That didn't take long.
- BERLUSCONI DENIES RESIGNATION RUMOR, ANSA REPORTS
Ita-Bund 8 wider on the news. We expect it to retrace the entire gain to 490 within seconds. In other news, we are all so lucky the market trades on fundamentals.
When all else fails, and with the Italian 10 Year hitting a new all time record of 6.6% and sending the Bund-Italian spread to the nausea-inducing 500 bps, all else has failed, spread wishful rumors of resignations. Sure enough, the Italian 10 year notes have pared dramatic losses amid reports of an imminent Berlusconi resignation. Italian PM Silvio Berlusconi may step down within “hours,” according to an article written by former minister Giuliano Ferrara in the online edition of Il Foglio, news agency Ansa reported. "Some people say it could be minutes,” Ferrara wrote on the website, according to Ansa. This, coupled with yet another round of ECB intervention has managed to bring the spread inside by... a meager 17 bps, keeping the Italy Bund spread still a well over 470 bps.
Based on the detailed exposures and DV01s thet Jefferies released on Friday, which we discussed as evidence of an implicit 2s10s (approximate maturities) curve steepener, it would seem that the dramatic shift flatter in the Italian bond curve this morning could be problematic. The huge 35-40bps compression in the spread between 2Y and 10Y BTPs is the second largest ever (largest being 4/8/11) and represents an 8 standard deviation drop compared to the last 8 years. This could mean a significant loss for the JEF book - unless they are perfectly hedged through BTP futures - which it does not seem is clear from the exposure sheet. The Italian yield curve has flattened over 100bps since the end of the EU Summit - inching perilously close to inversion which hasn't been seen since 1994.
UPDATE 1: ES -1%, EUR -0.5%, CHF -1.5%, Gold +0.9%, 10Y TSY -2bps, Bund -4bps, BTP spread +25bps at 479bps!
UPDATE 2: BTP spread widest since Jan1996, BTP 2s10s flattest since Sep2008, and BTP yield highest since Aug1997.
With EURUSD trading back to overnight lows at 1.3740 (100pips off its overnight highs), BTPs just opened 8bps wider to Bunds at +465bps. Gold is clinging to $1770 as Silver, Oil, and Copper drop notably thanks to USD strength. S&P futures are 16pts off overnight highs now having retraced almost 75% of Friday's late swing higher. US TSY yields are compressing but relatively parallel for now and in line with Bunds.
"Every Former MF Global Account Faces A Margin Call" - Non-CME MF Global Transfers Get The Monday BluesSubmitted by Tyler Durden on 11/07/2011 - 01:15
If you are a former MF Global account and you have your account transferred over to RJ O'Brien, or many others, you will have no choice but to fork out a bunch of cash to keep positions on, according to a statement awaiting all such accounts on the RJO website, or else be next in line for broad liquidations. To wit: "Former MF Global customers transferred to R.J. O’Brien were delivered with approximately 75% of the maintenance margin requirement related to their accounts. As a result, every former MF Global account faces a margin call. No excess equity was transferred." Naturally the next question is "Why are we not getting 100% of our MMR (Maintenance Margin) from the exchange?" And the answer: "This is an agreement between the trustee and CME Group. Please visit www.mfglobaltrustee.com for further information or questions." So, in addition to lowering initial margin for everyone, not just MF Global clients, did the CME iron out preferential terms over other exchanges and get larger equity of the account transfer than most? Because somehow we doubt that RJ O'Brien is the only exchange that is greeting their clients with this particular notice.
Having retraced almost 61.8% of the September drop, Gold's recent run up - as the USD strengthens no less (from 10/28) - suggests some demand for safety is back (or more simply is the demand for German Gold making the German's hoard a little more?). Silver is actually outperforming from Friday's close but remains below Friday's highs for now.
As China 'threatens/promises' liquidity injections to its banks, Greek politicians argue over premium parking spaces, US brokers/exchanges squabble over the MF capital leftovers, and global liquidity goes from bad to worse - perhaps it is time to take a step back and focus on what really hasn't seemed to matter - the economy. Ray Dalio published his Template For Understanding back in October of 2008 and has recently updated it (as of October 2011). For your Sunday evening reading pleasure - "How the Economic Machine Works and How It Is Reflected Now". Critically, the hedge fund manager provides a framework for considering what he believes are the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle.
Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the "next steps" for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress' court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe's latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis...
