China Manufacturing PMI prints at 50.4, down from 51.2, when consensus was expecting an increase to 51.8. This is the lowest print in 32 months, and the lowest since February 2009. But wait, before concluding that this is very bad news, uh, ahem... well, sorry, we haven't taken the CNBC spin school yet. It's bad news and the hard landing is coming. We leave the spin to the professionals. Oh wait, yes, China will go ahead and ease immediately if not sooner. Because the PBoC has surely completely forgotten how much fun it was to see pork prices rise by triple digits year over year, and because it knows all too well that no matter what it does the Fed will never, ever print, and thus export metric tons of inflation straight across the Pacific. How's that for spin?
Say you are the head back office guy at MF Global, it is the close of trading on Thursday, the firm has already completely drawn down on its revolver, and all the resulting cash in addition to all the firm's cash at your disposal in affiliated bank accounts, up to and including petty cash, has been used to satisfy margin demands due to declining collateral value, yet the collateral calls just won't stop, and impatient voices on the other side of the phone line demand you transfer even more cash over immediately or else risk default proceedings commenced against you within minutes. What do you do? Do you go ahead and tell your superior that the firm is broke even though the co-opted media is trumpeting every 5 minutes that "MF Global is fine", knowing full well you will be immediately fired for being the bearer of bad news, or do you assume that courtesy of your uber-boss being the former head of the Vampire Squid, and thanks to infinite moral hazard which after Lehman made sure nobody would ever fail ever again, that there is simply no way that you will be left without some miraculous rescue, if only you can last one more day, and as a result proceed to "commingle" some client funds with the firm's cash. It turns out that at MF Global you do the latter... over and over... until you have literally stolen hundreds of millions from the firm's client accounts in hopes that the miracle rescue will come on Friday... then over the weekend... and then you realize no miracle is coming, partly because your actions have been exposed, partly because miracles only exist in fairy tales. The next thing you know, your firm is bankrupt and hundreds of clients are about to learn that all their money is gone. Poof. This is not a fictional tale. This is precisely what very likely happened at MF Global in the past 72 hours. And someone has to go to jail. That someone, if indeed this criminal act is proven to have taken place, should be none other than Jon Corzine himself.
As in life, so in death. Reuters reports that "U.S. regulators are unhappy with the failure of MF Global Holdings Ltd to provide them with the required data and records, a source close to one regulator told Reuters on Monday. "So far they've been very disappointed with the cooperation in the fulsomeness of records and data from MF," the source said, noting regulators have been working with the firm since late last week. "They were supposed to be able to show us their books and they're supposed to be able to tell us what's what and where their customer funds are and how they've been segregated and protected and to date we don't have the information that we should have," the individual told Reuters." Seriously, as Erin Burnett would say, you are already bankrupt. Just how much worse is it if you even in death you still are hiding secrets? And at this point it should be obvious to everyone: whatever MF is hiding is not something that will hurt it or much less its stakeholders for which the management team obviously never cared one iota. After all the company is already dead. Whatever is on its books has huge impacts to those either behind the corporate veil, read Mr. Corzine, who may or may not have regulatory issues arising from 10(b)-5 "concerns", or more probably, to other banks and Primary Dealers. And with even one simple affidavit still to be filed in Bankruptcy Court, the panic behind the scene is palpable.
Euroskeptic think thank Open Europe once again appears on the scene with one of the first more extended reactions to what the possibility of a Greek referendum, which according to the Guardian will take place in January, means for Greece, the Eurozone, and the latest bailout (which according to Williem Buiter, who reiterates to the FT something we said 2 months ago, needs to be €3 trillion). One thing we would like to point out is that if indeed the popular vote on the future of Europe will take place in January, then kiss the year end rally goodbye as the uncertainty around the market will be insurmountable by anything the bureaucrats can throw at the concern that Europe is on fast-track to political suicide. From the source: "This could be big turning point in this crisis. The EU should move quickly to come up with plans to mitigate the fallout of a no vote, specifically how to handle a rudderless and broke Greece, which would probably include plans for allowing it to exit the euro. A yes vote would be far from a solution, at best it would buy some time for the Greek government and the EU to enforce some necessary reforms thanks to a fresh mandate. As with any referendum it may come down to the phrasing of the question. Let’s hope the Greek government and the EU do a better job of communicating the issues at hand than they have done so far in this crisis."
