Volatility continued across European equities in early trade supported by a short-selling ban imposed by countries including France, Italy, Spain and Belgium. However, prices came under pressure following news that Chancellor Merkel may not be able to keep her promise of getting changes to the EFSF before end-September, together with lower than expected GDP data from France. As the session progressed, appetite for risk emerged as the dominant theme as equities moved higher, led by financials, whereas the Eurozone 10-year government bond yield spreads tightened across the board, with aggressive narrowing witnessed in the French/German spread. This was supported by market talk of the ECB buying in the Italian and Spanish government debts, with the 10-year yield in Italy falling below 5% and France below the 3% level. Elsewhere, CHF weakened across the board partly on the back of market talk that the SNB was conducting currency swap operations via small Swiss corporate banks. Also, a weakening USD-Index supported EUR/USD and GBP/USD, whereas the latter received further boost following an upward revision to the UK's construction output data, which is said to add 0.1% to country's Q2 GDP. The release of Project Merlin data showing an enhanced lending by UK banks in Q2 as compared to Q1 helped the GBP currency further. Moving into the North American open, markets look ahead to key economic data from the US in the form of retail sales, business inventories, and University of Michigan confidence report. Fed's Dudley and President Obama are also scheduled to speak later in the session.
Today's economic docket includes retail sales and consumer sentiment and business inventories. Bill Dudley makes more remarks on iPad edibility although he may provide some critical insight as to what we may expect two weeks from now at Jackson Hole.
Earlier today, Europe's fulcrum economy - France - whose AAA rating is all the matters for continued European solvency, as a downgrade would effectively derail the EFSF even before its launch as Zero Hedge has discussed extensively in the past, reported Q2 GDP which not only missed consensus estimates of 0.3% growth, but plunged from Q1's 0.9% down to unchanged or 0.0% for Q2. The worry here is that, as Market Watch observes, "France’s economy, the second largest in the euro zone after Germany, recorded no growth in the second quarter, heightening concerns about the nation’s ability to achieve its deficit-reduction plan. The consumption expenditure of households slumped 0.7% in the second quarter, hurting GDP growth, INSEE said. Imports fell 0.9%, while exports were flat after growing 1.8% in the first quarter." And as those who have been following it know, the only reason why the rating agencies have not touched France's hallowed AAA-rating is due to their expectation that France will have no problem implementing a deficit-reduction plan which will then cut French debt. Alas, following this number which post revision could mean that France has re-entered a recession, concerns about the AAA rating, which is what set off this week's avalanche of fears about SocGen and all other French banks, are set to spike once again. “The flat outturn will not fit well with the current debate we are seeing around France and its ability to retain its triple-A credit rating,” said analysts at FxPro in a note. He was not alone to speculate about the linkage between GDP and rating: "today’s disappointing 2Q GDP data may well reignite" concerns about France’s ability to implement fiscal austerity necessary to maintain AAA rating, also said Daiwa’s Grant Lewis. In this market, which is desperately looking for things to be paranoid about, we expect that this could well become the next big meme, especially with all of Europe slowly rolling back into re-recession once again.
A quick update on market metrics this morning indicates that Europe has so far refused to protest violently against the short covering ban, and is for the time being enjoying the eye of the hurricane. According to the Bloomberg cross asset dashboard there is a sense of modestly improved sentiment in Europe as CDS spreads have mostly tightened for sovereigns and banks, following the French, Italian, Spanish (and Belgian? - they have a stock market? Must be to go with that government of theirs) ban on short sales as evident in:
- Soc CDS for France -14.5 bps, Germany -6.7 bps, Italy -14.6 bps, SPain -14.9 bps, Greece -22.7 bps, Portugal -41.5 bps, and Belgium -27.1.