Silvio Berlusconi: "We Don't Want Elections. We Want To Govern" - Tens Of Thousands Of Protestors DisagreeSubmitted by Tyler Durden on 11/06/2011 - 18:57
Even as the EURUSD is surging because of, uh, we are not quite sure - HFTs hitting all stops most likely, it is only 9 short hours until BTPs, that one and only fulcrum security for the entire European continent reopens. And while for Greece getting a new government, even if one headed by a former Fed member is somehow good news (we wonder how the people will react knowing that their fate as debt slaves repaying European banks has just been sealed for a few more months), in Italy government "stability" (we realize the comic value of this statement) is the key to prevent a blow out to the 10 Year BTP, and the launch of a domnino cascade that will stop only with French OATs, and potentially rip through through that final firewall: Germany (with or without BuBa's billions in gold reserves... which we can only hope are not parked with the New York Fed). So back to Italian government "stability" which according to France 24 is not doing that hot. "Tens of thousands of Italians gathered in Rome on Saturday to protest Prime Minister Silvio Berlusconi's tackling of the country's sovereign debt crisis. "Silvio out" was the rallying cry for the large crowd that took part in the rally organised by the Democratic Party, the country's main opposition movement. Some demonstrators poured scorn on the prime minister after G-20 leaders humiliatingly put Italy's struggling economy under surveillance, amid a lack of trust in Berlusconi's reform pledges. At the summit in Cannes, the billionaire prime minister played down the gravity of the economic crisis with a trademark quip, claiming that "restaurants are full and the planes fully booked." "I go to restaurants... to do the washing up," read one banner at Saturday's mass demonstration." And the kicker is that over the weekend enough defections from his party have taken place which according to many, but not Silvio, are enough to lose him his majority: "There is growing concern Berlusconi no longer commands enough loyalty among MPs to ensure the quick passage that European and international financial officials say Rome must achieve to avoid falling victim to a dramatic debt crisis like that bringing Greece to its knees... "We don't want elections. We want to govern," Berlusconi added." So much for democracy in yet another country, but he does bring up a fair demand, one shared by the increasingly more skeptical holders of BTPs. Because when Silvio finally falls, all bets are off.
The last few years have exposed many of the previous masters-of-the-universe for the beta-hugging, momentum-chasing, herd-like leveraged (and occasionally unethical) monkeys that they are. There are many exceptions to this rule, however, and some research by Oxford University sheds some light on how future performance of a hedge fund is considerably divergent based on that hedge fund's revision of performance in global hedge fund databases. It may seem odd to many that the performance of a fund is 'flexible' but this relates to the voluntary reporting of changes from the initial performance to the latest print for that period's performance. The research finds that since 2007, while revisions are relatively balanced (between positive and negative), funds that revised their performance have drastically lower performance (and dramatically higher fund outflows) than funds that did not 'revise' their performance. With trust being such a valuable asset nowadays, it seems giving managers a second chance has perhaps been academically proven a losing bet (Meriwether, Corzine, and many others) and maybe (just maybe) honesty pays!
The following cable from US ambassador to Germany Philip Murphy ("Ambassador Murphy spent 23 years at Goldman Sachs and held a variety of senior positions, including in Frankfurt, New York and Hong Kong, before becoming a Senior Director of the firm in 2003, a position he held until his retirement in 2006") "CONFIDENTIAL: 10BERLIN181" tells us all we need to know about what has been really happening behind the smooth, calm and collected German facade vis-a-vis not only Greece, but all of Europe, and what the next steps are: "A EUROZONE CHAPTER 11: DB Chief Economist Thomas Mayer told Ambassador Murphy he was pessimistic Greece would take the difficult steps needed to put its house in order. A worst case scenario, says Mayer, could be that Germany pulls out of the Eurozone altogether in 20 years time. In 1990, Germany's Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an "inflationary zone," or 2) the German taxpayer became the Eurozone's "de facto bailout provider." Mayer proposes a "Chapter 11 for Eurozone countries," which would place troubled members under economic supervision until they put their house in order. Unfortunately, there is no serious discussion of this underway, he lamented." This was In February 2010. The discussion has since commenced.
Have a sinking suspicion that the way the Eurozone has handled the past week's Greek threat has set the stage for the collapse of the Eurozone (here's looking at you Italy, over and over) now that Merkozy has made the possibility of a country leaving the Eurozone all too real? You are not alone: Morgan Stanley's Joachim Fels has just sent a note to clients in which he not only commingles three of the catchiest and most abused apocalyptic phrases of our time ("Emperor has no clothes", "Water Pistol not Bazooka" and "Pandora's Box") he also warns, in no uncertain terms, that "by raising the possibility that a country might (be forced to) leave the euro, core European governments may have set in motion a sequence of events which could potentially lead to runs on sovereigns and banks in peripheral countries that make everything we have seen so far in this crisis look benign." And when a major investment bank, itself susceptible to bank runs warns of, well, bank runs, you listen.
Here is the latest installment in the tragicomedic drama that just. won't. end
- PAPANDREOU TO STEP ASIDE AS PRIME MINISTER; NEW PREMIER MONDAY
- GREEK PRESIDENCY STATEMENT SAYS PAPANDREOU WON'T LEAD GOVT
- GREEK PARTIES AGREE TO FORM UNITY GOVERNMENT, PRESIDENT SAYS
Lastly, why decide today, what you can put off until indefinitely:
- GREEK PRESIDENT TO CHAIR MEETING OF PARTY LEADERS TOMORROW
Most likely the outcome will be that predicted by To Vima hours ago, with PASOK's L-Pap in charge, and a New Democracy vice premier. In other words: meet the new boss - same as the old boss, only this time with the Fed's blessing.