While much was made of the MF Global news today, we suspect that the tipping point for risk assets was more likely driven by the plethora of reality-based analysis of the situation in Europe combined with the afternoon news that Greece is facing a referendum and a lack of demand for the EFSF issue today. Heavy volume arrived into the close to the downside, suggesting asset allocation rotation from equities to bonds, which helped propel TSYs even further down in yield. The entire complex flattened notably with 30Y outperforming -24.5bps, the largest single-day yield move since March 2009, as the much-watched 2s10s30s butterfly has retraced all of last week's increase. ES closed at its lows (down over 2.5%) only to extend those losses in the evening session as we post as IG and HY credit tracked notably wider once again.
While we have shown this series of images by Bulgarian modern artist Yanko Tsvetkov previously, now that the question of European "unity" is more debatable than ever, and with a Greek referendum in effect guaranteeing the collapse of the Eurozone at least in its current framework, it makes sense to refresh on these pictures which straddle the thin line between reality and satire, which these days is one and the same. But no matter what, the important part is that everyone is hedged. Just ask MF Global... and MS.
More from our Bank Exec friend, this time on MF Global after we tried to lay blame on Rubin, Thain and Corzine for blowing up their firms: "MF Global. They named that company right. You probably didn't see it first hand but Lehman, Bear and Merrill were doing the dumbest real estate deals "ever" in the run up to the implosion. Every real estate veteran saw it, and while AIG's CDS exposure gets airplay, bad real estate lending is at the center of the disaster. So, Merrill was toast before Thain showed up. He was just the funeral director. Citi (with its 14 off balance sheet SIV's @ $1 trillion) was an abomination in progress before Rubin arrived, the Enron of banking and each and every officer and board member should go to jail. But they won't because they are all too powerful and very politically connected."
Joining US TSYs, BTPs, and SPGs, the EUR has now retraced the entire post-summit rally in a mere 3 days, and is down 300 pips today alone. It also seems the actions in Greece are starting to get reactions in US financials and broad risk assets. We also note that EURJPY has retraced over 75% of the intervention in 18 hours...perhaps Azumi will let the market be now?
Previously we noted that, just as expected, the weakest PIIGS - Portugal and Ireland - wasted no time to start rumblings about a "suddenly slowing economy" in the aftermath of the Greek bail out which achieved nothing but to delay contagion by 48 hours (we won't bother readers with the blow out in Italian bond yields any more), and to unleash demands by everyone else to get the same concessions, in essence pushing Europe into an even deeper hole, forcing Golum Van Rompuystiltskin to say he was only kidding about the 4-5x EFSF leverage: he really meant 45x. Confirming that the tsunami of demands has been unleashed is today's announcement from the Bank of Spain that not only was Q3 GDP flat (read: negative), but that the deficit target for the year would not be achieved. Google translated from Expansion: "The Bank of Spain says the Spanish economic growth was zero in the third quarter from the previous quarter and warns that there are significant risks that may prevent achieving the deficit target this year. The Bank of Spain said that the information available for the third quarter suggests that the pattern of decline shown in the previous quarter "would have continued in the middle months of the year, in an environment marked by the deepening crisis of sovereign debt euro area." Truly nobody could have seen this coming, yet it is odd how it was casually slipped in broader discussion three short days after the Greek bailout.