- French bank CDS: SocGen -3.8 bps (just barely tighted after blowing out), UniCredit -12.6 bps, BNP -6.7 bps, Credit Agricole -11.7 bps
- Bank funding pressures easing as Euribor, Libor/OIS spreads, 1 year euro basis swap moderately improved
- Equities up 1-1.5 standard deviations, led by Euro Stoxx +2.1% on the short-sale ban
- and most EU yield spreads to Germany moderately tighter
About a month ago we penned a post to refute some misconceptions about a material spike in M2, which led such luminaries as Andy Lees and Art Cashin to get confused that this may be an indication that either the government was forcing money into the population with the end of QE2, or that this was actually a confirmation that QE was working. It was neither. As we explained it was a combination of the Treasury general account on the Fed's balance sheet soaring (from a balance sheet standpoint), and due to the repeal of Regulation Q (from an actual flow perspective), that led to the move. Sure enough, in the 3 weeks following, M2 dropped to very much unremarkable weekly change levels. Until the week of August 1, or the week in which the specter of a US bankruptcy came to life, and in which the market took its first notable leg down. In that week, the broadest publicly released monetary aggregated - the M2 - soared to an all time high $9.5 trillion, or a $159 billion weekly change. This make it the third largest weekly spike in history After the Lehman bankruptcy and September 11. Then again, this data includes the traditional seasonal fudge adjustments by the Fed. A look at the non-seasonally adjusted time series indicates that last week's spike in M2, primarily in demand and savings deposits at commercial banks, was the highest on record! Sure enough, the bulk of this cash ended up in America's largest depository institution, Bank of America. And yes, this was in the week prior to the massive market rout. Yet as the charts show, following every massive inflow of money into demand deposits and savings accounts, it goes right back out the next week. Which is why we wonder: is Bank of America, so flush with cash a week ago courtesy of the debt ceiling fiasco, suddenly cashless, as investors follow up with the kneejerk withdrawal of capital from the depositor bank due to worries of bank runs and other less quantifiable reasons? Does this explain why, in addition to the fact that the bank's sale of its China Construction Bank stake is not going well, BAC may soon be forced to enter the capital markets to raise equity capital, just as we have been predicting all along?
The Fed has helped print a new kind of currency, currency being a means of exchange that in and of itself offers no return whatsoever. This new kind of currency used to be referred to as notes and bonds. Please be mindful of this change if you plan on using the tired old phrase, “A man’s word is his bond”. Remember to replace “word” with “money”, and you’ll be okay, at least until 2013. Money is freely available to those who don’t need it and don’t deserve it. For everyone else there’s 29.99% Mastercard and Visa.
That the US postal service is on the verge of bankruptcy is well-known by now and was discussed by Zero Hedge long before it became mainstream news. Furthermore, as we previously noted, the key sticking point in cost reduction negotiations is the labor force compensation (80% of all costs), which is paid an average of $41.15 an hour, and which is over 60% unionized. As of today, we finally welcome the USPS to reality which has announced that, in an attempt to avoid bankruptcy, it is now seeking to reduce its total overhead by 20%, or a whopping 120,000 workers (a number which would amount to roughly an increase of 0.1% in the national unemployment rate). Ah yes, but this is prohibited by existing union contracts. Furthermore, WaPo writes that "SPS also wants to withdraw its employees from the health and retirement plans that cover federal staffers and create its own benefit programs for postal employees." Good luck trying to convince a labor union that cutting an ungodly amount of jobs is for the greater good. Alas, what happened in Greece (and what is about to happen in Italy) will be nothing compared to what will happen when the entire post office goes, well, postal.
Dear Mrs. Schapiro,
We would like to thank the SEC for implementing the Stub Quote Rule in December of 2010. While stub quoting did not cause the Flash Crash of May 6th 2010, it was a contributing factor and we welcome the stub quote ban.
However, after studying four recent trading days, we have a question. Is there any intention of enforcing the stub quote rule? If so, can you please tell us when?
