American Electric Power (AEP) sent shock wave last week by suggesting consumers could see their electricity bills jump an estimated 40-60% in the next few years due to new air regulations by the EPA.
- Greece reached a deal on extra tax rises and spending cuts with the EU/IMF to plug a EUR 3.8bln funding gap
- Better than expected German IFO data promoted risk-appetite, which supported EUR
- Shares in Italian banks, including Unicredit and Intesa Sanpaolo, got suspended, partly due to market talk that some Italian banks had failed stress tests
- Moody’s changed its outlook on 13 mid-sized and smaller Italian banks to negative, and warned them of a potential downgrade. However, Italian PM said Italian banks are well capitalised, and is not worried about Moody’s warning
- ECB’s Gonzalez-Paramo said the Eurozone crisis is not over and will not end soon
- Greece's PASOK lawmaker, Robopoulos, said that he may vote against the mid-term fiscal plan
It is not only the Chinese interbank market that has found itself in a liquidity vacuum. A quick look at recent moves in European overnight lending rates shows that in the past two weeks the key Eonia overnight rate hit a multiyear high of 1.549%, which was rather disturbing because as Reuters points out "Factors related to the end of the first half of the year, when banks tend to lend less as they square up their books, also kept cash prices over two weeks near the European Central Bank's main refi rate of 1.25 percent, money market traders said." Of course, concerns about Greece are a far more prevalent factor in the closed loop that is liquidity evaporation. Which is why the Eonia plunge to 1.091% on Wednesday would have been surprising in isolation, but not if one considers that during yesterday's ECB Main Refinancing Operation (MRO), banks borrowed a whopping €186.9 billion in 7 day funding at a fixed rate of 1.25%. This is €50 billion more than what was borrowed in the past week, and as the chart below shows, is the highest since January when the market was once again concerned about European exposure to Portugal and Ireland (then subsequently forgot all its concerns for about 5 months).
The big question is how many people are long stocks because they played the 200 day moving average bounce? We have had at least 3 chances in the last week for investors to buy the moving average. It seems like a lot of people had stopped buying the dip during the relentless march down for stocks, but everyone seemed to jump on the bandwagon that the 200 DMA was a big support for stocks. I think a lot of investors got sucked in and allocated capital and are now weak longs. One group waited until Tuesday when the market really seemed strong and 'was destined to test resistance at 1300' before buying in. The other group of weak longs are those who typically don't play technicals but found the 200 DMA bounce theory too compelling to resist. It is always difficult to trade when losing money, but the ability to make really dumb decisions goes up when we have positions that were put on for reasons that we don't normally follow. The technicians are used to these trades, it is what they do. The 'fundamentalists' are not and are more likely to react badly to losing money here. People must be scratching their heads a little, since it seems, according the rose colour glasses world i) Greece fixed, ii) Contagion avoided, iii) economic soft patch is only a soft patch and no risk of double dip, and iv) Bernanke will be there for us.
Risk-aversion remained the dominant theme during the European session on the back of the ongoing Greek debt concern, allied with worse than expected manufacturing PMI data from core Eurozone countries like France and Germany. This resulted in weakness in European equities, which provided support to Bunds, and also observed widening of Eurozone 10-year government bond yield spreads across the board. In the forex market, strength in the USD-Index weighed upon EUR/USD and GBP/USD, whereas weakness in commodities exerted downward pressure on commodity-linked currencies. Moving into the North American open, markets look ahead to key economic data from the US in the form of jobless claims, Chicago Fed and new home sales. In fixed income, 2-, 5-, and 7-year Note refunding announcement, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Aug'21-Nov'27, with a purchase target of USD 1-1.5bln, and USD 7bln 30-year TIPS auction are also scheduled for later.
From Goldman's Jan Hatzius, who was probably typing while he was being interviewed by CNBC: "Fed Chairman Bernanke’s press conference included many details but few major surprises. On activity, he expressed relatively low conviction, saying “We don't have a precise read on why this slower pace of growth is persisting” (note that quotes come from the real-time transcript, which may be revised slightly). However, consistent with the FOMC’s forecasts (see below), he emphasized that he thought that some factors restraining growth were temporary."
It will be a fun experiment to see if we can truly strip a government down to the singular function of taxing the citizens to give money to banks - consider it a practice run for their vision of the US.
- Overnight the Greek government passed through a crucial confidence vote, however risk-aversion remained the dominant theme today as markets look ahead to next week when Parliament discusses the country's medium-term fiscal plan
- A German government source said that the finance ministry will hold talks today on working group level with banks and insurers over private creditor contributions for Greece
- BoE’s June meeting minutes revealed that some members think it is possible that more QE might be warranted if downside risks materialise
Courtesy of GTAA's latest fixed income update, we wanted to present a curious chart which looks at the correlation between US social demographics (in this case, the ratio of retirees to savers) and the 10 year yield. As the chart demonstrates, the two data series have a strong correlation of 0.91 since 1960, and based on predicted social dynamics, corroborated by various independent budgeting organizations, the demographic ratio is expected to continue growing at the current rate and hit highs last seen in 1981. The obvious question: does this mean that the 10 year, now once again close to all time record low yields, will follow through and revert to 1980 Paul Volcker levels, or will the Fed attempt to offset not only the impact of the business cycle and record systemic leverage, but also take on nature and aging directly?
