No and Yes ...
- Risk-appetite gathered pace during the European session after Germany and France demonstrated a united front in tackling the ongoing Eurozone crisis. Meanwhile, Russia said that it may help the EU and Spain with the debt crisis, and is ready in principle to buy the Spanish government debt
- S&P affirmed France's ratings at AAA, with a stable outlook, and affirmed Belgium's ratings at AA+, with a negative outlook
- Slovak government party SAS turned down a compromise offer from coalition partners on the EFSF ratification, however the Slovak Parliamentary Budget Committee recommended the EFSF approval
- Weakness in the USD-Index provided support to EUR/USD and GBP/USD
- The governments of Belgium and France agreed to nationalise the Belgian subsidiary of Dexia
Dire numbers prove that running up deficits and printing trillions can't create a healthy economy. Yet, inexplicably, it's what the status-quo media continue to propagate.
The topic of the European "Ice-nine"phenomenon is nothing new to regular Zero Hedge readers: every day we point out the increasing freeze in European interbank lending (in both the traditional and shadow formats), in various money markets, in commercial paper, in broad fixed income issuance, and in the overall collapse in market liquidity, so deftly masked for now by daily political and central bank rhetoric, which for all its market kneejerk reaction glory is merely unsubstantiated innuendo and lies - keep in mind that the last time the incoherent and disorganized Troika came to an actual decision was July 21, with the second Greek bailout, and even that has not yet been implemented! So while hopes still percolates faintly on the surface, the riptide just below it has grown to record proportions. Presenting the chart that everyone who has an opinion on Europe, one way or the other, has to see. Here, courtesy of Diapason's Sean Corrigan, is the epic "Fear and Loathing" in the European banking system, in all its $1.3 trillion glory, or nearly double where it was when Lehman filed for bankruptcy. Banks may say they trust each other, they may promise the system is viable, they may even submit bogus (if increasing) Libor indications to the collusive organization that is the BBA, but the truth is, in vivid color, presented below. Never before have European banks parked as much of their hard earned cash with the only two remaining pillars of "stability", the Fed and the ECB. And with Dexia about to be nationalized, and an unpredictable, and highly contagious, waterfall chain of events about to be unleashed on Europe all over again, will the worst case scenario transpire and the ECB's credibility be swept away? If so, prepare for all the money in the world to funnel into the binary number-based safety deposit box located in the servers of 33 Liberty street. Then the two ultimate questions become: how long before the Fed's own viability is questioned by the global vigilantes (who have finally started asking the right questions), and who will bail out the central bank tasked with bailing out the world?
Several years ago Paolo Pellegrini, Kyle Bass, Michael Burry and several other visionaries were well ahead of the conventional wisdom groupthink curve by not only sensing that the housing market was massively overvalued and riding on the crest of a huge leverage bubble (many others agreed) but by finding a ridiculously cheap, low theta way of expressing an uber-bearish long-term outlook with negligible downside and virtually unlimited upside by purchasing billions in ABX index notional at a cost of a few basis points, and watching it explode as one after another asset manager figured out just what "subprime" means and why it may not be conducive to a healthy career in finance. Virtually all of them ended up being very, very rich in just a few short years having had the foresight and, more importantly, the way to express that vision. Lightning may be about to strike twice as the Subprime implosion of 2007 becomes the Prime implosion of 2011. Back in December 2009, when musing on the very interesting topic of the advent of a new ABX-like index, this time tracking Prime mortgages, we asked, rhetorically as so often happens, "Will The New ABX Prime Index Be The Reason For The Next RMBS (And Thus, FHA/GSE) Collapse?" (for more on this index which MarkIt now markets as PrimeX see here). And while the rest of the world is fretting about Europe, Morgan Stanley, lack of decisive political decision-making in a pseudo union of 17 different countries, lack of decisive monetary intervention, a Chinese hard landing and everything else that makes front pages these days, slowly our prediction is starting to come true. But you won't hear about it anywhere else, because if the market understands that in addition to a global solvency crisis, America has another Subprime contagion on its hands actually being expressed in the markets as we type, and potentially costing banks, pension funds and various asset managers billions in losses behind the scenes, that may well be the last straw.
Geithner frets that the crisis in Europe could undermine confidence. But if confidence isn't based on facts and transparency, it's a con game.
Do not be fooled. This move is short-covering and a snapback and nothing else. We’ve seen several of these in the last two months alone. Every time the market rolled over quickly and collapsed. So let the traders play their games. Based on retracement levels this move could go to 1,182 or 1,200 on the S&P 500. But this rally should be used to get even more defensive than before.
We have highlighted this before but given the incessant rumblings that everything is fixed and that nationalizations, recaps, and EFSF votes are 'positive', we thought a reflection on what is really going on would be useful. The mother of all short squeezes as we mentioned recently continues - catalyzed by the since refuted FT Rumor of a pan-European bank recap 'plan'. The fact that Short Interest is at its highest since the "generational lows" only helps.