While the president makes yet more speeches about how the time to leave the past behind us is now (while newly scapegoating Europe for the economic catastrophe), the sniping war against S&P continues, only this time with a twist. According to the FT, the SEC has asked the rating agency to disclose who at the company knew about the downgrade, "as part of a preliminary look into potential insider trading." The funny thing is that while the answer will be everyone, even in that case the SEC will end up doing nothing as it always 'does' (pun intended), and the whole process is nothing but a sham to humiliate the rating agency. "The inquiry was made by the SEC’s examination staff, which has oversight of credit rating firms, one person familiar with the matter said. The exam staff can make referrals to the SEC’s enforcement division if it believes any laws have been violated, but the inquiry might not result in a referral....Proving someone leaked information about the downgrade, or traded ahead of it, could be challenging. Many traders anticipated the downgrade and bets could occur across numerous securities or currencies without inside information. In a traditional insider trading case, there is often a more predictable correlation between a company’s stock price and a particular development." Of course the next question is what is the null hypothesis: that leakees would buy or sell bonds based on the info? Because the natural response would be to dump treasuries even as the real outcome was a plunge in equities and a scramble to safe one-ply paper. So is PIMCO about to be charged with insder trading for having sold 10 Years even though in reality the spread tightened by a record 60 bps in the following week?
Official Statement From Spanish Regulator On 15 Day Financial Short Selling Ban, Which Also Includes OTC DerivativesSubmitted by Tyler Durden on 08/11/2011 - 17:51
Just as in the case of France, here is the official statement from the Comision Nactional de Marcado de Valores, disclosing the Spanish 15 day prohibition on shorting stock. The banks impacted are Banca Cívica, S.A., Banco Bilbao Vizcaya Argentaria, S.A., Banco de Sabadell, S.A., Banco de Valencia, S.A., Banco Español de Crédito, S.A., Banco Pastor, S.A. Banco Popular Español, S.A., Banco Santander, S.A., Bankia, S.A., Bankinter, S.A., Caixabank, S.A., Caja de Ahorros del Mediterráneo, Grupo Catalana de Occidente S.A., Mapfre, S.A., Bolsas y Mercados Españoles, S.A., Renta 4 Servicios de Inversion, S.A. Unlike Frace, Spain has also explicitly banned not only short cash transactions, but also any position in OTC derivatives "which involves creating a net short position, or increasing an existing one." Next and last: the Italian statement, as frankly nobody cares about Waffles.
The 15 day short selling ban (which appears to include all shorts, not just naked ones), includes the following names: April Group, Axa, BNP Paribas, CIC, CNP Assurances, Crédit Agricole, Euler Hermès, Natixis, Paris Ré, Scor, Société Générale. We wonder whether the French AMF is also aware that one can just as easily create identical synthetic shorts by buying puts and selling calls on the names in question or maybe nobody in the French regulatory body has graduated beyond cash products and into derivatives. And the kicker, August 26 just went supernova, as this is the day the short selling ban expires, the BEA reports the second, sub 1% GDP revision, and Bernanke presents his 2011 Jackson Hole keynote speech.
Stop the presses. Barely did we have time to report that European regulators failed to impose a coordinated short selling ban, that Bloomberg reports that the countries most impact by the market plunge are about to impose standalone short-selling bans. These are Belgium, Italy, Spain and France. In other words, it really is on and the 2008 Lehman PTSD flashbacks may now resume. Until we get a headline that says it isn't. The rescue of the Borsa Italian is now more schizophrenic than that of Greece. As a reminder, in the previous post the FT quoted Abraham Lioui, a professor at the Edhec business school in France, who said “It is the worst thing to do right now. This would signal to the market there may be something fundamentally bad that is happening." He is correct. Something is fundamentally very wrong and about to break.
The latest iteration of the "rip your face off rally" was fun while it lasted. And now, it is, once again, about to be replaced with the "face your rip off" version, after the FT reported that European regulators have failed to agree on a coordinated short-selling ban, "leaving France and other advocates of the curbs considering unilateral action to stem the recent sharp falls in share prices." This means that the last ditch effort to prevent the daily wipeout in the FTSE MIB has now been pulled off the table, and all those who otherwise would have been forced to cover their halted futures positions as cash soared, will now sit pretty and wait for the market to come to them. It also means that while Europe could have potentially stood united, if even for a few more days, divided it will fall. But not all is lost: there is a potential loophole, and if the Borsa opens limit down, it may well be the final recourse: "The new European Union market regulator, Esma, is trying to co-ordinate action by national regulators and more conversations could take place today. A Thursday evening conference call was unable to reach unanimity." That, however, now appears like a long shot.