And so the one thing that was supposed to be set (if only briefly) in stone, the terms of the Greek creditor haircut, has now fallen apart. From Reuters: "The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind. Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020." And confirming that the IIF has now lost control of the situation, "the country has now started talking to its creditor banks directly, the sources said." And because the NPV is only one component in determining what the final haircut really is, this means that the haircut just got higher or the actual coupon due to creditors will be slashed, a move which will see Sarkozy balking at this overture in which Greece once again sense weakness out of Europe. We can't wait to hear what France says to this latest escalation by Greece, which once again has destroyed the precarious European balance.
It is 17:03 in Zurich...and it appears that rumors of an SNB intervention have been once again greatly exaggerated. Either that or Hildebrand has pulled an Obama and is stuck in the sandtrap on the 18th. Immediate result: EURCHF down 40 pips on the lack of news, and will continue dropping to the 1.2250 level with every minute which confirms the SNB floor hike rumor was just that.
Deutsche Bank Exercises In MADness: "Crisis Likely To Get Worse Before It Can Get Better... If Indeed It Ever Does"Submitted by Tyler Durden on 11/25/2011 - 11:41
Deutsche Bank's Jim Reid, who has taken etudes in Mutual Assured Destruction to a level not even Leopold Godowsky would be able to execute (which is expected: DB is the one bank in Europe that has the biggest disconnect between reality and where the market trades its securities) reminds us once again that without the ECB stepping in it is all lost: "We are fast running out of options. The great hopes of the last few weeks for Europe have fallen one by one. We first had China pulling back, then a Levered EFSF scheme that has stalled before it has taken off, a powerless IMF and now yesterday we had even more insistence from Mrs Merkel that Eurobonds are not the answer and neither is a more aggressive ECB. It leaves us scratching our heads as to what the answer is." Yet the ultimate step: the questionable integration of Europe's countries in a union whereby they abdicate their sovereignty to Germany in exchange for the issuance of Eurobonds, is not only extremely unlikely, it will also come too late: "Should we get excited ahead of the treaty changes? The answer is that we are undoubtedly slowly moving closer to the start of a path towards fiscal union. However this process, even if it runs smoothly, will likely be a long, drawn-out, arduous journey. Unfortunately markets are moving at a much, much faster pace and we probably don’t have the time for a slow measured path towards fiscal union." In other words, even if the ECB, and thus Germany were to relent, the markets can at best hope for a few days rally before risk tumbles off once again, only this time there will be no scapegoats aside from the bloated and terminally broken European bureaucratic engine which, when all is said and done, is the fatal flaw of the European experiment.
Presented with little comment as chatter about the EURCHF peg being adjusted spurred some stick-save buying in EUR as it approached the critical 1.3200 level, ES (and most of high beta risk) has spiked up as US equity's day session opened. ES is 18pts off pre-market lows - well ahead of broad risk assets though. Silver and Oil spiked considerably and Gold is shifting higher as the USD leaks off a little. Volume is not that low in ES for now but we would expect it to fade after this opening excitement as Financials are leading the way +1.3% - notably outperforming their credit spreads.
Given the recent market reaction to short- and mid-dated bond auctions in the European sovereign space, it seems the Spanish have blinked and decided to cancel the planned 3Y auction for next week. Reuters is reporting that instead of a single 3Y new issue, they are reopening 3 existing deals in the hope it will be easier to garner demand across several maturities and potentially more fungible for managers to add to existing positions than create new ones. Of course, it really doesn't matter too much as what we are concerned with is the secondary-trading 2015, 2016, and 2017 bonds will now be perfectly repriced at whatever is marginal demand for new risk positions - which we suspect will not be positive. The main reason for the shift to off-the-run, we suspect, is that the ECB is now allowed to 'buy' the bonds (not at re-issue but in the secondary pre-acution) as it is not allowed to buy primary issues. Once again - it smacks of desperation.
European sovereign credit curves are bear flattening (inverting wider) in almost all cases as short-dated yields breaks to new records in several names. At the same time, European credit is breaking to new lows in Corporates and financials with Subordinated financials underperforming. Somewhat strangely - though not exactly surprising given the market's behavior in the last few weeks - European equities are holding up as they ignore the reality priced into credit. It seems equities see the light at the end of the tunnel, but credit knows its an oncoming train. US markets are in sync with the broad risk-asset basket (CONTEXT) for now but correlations are tending to be much lower than on average so far.
Market participants continue to be surprised by gold’s continuing weakness and some are even questioning gold’s safe haven status. However, the fundamentals of broad based global physical demand remain very sound as evidenced by the central bank gold buying data today. Russia bought 19.5 metric tons of gold in October bringing their total gold reserves to 871.1 tons according to IMF data released today. Belarus increased holdings by 1 ton, Colombia by 1.2 tons, Kazakhstan by 3.2 tons and Mexico by 0.9 ton, the data show. Germany reduced reserves by 4.7 tons and Tajikistan cut reserves by 0.4 ton, the data show. Thus, Russia, Kazakhstan, Colombia, Belarus and Mexico added a combined 25.7 metric tons of gold to reserves in October, after gold prices corrected from record highs...Might Russia and China use gold in order to undermine U.S. political and economic dominance? There is certainly the possibility that they may use gold as a geopolitical weapon against the U.S. and as a way of furthering their growing global political and economic aspirations. Putin's endorsement in 2005 of the Russian Central Bank's plans to diversify the Russian reserves out of fiat currencies and debt instruments and into gold bullion was seen by some as as much a political act as an economic one.