Anticipation of the Greek government passing through today's confidence vote successfully witnessed a re-emergence of risk-appetite in early European trade. This provided support to EUR during the session, witnessed strength in equities, and Eurozone 10-year government bond yield spreads narrowed across the board. However, EUR/USD did come under some pressure following much worse than expected German ZEW survey results, whereas Euribor futures received support after the ECB allotted higher than expected amount in its weekly refinancing operation. In other news, GBP weakened following dovish comments from BoE's Fisher, who said that further quantitative easing is still an option. Moving forward, markets look ahead to existing home sales data, allied with API inventories figures from the US later. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16-May'18, with a purchase target of USD 4-5bln is scheduled for later in the session. Moreover, any comments pertaining to the Greek debt situation or the vote of confidence will be keenly watched.
Following the release of its quarterly equity market update, Global Tactical Asset Allocation has released the must read Q3 debt update, which covers virtually every aspect of the fixed income space with more granularity than can be found in the best sellside research report. Since the imminent global insolvency is not about equities, and all about coupon and variable rate instruments, this could we be the most important update piece from Damien Cleusix this quarter. Your all in one compendium on fundamentals, technicals, and everything inbetween can be found inside.
Virtually all other times when stock volume was as pathetic as today's in recent history, were holidays. The chart below speaks for itself.
PIMCO Scott Mather has released a fascinating Q&A in which the key topic of discussion is the artificial push to keep rates low in developed economies, also known as central bank hubris to maintain the "great moderation" in which he clearly explains i) what this means for global fund flow dynamics (using developed country reserves and purchasing EM bonds) and ii) for the future of a system held together with glue and crutches. To wit: "Financial repression is any public policy
that is designed to influence the market price of financing government
debts, either through government bonds or the nation’s currency. Direct
methods of repression include things like setting target interest rates,
monetizing government debt or implementing interest rate caps. Indirect
methods include polices designed to change the amount of debt or
currency at a given price. Examples include requirements to hold minimum
amounts of government debt on bank balance sheets or establishing
minimum requirements for government bonds in pension funds." Just in case anyone is confused why central planning is a bad idea: "Governments may take these steps to improve their ability to
finance public debt and forestall more painful adjustment processes,
though there can be other motives, and because these methods are less
transparent, and thus less controversial, than direct tax hikes or
spending cuts. Investors should be wary of financial repression because
it is primarily a tool to redistribute wealth from creditors (citizens)
to debtors (governments) to the detriment of creditors, fixed income
investors and savers." Needless to say, central planning always fails: "It is important to realize these methods as practiced are only
partially effective and cannot go on forever, as advanced economies
continue to add significantly to their public debts despite low
financing costs. Some intensification of financial repression, fiscal
austerity, or stronger growth must occur to lower the likelihood of a
future debt crisis." Bottom line: "kicking the can" can only go on for so long before EMs (read why below) provide a natural counterbalance to an artificial market created by developed world central banks. PIMCO's advice: get out of balance sheet risky DM bonds ahead of central planning failure, and buy up every EM bond possible, or bypass paper and just buy EM currencies as "EM policymakers who have resisted appreciation will
eventually allow more appreciation over the next three to five years as
they nurture domestic consumption and their economies become less
dependent on export demand." We expect to see much more on this topic as the MSM realizes the implications of this new risk regime change.
Risk-appetite, which emerged last Friday, couldn’t sustain its momentum today after Eurozone finance ministers decided to delay any final decision on a new Greek rescue package till July. The decision led to a re-emergence of risk-aversion, which provided support to the USD-Index and in turn weighed on EUR/USD and GBP/USD. The ongoing Greek debt concerns once again weighed on equities, with particular underperformance seen in financials, which underpinned the strength in Bunds. Allied to this, Eurozone peripheral 10-year government bond yield spreads widened led by the Greek/German spread.
Gold Rises To New Record In GBP - Close to Near Record Highs In Euros And Most Currencies On Global Debt Contagion RiskSubmitted by Tyler Durden on 06/20/2011 06:21 -0500
Gold is being supported as default risk has increased after EU finance ministers failed to agree on a new Greek loan package. Gold priced in sterling rose to new record nominal highs this morning at £954.84/oz and the weakness of the euro has seen gold rise to touching distance (9 euros) from new record highs in euro terms at €1,088/oz. The cost of borrowing euros for three months in the interbank market continued to rise today with the three month Euro Interbank Offered Rate, or Euribor, fixed at 1.510%, up from 1.502%. Corporate borrowing costs in the U.S. as measured by U.S. swaps rose sharply from 20 to 26.99 last week - the highest so far in 2011. Societe Generale SA raised its third quarter gold forecast by $90 to $1,580 an ounce and silver by $3.50 to $42 an ounce.