Just like the first time around, the net gain from the LTRO when taking into account rolling off instruments, will be lower than the Gross amount. How much? According to SocGen, the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number. From SocGen's Lauren Rosborough: "The LTRO outcome: €529.53bio was allocated to 800 institutions (compared with €489.19bio allocated to 523 institutions in Dec). The net increase, according to our economists, is €311bio (adjusted for yesterday’s MRO reduction, 3m LTRO allotment this morning, and the roll-off of the 3m and 6m LTROs tomorrow). The allocation was above our and at the upper end of the market range of expectations. After a brief and limited positive risk move (AUD/USD spiked to 1.0857), currencies are broadly unchanged and the EUR/USD is lower, possibly reflecting positioning unwinds. The LTRO outcome opens the way for further positive risk moves (high-beta, non-Japan Asia, lower DXY) but recent price action suggests to us that the rally is fatigued." Net: this means that following settlement, European banks will park not €500 billion but up to €810 billion with the ECB, on which they will collect 25 bps (while paying 1%, aka inverse carry as described here first). It also means that in three years Europe's bank will have to not only pay the ECB €1 trillion in case (assuming there is no perpetual rollover of the LTRO, which there will be), but also delever by another €2.5 billion, for net asset drop of €3.5 trillion. Good luck building up shareholder equity by the same amount to offset unchanging liabilities.
As the ECB has stopped its SMP bond-buying and now the LTROs are all done (until the next one of course), Portuguese bond spreads have been increasing rapidly and post-LTRO today even more so. While broadly speaking European sovereign risk is modestly higher this week (and notably steeper across the curve) leaving funding costs still very high for most nations, Portugal has exploded over 100bps wider (and almost 70bps of that today post-LTRO) to back over 1200bps wider than Bunds. Only Italian bonds are better and even there they are leaking back to unch from pre-LTRO. Perhaps, shockingly, more debt did not solve the problem of too much debt and with growth and deficits being questioned in Ireland and Portugal (and Spain), it's clear the newly collateralized loan cash the banks have received won't be extended to the medium-term maturities in sovereign bonds.
On this leap day, we have a busy schedule which includes the second Q4 GDP revision, Chicago PMI (expect another massive beat courtesy of consumers confident that they can have Apple apps, if not so much food, since they still don't pay their mortgages), various Fed speakers, of which most important will be Ben Bernanke who takes the podium in Congress at 10 am for his semi-annual monetary policy report.
Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily. Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors. This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months. There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.
The following people are paid to have an opinion, whether right or wrong, so it is our job to listen to them. Supposedly. Reuters summarizes the professionals kneejerk reaction to the LTRO 2. Because when it comes to explaining why Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits soon to be handed over to the ECB, one needs all the favorable spin one can muster.
- Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash (Bloomberg)
- Papademos Gets Backing for $4.3B of Cuts (Bloomberg)
- China February Bank Lending Remains Weak (Reuters)
- Romney Regains Momentum (WSJ)
- Shanghai Raises Minimum Wage 13% as China Seeks to Boost Demand (Bloomberg)
- Fiscal Stability Key To Economic Competitiveness - SNB's Jordan (WSJ)
- Bank's Tucker Says Cannot Relax Bank Requirements (Reuters)
- Life as a Landlord (NYT)
Since for all intents and purposes the ECB's LTRO is equivalent (and likely accepts even 'looser' collateral) to the Fed's massive (for its time) liquidity injection following the failure of Lehman, a good question is what happened to stocks after the Discount Window usage spiked back in the fall of 2008. Spoiler alert: nothing good.
UPDATE: European Sovereigns not excited and PORTUG getting ugly...and corporate credit spreads leaking wider
EURUSD and equity markets are undecided, European sovereigns have rallied modestly back to earlier day tights but no further (and Portuguese debt is underperforming), and credit markets in Europe are leaking modestly wider so far. The biggest movers initially appeared to be AUD (carry FX as we noted earlier) and the precious metals (with Silver outperforming Gold so far). Cable (GBP) is weakening relative to USD and EUR and that is holding DXY up a little here. Treasuries are doing better. As we post, the USD is now strengthening, ES is losing steam, and gold and silver are slipping back. CONTEXT is lower than pre-LTRO as risk is leaking off for now.
Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a "positive." We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is "fade", at least until the next major crisis.
The results for the second European 3 year discount window operation, pardon LTRO are in, and the winner is...
- ECB ALLOTS EU 529.5BLN IN 1,092 DAY REFINANCING TENDER
- ECB SAYS 800 BANKS ASKED FOR THREE-YEAR LOANS
Since the expected range was €200 billion - €1 trillion, and just above the median €500 billion, this is clearly within expectations, however notably less than what the Goldman investor survey expected at €680 billion. What is certainly scary is that the number of banks demanding a hand out was a whopping 800, well above the 523 from the first LTRO: clearly many banks are capital deprived.