Update: "a word out of line" - Trichet says not appropriate to leverage the EFSF... Not what the market wanted to hear.
On one hand, the ECB keeps Germany happy with no rate cut, on the other, he promises as much liquidity as possible (but probably not enough - see below) and paints a very bleak picture of the economy in the period ahead. Bottom line: no recapitalization from the ECB, but the central bank will make rolling of existing debt as easy as possible, and allow insolvent European banks to pledge any assets they have for cool cash.
Europe is in the midst of doubling down again. In May 2010, Europe was going to save Greece to prevent the "problems" from spreading into Ireland and Portugal. In August 2010, Europe decided to save Ireland, Portugal, and provide more to Greece to stop the problem from spreading. In early 2011, Europe starting buying Italian and Spanish bonds in addition to Portuguese, Irish, and Greek bonds to stop the spread of the "problem" into Italy and Spain. In July, they increased the effort to save Italy, Spain, Portugal, Ireland, and Greece so the "problem" wouldn't spread to the banks. Now, in October, they are going to save Dexia and the banks and Italy, Spain, Ireland, and Greece, to save the world. It is not too late for Europe to stop the madness. Let Greece default. Let Portugal and Ireland negotiate real haircuts on their debt. Let some weak banks (even large weak banks) fail. Then provide support. Support the best of the rest. Provide infusions. Create new institutions where necessary. Stocks will be lower, but a floor can be provided.
Update: Trichet announces two fixed rate LTRO tender operations, one 12 month in October, and one 13 month in December, very much as expected. In other words, the ECB will repo even more crap than it has already.
Update 2: Trichet announces CBPP2 - a new €40 billion Covered Bond Purchase Program, i.e. a new €40 billion QE program as the ECB will purhcase covered bonds in primary and secondary markets.
A historic press conference is about to unfold, in which the current ECB president, in a state of complete denial about the imminent implosion of his continent, will mumble for 45 minutes one last time and attempt to preserve his "legacy" after which he will hand over the "printer" briefcase and secret codes to none other than Goldman's Mario Draghi. And Goldman, as is well known to Zero Hedge readers, is certainly not nearly as shy as ole' Tricky to print when needed. Expect some vague promises of more liquidity, possibly the reopening of a 1 or 2 year repo line in which the ECB will accept even more used banana peels and sexual prophylactics in exchange for euros, and an overall deflationary bias. It doesn't matter. It is too late. More importantly, today's "shot rules" are a shot of Jager every time the words "price stabeeleetee" are uttered. Trichet's full prepared remarks transcript can be found here.
In early European trade risk appetite was again the dominant theme following the higher equity closes in Asia overnight. Particular focus came upon comments from EU’s Barroso who said the EU Commission is proposing coordinated action by member states to recapitalise banks. This comment was also followed the European Banking Authority who said that they were reviewing bank capital positions with no new round of stress tests scheduled. This spurred the equity markets across Europe with financial stocks gaining an immediate boost alongside the EUR currency which climbed against the USD sharply. Bunds have been weighed by the general risk-on sentiment, with additional pressure observed following successful bond auctions from both Spain and Italy with lower yields across all six taps today. The Spanish 10-year cash bond yield trading below the key 5.00% mark. In the forex markets the CHF weakened dramatically across the board following the release of the SNB forex reserves data which showed an increase on the previous month, before the fast money move quickly reversed. Elsewhere, all attention focused on the Bank of England key rate decision in which the benchmark rate was kept unchanged, however the Bank announced a further GBP 75bln of QE. This caused extravagant moves in UK related assets with Gilts spiking higher by 100 ticks and GBP/USD falling 150pips. Looking forward Trichet’s last press conference looms large following the ECB keeping its rate unchanged. In terms of economic data there will be the weekly unemployment claims data from the US with Operation Twist conducting its first selling of securities.
Where is that beef?
What do MS CDS and S&P Futures have in common? Everything AND Nothing. MS CDS and ES (E-mini S&P Futures) are clearly correlated. As MS CDS tightens, S&P futures rally, and vice versa. That is pretty clear. They are also the two most talked about things all day long lately. That is where the differences become blatantly obvious. I have to admit that I am sick of listening to talk about MS CDS when so much of the conversation addresses issues like volumes, liquidity, transparency, depth, counterparty risk, etc., when all of those issues could be, and should have been, addressed by regulators. The focus should be on whether or not there is value in MS credit at these prices/spreads not whether the prices/spreads are merely an illusion. I suspect that if we had all the same transparency that exists for stocks, MS CDS and bond spreads would be exactly the same as they are now, but at least we could be focused on the real problems and issues at MS.