It appears the Greek leader has had it, and is officially throwing in the towel, leaving his citizens to tell Europe to shove their perpetual bank rescue plan, via Bloomberg:
- PAPANDREOU SAYS NEW GREEK PLAN MUST BE PUT TO REFERENDUM
- PAPANDREOU SAYS GREEKS CALLED ON TO CHOOSE ON COUNTRY'S COURSE
- PAPANDREOU SAYS CALLS FOR VOTE OF CONFIDENCE ON POLICIES
- PAPANDREOU SAYS GREEK DECISION WILL BIND ALL POLITICAL PARTIES
- PAPANDREOU SAYS REJECT ELECTIONS AT THIS TIME
Naturally, with scenes like this one from last week, don't expect a glowing Greek endorsement of abdicating national sovereignty to the European superstate. In fact, expect the opposite. And with that, preparations for a Greek exit from the Euro and Eurozone begin in earnest.
Well, they are right: 50% and the gun next to your head does not go off, hence "voluntary" or push for fair treatment in bankruptcy, get exiled from the ponzi in perpetuity, and hope for a 0% recovery at best. Next steps: the upcoming 90% haircut, which make no mistake is coming once the 50% one is deemed insufficient, just like the 21% before it, will also be voluntary? Thank you ISDA for confirming whose interests you have truly at heart, and for forcing everyone to take a quick peek at the members on your "determinations committee."
Just like with Lehman, when it took 3 days for the full consequences of the bankruptcy to manifest themselves in the form of a complete freeze of money markets, so too now we are starting to see the same phenomenon following the blow up of one of the world's largest exchanges. The first observation comes courtesy of Dow Jones which informs us that the MF Bankruptcy has "devastated stock futures liquidity." Specifically, "MF Global's departure from the clearing scene has "devastated liquidity" in stock index futures, a long-time CME floor broker said. He estimated about a third of the pit population is missing. On a normal day, six or seven filling brokers stand on the top rail. That's down to three. In the rate futures markets, another veteran broker sees "marginal" impact because MF's business in Eurodollar and Treasurys is not as large as Newedge USA and Goldman Sachs. "Whatever the effect, it will be extremely short- term in nature because accounts will find new clearing firms and executing brokers quickly," the rate futures broker said." One can only hope the futures broker is right. In the meantime, the CME's margin drop in Dow related margins from last week probably could not have come at a better time.
Reaching for yield (and prospectively capital appreciation) while shortening duration had become the new 'smart money' trade as we saw HY credit curves steepen earlier in the year (only to become the pain trade very quickly). The attraction of those incredible yields on short-dated sovereigns was an obvious place for momentum monkeys to chase and it seems that was the undoing of MF Global. The Dec 2012 Italian bonds (in which MF held 91% of its ITA exposure), as highlighted in today's Bloomberg Chart-of-the-day, appears to be the capital-sucking instrument of doom for the now-stricken MF. As if we need to remind readers, there is a reason why yields are high - there is no free lunch - and while some have already leaped to the defense of the bet-on-black Corzine risk management process with comments such as 'He was simply early and will be proved correct' should remember that only the central banks have bottomless non-mark-to-market pockets to withstand the vol. It also sets up a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt - but given today's issue demand, perhaps that is moot.
It just goes from bad to worse for Europe, which had been hoping to issue €5 billion in 15 year bonds to finance part of the Irish bail out via the EFSF. Instead, once seeing the orderbook, or lack thereof, Europe ended up slashing the notional by 40% and the maturity by 33%, to a €3 billion issue due 10 years from now. And that is hardly the end of the concessions. As the FT reports, "The bond from the European Financial Stability Facility will only target €3bn, instead of €5bn, and will be in 10-year bonds rather than a 15-year maturity because of worries over demand. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity. Banks hired to manage the deal are Barclays Capital, Crédit Agricole and JPMorgan." Do you see what happens Larry, when China walks? But so we have this straight, Europe plans to fund a total of €1 trillion in EFSF passthrough securities.... yet it can't raise €5 billion? Just.... Priceless.