It is time to face facts. I think there is a solution to the financial war in Europe. It isn't pleasant, particularly if you are a mediocre bank, but it may work. In the meantime, Europe needs to do something to calm the markets so they can spend a month preparing for orderly chaos in Europe. The EFSF should announce bonds sales to the Fed. The Fed should purchase 200 billion Eur of EFSF bonds today. They should commit to further purchases of 100 billion in Q1 and Q2 next year. The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity. It has also been looking (quietly) for ways to keep the dollar weaker.
Italy held an auction for EUR8 billion 6 month Bills today. Unlike Wednesday's German 10 Year Bund issuance, the auction was not a failure (at least not yet), and for good reason - the yield paid for the Bill was 6.504%, the highest since August 1997, and is nearly double the October 26 auction when it priced at a now nostalgic 3.535%. But... the maximum target of EUR 8 billion was met without anybody's central bank have to retain anything. The bid-to-cover was 1.47 compared to a bid-to-cover of 1.57 one month ago and average yield of the last six 6-month auctions of 2.443% and average bid-to-cover 1.636. All sarcasm aside, this is an unprecedented collapse and a total catastrophe as Italian Bills now yield more than Greek ones - the market has basically said Rome needs a debt haircut and pari passu treatment with Athens. In the aftermath of the auction everything has come unglued: 2s10s is inverted at unseen levels, the 5 Year has hit 7.847% , and Euro liquidity is gone...it's all gone.. as the 3 month basis swap hits -157.5 bps below Euribor, the lowest since October 2008.
- Trading volumes remained thin owing to early closes associated with Thanksgiving in the US
- Italy paid a record premium of 6.504% on the 6-month BOT and the bid/cover remained on the softer side, however the country managed to raise the full amount in the auction
- Market talk of the ECB buying Italian and Spanish government debt
- According to an article in the FT, the EFSF may not be able to raise enough funds to increase its capacity to more than EUR 1trl as planned
- ECB's Coene said that if the current trend continues, rate cut is probable
If only we had known that the EFSF was nothing but the latest Chinese reverse merger IPO gimmick, dependent entirely on market conditions for its success, we probably would have sold even more euros to Thomas Stolper. Alas, despite all the pomp and circumstance of last month's European summit announcement when the 50% Greek debt haircut (which has a snowball's chance in hell of passing) was accompanied by vague promises of a 4-5x leveraging of the EFSF's €440 billion, it now appears that our original skepticism was well-founded. Because according to the latest news out of the FT, the EFSF won't get 4-5x leverage. Nope. It will, in fact be lucky if it can be doubled, which however kills the whole point as it needs to be well over €1 trillion to even exist. From the FT: "A plan to boost the firepower of the eurozone’s €440bn rescue fund could deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month, according to several senior eurozone government officials." Well what do you know. Next we will learn that when the EFSF denied it was an outright pyramid scheme, and was buying its own bonds, it was actually kidding. Either way, as it currently stands, there is no bailout in place for Europe whatsoever, as the ECB's demands for a fallback to the ECB are now moot. Furthermore, once the market realizes there is no even implicit backstop to the trillions in debt rollover over the next several years, it will dump sovereign bonds with even more gusto, pushing Europe into an even deeper funding crisis, which in turn will make bond repayment even more impossible, which will send prices even lower, and so on. There is a reason they call it a toxic debt spiral.
After being mocked and humiliated (repeatedly) by various blogs, not to mention losing a ton of money (for the clients, not the Goldman traders on the other side of the firm's clients) on his most recent horrendous EURUSD reco, Goldman's Tom Stolper has had enough (as a reminder, precisely the same thing happened at precisely the same time last year - sometimes even a broken clock is never right). And not only him, but all of Goldman appears to be withdrawing from making any future recos on Europe. To wit: "The lack of predictability in Euro-zone policy developments and the high degree of volatility it has created for markets have made it particularly challenging to recommend trades around that theme. Over time, our attempts to actively trade Euro-zone-related developments have had varying degrees of success. Our long EUR/$ trade recommendation was the latest to fall victim to this broader market uncertainty. We initiated the trade under the assumption that reduced political tensions in the Euro-zone ten days ago would also help the EUR move higher, given the significant degree of negative sentiment for the currency. Despite positive developments in Italy, Greece and Spain, however, market tensions have broadened. We therefore closed the trade yesterday at close to 1.34, as we thought that further deterioration in price action was likely." This is truly sad news: it means that the one sure source of (inverse) alpha in the past 2 years, Goldman's FX "advice", has been silenced, and if anything has now turned outright bearish on Europe - and all it took was 2 weeks for Goldman's expert strategists to completely invert their opinion. Oh well, nobody ever said trading was supposed to be easy...
Citing uncertainty over the country's ability to meet 'austerity' targets and its rising susceptibility to external shocks - given its heavy reliance on external investors - Moody's just downgraded Hungary to Junk Ba1 (with a negative outlook). With its 10Y yield currently at 9%, only 190bps wider than Italy, we thought it somewhat ironic that Hungary's average 10Y yield from SEP09 to SEP11 was 7.2% - almost exactly where Italy finds itself trading currently.
The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.