Equities dramatically retraced to the very edge of the global bailout rally top with credit very much in sync and most notably HYG not finding a bid. Implied correlation (sometimes considered crash risk) rose to contract highs for the 2013 maturity as cheap protection was very bid this afternoon. Peter Tchir, of TF Market Advisors, said it best today: "I can't get the Amy Winehouse No No No song out of my head. No ECB. No IMF. No Fed. No PSI. No balanced budgets. No QE." Commodities were demolished late on with Gold, Silver and Copper all falling down 5% on the week and while Oil managed to hold its 'Iran-risk' premia, even that started to leak lower as everyone derisked as 'market-saving-interventions' seemed obviously impotent. Financials, rightfully so, were hardest hit with the majors seriously lower (and wider in CDS) from the open. Equities which remain rich to credit markets on a medium-term basis, underperformed broad risk assets as some late-day covering pulled TSYs off their low yields of the day and gold/silver managed to pull back a little. However, the syncing of HYG and the equity and credit markets (with credit ending at its wides) suggests protection weas heavily bid and HY bond pressures could be coming on outflows.
As the IIF continues to believe it is negotiating with Greece on voluntary haircuts and Ireland follows the Greek playbook by threatening referenda and asking for bailout term adjustments, is it any wonder that the words of a supposedly united Europe ring hollow in the ears of investors who seem to expect a Euro breakup sooner rather than later. Deutsche Bank's credit team see two noteworthy similarities between the world today and where it was in the 1930s. First, they view the Euro today as creating the same problems for Europe as the Gold Standard did in the 1930s and secondly, the austerity now is perhaps equivalent to the tightening of fiscal and monetary conditions in the US in 1937. Obviously this led to a deep recession after the fragile post-Depression recovery and given the current central bankers' tendencies outside of Europe, the inevitable (and so much more easy to achieve now) print-fest solution to the necessary deflation.
Not an hour after we asked who gave permission to MF Global estate to sell Italian bonds to JPM (which was a lender to MF Global, discussed extensively here) at preferential terms and we get the following headline from Bloomberg:
JPMORGAN ACTIONS AS MF LENDER LIKELY TO BE PROBED: LIQUIDATOR
Needless to say, we are quite happy. Someone who isn't however, are JPM's shareholders, as the stock just took out the lows on the news.
UPDATE: HYG just bounced hard off the lows and disconnected from stocks and credit - it seems they really do need to save that asset-heavy ETF.
There is a clear and significant sell-off across all risk assets. Equities are leading CONTEXT lower (after converging perfectly pre-Fed) but equities and credit are falling tick for tick for now with HYG (the high yield bond ETF) falling significantly (which remember has been critically important recently). Commodities are where the real action is though for now with Silver now down over 4.5% on the week (and Gold and Copper not far behind). The velocity of the moves suggest the disappointments in other risk assets are leading to forced selling as a dearth of QE-related comment from Ben and the boys has the USD now over 2% stronger on the week legging higher once again as EURUSD is now -220pips from its early morning highs.
No QE3 Mention In FOMC; Fed Leaves Twist Untouched; Dove Evans Continues To Cry - Full Redline ComparisonSubmitted by Tyler Durden on 12/13/2011 - 15:17
- FED: FINANCIAL STRAINS STILL POSE `SIGNIFICANT DOWNSIDE RISKS'
- FED REPEATS `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST MID-2013
- FED SAYS ECONOMY `EXPANDING MODERATELY' AS GLOBAL GROWTH SLOWS
- FED LEAVES OPERATION TWIST PROGRAM UNCHANGED
- FED SAYS CONSUMER SPENDING `HAS CONTINUED TO ADVANCE'
- FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'
- FED EXPECTS `MODERATE PACE' OF GROWTH IN COMING QUARTERS
- FED: FINANCIAL STRAINS STILL POSE `SIGNIFICANT DOWNSIDE RISKS'
- EVANS DISSENTS FROM FOMC DECISION, PREFERRING MORE EASING
The market can not be happy
Who Gave Permission To A Bankrupt MF Global To Sell Italian Bonds To JPM At A 5% Discount To Market Value?Submitted by Tyler Durden on 12/13/2011 - 15:02
We already knew previously that shortly after it filed for bankruptcy, George Soros bought $2 billion in Italian bonds from the bankrupt MF Global. One thing we did not know was the terms of the purchase. Today, the WSJ has disclosed another facet of the bankruptcy which like Lehman will expose gigabytes of dirt on the corrupt US financial system. Namely, that after liquidating, MF sold Italian bonds - the culprit that ultimately led to the bank's bankruptcy - to none other than JP Morgan and "one large hedge fund."So far so good. Where it gets disturbing is that as the WSJ discloses, "buyers paid about 89 cents on the dollar for the Italian bonds, compared with a market price of about 94 cents at the time, according to the trader who bought them...Today, those bonds trade at more than 96 cents, according to Tradeweb." Our question is first, why did the bankrupt MF Global estate proceed to unload post-filing assets and under whose discretion: after all the company had entered bankruptcy, and it is up to the estate, which includes bondholders and other stakeholders to determine what assets and under what conditions, can be liquidated. Did MF Global believe that the same exemption from the law that it apparently thought was applicable to its pre-petition, was also valid under bankruptcy? Because if the firm did not get prior-permission form a bankruptcy judge to liquidate these assets, this is an act far worse than commingling and even the firesale of Lehman's US Brokerage to Barclays for pennies on the dollar - this is flaunting bankruptcy law front and center. Secondly, and perhaps just as important, who on the estate agreed to give JPM a 5% explicit discount to what the article notes was a fair price that is 5% higher and which by definition would have had bidders at that price. We hope someone in the Senate will take a quick look at this note, and the related WSJ article, and ask Messrs Corzine et al to provide some much needed clarity on this topic.