It appears markets have re-converged in the last few days across asset classes as European credit markets have rallied to meet a modestly underperforming European equity market after quite significant drops in the former a week or so ago. In the US, equity futures have reconverged with CONTEXT (our proxy for broad risk assets) as Treasuries have weakened and FX carry has improved tone overnight while futures themselves have drifted sideways. Commodities have largely drifted also with a modest improvement in Copper and slow drift up in WTI (back over $107 now). For some perspective, GDP-weighted European Sovereign risk has improved 80bps from its Nov2011 wides (or around 23%) but remains over 200bps wide of Post March 2009 lows and over 500% higher still - back only to levels seen in August 2011. Consensus appears to be that a larger than expected LTRO is positive for risk assets with Equities and then Credit the main beneficiaries (with FX the least) and a notable divide between European traders and non-European traders with the former believing the EUR will strengthen vs USD and the latter not so much (more focused on carry trades). For now, Italian and Spanish sovereign yields are leaking higher but in general wait-and-see mode remains with anxiety high.
"It Ain't Over Till It's Over": Empirical Observations On Who The Next Occupant Of The White House May Be And WhySubmitted by Tyler Durden on 02/28/2012 - 22:44
It is appropriate that as a post-mortem to tonight's GOP primary, which according to initial reports has Romney as winning both Michigan and Arizona, we have ConvergEx' Nick Colas providing an extensive summary of the factors in favor and against both the presidential incumbent, and the challenger, and in doing so handicap the possibility of election victory for either Obama or the Republican candidate, whoever he may end up being. As Colas says, 'it ain't over till it's over' - "As the battle for the 2012 Presidential election begins to pick up speed, we read a flood of reports that President Obama is a lock for reelection. And just as many that he is destined to be a one-termer. Those who believe that the winner of the 2012 election will be Republican claim that the keys to Obama’s downfall will be unemployment, skyrocketing oil prices, and increased federal spending. However, according to historical data and some political science theory, it looks like Obama has a pretty good chance of staying in the White House.... The GOP isn’t out of the race yet, but it’s up against some strong historical opposition." And while we would agree that all else equal Obama likely is a shoo-in, never before will there have been a full blown debt ceiling crisis in a repeat of August 2011 in the weeks and months leading into the election - that factor alone, in our humble opinion, could end up being the swing variable that pulls the otherwise ironclad victory away from Obama's clutch, and explains why the GOP caved so quickly on the payroll tax extension which will add $100 billion in debt, and force a debt ceiling breach ahead of November, as was first predicted on Zero Hedge. That, of course, and runaway oil: should crude continue its relentless surge, which it will if QE3 occurs, or an invasion or Iran becomes reality, Obama can kiss another 4 years goodbye.
Although U.S. demand for crude oil has fallen by 1.5 million barrels per day since 2007, anyone spending more than a few minutes on the road, watching TV, or surfing the internet will be more than unpleasantly aware of the rapid rise in gas prices recently. As we noted earlier, following January's record high average gas price, February just surpassed its own record and TrimTabs quantifies the impact of this implicit tax on consumption, noting three key factors that will remain supportive of high oil prices: Central Bank liquidity provision (ZIRP), political tensions, and implicit USD devaluation. Critically, around 70% of the benefits of the payroll tax extension has already been removed thanks to 60-80c rise in gas prices nationwide whose growth has far outstripped wage and salary growth in recent years. As Madeline Schnapp points out, while the latest round of oil speculation is likely to end with a pop, the erosion of purchasing power from high energy prices is here to stay. Bottom Line: Rapidly Rising Fuel Prices Put Sluggish Economic Growth at Risk.
The seemingly endless GOP primary goes through the states of Michigan and Arizona tonight, where Romney and Santorum are the key competitors, while Gingrich and Paul focus elsewhere. BBC reports: "Both men have been campaigning intensively over the past few days. Pre-primary polls gave Mr Romney a marginal lead in Michigan, and a stronger advantage in Arizona. Analysts say a victory in his home state of Michigan is key for Mr Romney. He has long been seen as the front-runner and favourite for the nomination - and currently leads the race for delegates - but has struggled to win over a strong majority of conservative Republican voters. Most polls will close in Michigan at 20:00 EST (01:00 GMT), where 30 delegates are at stake. Delegates will be awarded to candidates in each congressional district, with two at-large delegates also awarded. In Arizona, where polls will close at 19:00 local time (02:00 GMT), 29 delegates will be awarded to the winner of the state's primary."