growth Forecasts, Blames Euro Crisis (Bloomberg)
- Thanksgiving Weekend Sales Set Record (Bloomberg) - we give this story one week before the truth comes out
- China Eyes European Assets (Reuters)
- US Urges Speedier Action on Debt Plight (WSJ)
- Chinese Profit Growth Slowing as Real-Estate Curbs Bite (Bloomberg)
- China Vice Premier Says Property Curbs to Stay, Xinhua Says (Bloomberg)
The La Stampa rumor that the IMF would bail out Italy has come and gone, roundly refuted by none other than the IMF as expected, but not before lifting futures by over 30 points in the premarket session, and setting a very favorable tone to the market overnight. How long it lasts now depends on the amount of time it takes the bipolar market to realize that the tapped out consumer, already at near multi-year lows in savings, will be unable to carry this holiday period despite what the Retail Federation reported about supposedly record Black Friday sales. But for now all is forgiven and not a moment too soon: after all S&P had just downgraded Belgium which was coming to market with a new 10 year bond issuance. And courtesy of the US consumer, the auction was not a failure, yet still pricing over 1% higher compared to a month ago, or at 5.659% compared to 4.372% on October 31. Still, the bid to cover rose, and thus the modestly successful auction saw the 10 year yield drop 16bps to 5.7%, the biggest decline in a month and the first in 6 days; hit 5.91% earlier, highest since 2000. Just shortly before Belgium, Italy sold €567MM in 2.6% 2023 Inflation Linked linkers at a bid to cover of 2.16 but most importantly at a yield of 7.3%. This was an epic collapse compared to the last such issuance from October 27 when 2.1% I/Ls due 2021 priced at a 2.14 B/C and a 4.61% yield: nearly a 2.7% increase. And somehow this unsustainable yield (not to mention another BTP auction tomorrow) is considered a good thing: the 10 Year dropped to just over 7% in the auction aftermath after hitting 7.3% earlier. And for now Europe is on the backburner with all eyes on how few contracts of ES can get the S&P up 3% today: all signs of a perfectly functioning market.
Back in August when Bloomberg first scoured the depraved depths of the almost-30,000 pages of FOIA-released Fed documentation surrounding the biggest ever bailout in history, the sheer volume of the loans, ultra-low cost of funds, and lying-through-their-teeth nature of the bank CEOs was enough for some vindication of tin-foil-hat-wearing fringe blogs. In this month's Bloomberg Markets magazine, much of this is rehashed but the truly incredible part - though not entirely shocking to us - is the magnitude of the profits that the banks amassed directly as a result of these 'secret' bailouts. Almost a quarter of their entire income was generated during this period from bailout-related sub-market funds. Over $13bn profit was 'appropriated' during the crisis with Citi and BofA among the largest profiteers.
As the hopes of an IMF bazooka fades, Market News is reporting that the ever-ready-to-print-a-story European newspaper Die Welt says Germany and the other 5 AAA-rated nations of Europe are discussing jointly issuing 'Elite' bonds. We assume the borrowings could be used to fund the less-well-rated nations and avoid a true Euro-bond joint-and-several issuance which Merkel and other have been so opposed to. For now, it is clear that the 'Have's and the 'Have-Not's are becoming increasingly divided and this - much like our earlier discussion of the recap section of the EFSF draft - seems to be further from a fiscally united Europe and any inevitable endgame. We wonder what will happen when Austria gets downgraded? It certainly seems that the much-ridiculed ratings agencies are now playing an even more important role?
It is increasingly clear that Europe is bifurcating in many ways - High-grade and everyone else - and it appears the preparation is beginning. Is Germany becoming the mercantilist vendor-financier to its hugely imbalanced European trade partners?
UPDATE: Some comments from China not helping sentiment
*MOFCOM'S CHEN: EU RESCUE FUNDING STILL FACES SHORTFALL :MOCZ CH
*MOFCOM'S CHEN: CHINA OBSERVING QUIETLY EURO SITUATION :MOCZ CH
*MOFCOM'S CHEN: WORLD ECONOMY FACES DOWNWARD PRESSURE ON EU DEBT
Well they bought the rumor and now comes the sell-the-news/rumor/denial part of the evening as Dow Jones cites an official that 'No Discussion Within G-7 Of Reported Large Package For Italy".
The week ahead brings key cyclical data in the form of the global PMIs and the all-important non-farm payrolls report for the US. For China's official PMI we are looking for a flat reading, while consensus is looking for slight moderation below the 50 threshold. Our forecasts for both the ISM and non-farm payrolls are below consensus, though – given the volatility of both numbers – not significantly so. The week brings central bank meetings in Hungary, Israel, the Philippines, and Thailand. In terms of FX, with European bank funding stress continuing to become more acute – EUR/$ 3-month cross-currency basis has now moved out to 146 bps (Figure 3) – heavy bond issuance by the likes of Belgium, Italy, Spain, and France this week, and Euro zone growth weakening sharply, we think CE-3 FX will remain under pressure. We maintain our tactical recommendation to be long RUB/HUF with a target of 8.00. Our Sunday trade idea for the upcoming week is to be long EUR/CZK. Although CZK has less exposure to rollover risk than its CE-3 neighbors (see here), it has a large export exposure to Western Europe and has sold off relatively less than its peers.
Buy the rumor, sell the news? Investors bought the rumor, then sold the lack of news, I think you are supposed to sell the news again, as there is nothing in this document that provides evidence that they get it, or that any scale can ever be achieved, and if anything, it makes you wonder if they will even get to the 440 billion of support the market thought they had back in July.
Because if stocks like the prospect of imminent printing, or at least the latest daily rumor thereof, until Germany once again opens its mouth and refutes everything, gold should love it. Sure enough, the yellow metal has opened $20 higher and is back over $1700 again.