If there was any concern that today's auction of 10 year bonds may have trouble finding buyers, the just released results should sweep any fears deep under the rug: the $24 billion 10 year auction priced at 2.02%, the second lowest ever, higher only compared to the 2.00% from September 2011, while the Bid To Cover soared from 2.64 to 3.53, the second highest ever only to the 3.72 from April 2010, and lastly, the Indirect Bid jumped from 41.6% to 61.9% of the total takedown, amounting to $12 billion of the total ex Soma, which is the second highest ever only to the record 71.3% from February 2011. Further, coming 2 bps to the 2.045% When Issued, shows that there was nothing about this bond not to like. In other words, the market continues to drift off in some QE3 hopium-inpsired parallel reality (which will promptly crash if and when Bernanke says nothing in exactly one hour), even as credit continues to flood into the relative safety of US paper (earlier we saw 4 week Bills price at 0.000% - some "risk taking"). One wonders where and why the surge in foreign demand for safety came from. We will likely very soon know.
In continuing efforts to save governmental money (and waste) the Washington Post is reporting that the United States Mint will cease production of Dollar coins (with each carrying a deceased President's likenesses), saving a stunning irrelevant $50mm. More than 40% of the coins have been returned to the Fed because no one wants them. Who needs real money when 1s and 0s are all that counts nowadays?
Greek Bank Run Hits Record: Unprecedented €6.8 Billion In Deposits Pulled From Greek Banks In OctoberSubmitted by Tyler Durden on 12/13/2011 - 13:42
While it is no surprise that Greek bank deposits are rapidly fleeing both the country's banking system, and the country, following September's record outflow of €5.5 billion, the situation just got far worse, after October data reveals that a record €6.8 billion was taken out of corporate and household deposits in one month. This is unprecedented 4% of all of the country's period end deposits of €176 billion at the end of October, and represents a €33 billion decline, or almost 20%, of the country's deposit base in 2011 which started with €210 billion in bank cash buffer, and is now down to €176 billion. Furthermore, according to recent article in the German press, this number has supposedly ramped even more in recent months to double digit withdrawals, an event which means the Greek financial system is completely and totally finished. Because as history always shows there is no such thing as a bank run that gets fixed on its own. One thing is certain: November data, and then December, and so forth, will only be worse and worse and worse, until the whole country finally implodes.
In a double-whammy of downbeat dystopian discussions, GMO and Kyle Bass are active on the inevitability of Europe's demise. Perhaps that is too strong but the two are focused directly, in separate pieces, on the huge need for capital and the dire dearth of it available. GMO's central focus on the direct capital needs of the European banking system in the case of a recovery (but under Basel III) and under stress scenarios. Dismissing the EBA's efforts, and recognizing that the problem is capital/solvency (if there were more, the market would not be worrying about liquidity and deposit flight), their 'neutron bomb' scenario where sovereign debt is recognized as a 'risky asset' (which seems more than plausible to us), the capital needs are almost EUR300bn with Spanish and French banks dominant but Italian and German banks are close behind. As Kyle Bass notes "There is no savior large enough with a magic potion of capital to stave off this unfortunate conclusion to the global debt super cycle.". This leads to only a bad and worse outcome for Europe, as the cataclysm plays out because the banks do have an alternative to raising capital – shrink the balance sheet. Deleveraging is already going on in a number of countries, with loan-to-deposit ratios dropping in recent months in Portugal, Spain, and Italy. This reduces the capital needs of banks, but fairly quickly starts to cut into the muscle of the financial system. The banks have little alternative but to keep holding sovereign debt in the short term, since it is the collateral for their borrowing needs. And as we have been so vociferously explaining recently, should they be forced to delver even more, and sell reduce these sovereign assets, then the daisy-chain effect of de-hypothecation on shadow banking will not end well for anyone.
As we said last week, when the S&P, in desperate hope that the Euro summit would achieve something, anything, to avoid an eventual downgrade of Europe, called Europe's bluff... and Europe was found to hold 2-7 offsuit. Now, when it has no choice but to downgrade the EuropeAAAn-club, S&P is practically apologizing for its action, and is today saying that since nothing happened to change its opinion, it will have no choice but to proceed with pervasive downgrades, only this time not only sovereigns (which it is expected to conclude on shortly) but also corporates of all shapes and sizes. Unless of course it doesn't, at which point the rating agency can just tell the last guy to turn the lights out on their way out.
UPDATE: European credit closed abruptly negative (especially Financials) - even as stocks managed a small gaiun into the close
It has been an extremely volatile start to the US day session as QE3 rumors and Oil geo-political concerns set the markets on fire only for denials and Merkel's straight talk to dash those hopes. EURUSD is 180 pips off its earlier highs having broken through 1.31 to 11 month lows. European credits are rolling over rapidly (especially financials and XOver) as are US credit and equity markets with financials, tech, and consumer discretionary now in the red on the day. HYG is selling off tick for tick with the broad equity and credit markets which is what we were concerned about yesterday with its impact on secondary bonds if we see outflows. Commodities have continued their week of chaos with Oil having retraced about 50% of its spike but Gold and Silver now significantly below the pre-QE3-rumor levels (down over 3% on the week).
...but if Fitch changing the outlook from positive to stable on Bulgaria, Czech, Lativa, and Lithuania can push us down 0.5% then if you are long, you need to be putting on some sort of a hedge. I'm not a big fan of puts, and maybe this isn't the news that caused the market to go down, but if it is, then that is scary.