Across the Curve
Call it "X Date", call it "D(elinquent/efault)-Day", call it what you will: it is simply the day past which the US government will no longer be able to rely on "extraordinary measure" to delay the day of reckoning, and will be unable to pay all its bills without recourse to additional debt. It is not the day when the US defaults, at least not defaults on its debt. It will begin "defaulting" on various financial obligations, such as not paying due bills on time and in full, but since this is something Europe's periphery has been doing for years, it is hardly catastrophic. It will hardly be pleasant, however, as some 40% of government obligations go unfunded, and the US is converted to a walking, talking bankruptcy as unsecured claimants rush to demand priority, as the market, long living on hope and prayer, realizes that only now is it truly without a cliff under its feet, and most importantly, as suddenly $500 billion in maturing debt between February 15 and March 1 finds itself in a very, very precarious position.
A well-timed leak of an Obama-Boehner meeting this evening provided enough exuberance to allow algos to lift the markets (futures and ETFs first) from 'about to break the lows' to VWAP (to the tick!). S&P 500 futures picked off VWAP perfectly and slid back. The Dow and the S&P spent the afternoon stuck at unchanged on the week before the rally-monkey saved the day (as did Financials). Treasury yields continue to bleed higher (now up around 10bps on the week). Silver dislocated (worse) from its commodity peers who have recoupled +/-0.3% on the week (even as the USD is -0.6% on the week). Gold and silver (as we noted earlier) really fell out of love from the start of the day-session but silver was starting to recover into the close. AAPL was very close to its lowest close in 10 months (but again was rescued by some rampant white house leak about a totally fruitless rumor) though ended at a critical VWAP support level. By way of record-breakers - today marked the first time that we have seen stocks negative from the day before a QE announcement to the day after (no matter what Bob Pisani tells you). Equities tumbled into the close (after ringing the bell at VWAP) ending near the lows after-hours leaving financials and energy practically unchanged on the week. VIX jumped 0.5 vols to 16.4% and HYG had a very weak day on significant volume. But apart from that...
Markets getting back to some normality with the Periphery still recovering, although less today after the auctions, Bunds 5 wider on the week, Italy 10, but Spain 7 tighter across the curve from last Friday. Equities and Risk oblivious to that anyway and synching with the US. Getting difficult to find something crisp out there with reduced news flow and volatility. Excitement to be found in the US on FC developments, now that Greece, Spain and Italy are seemingly off the table and that the FED has moved to QE4.
"When It's Sleepy Time Down South" (Bunds 1,35% +1; Spain 5,38% +4; Stoxx 2622 -0,2%; EUR 1,308 +40)
No one wants to mention that the Fed Chairman has changed the rules of the game in the middle of the game but there you are; a backsliding Federal Reserve Bank whose statements are only crafted for the moment and future moments may be brief; we just don’t know. Apparently we have transitioned to a “whatever is convenient” policy at the Fed and we all should bear that in mind when assessing probable actions. When money talks, nobody pays any attention to the grammar. The Treasury issues, the Fed prints money and buys, the cost of financing for the country is incredibly low and the yields for investors are paltry. In the risk markets there will now be a demand as instigated by the Fed, that overwhelms the supply of new issuance. Between the coupons paid and the maturities for 2013 the figure is about $1 trillion in excess demand more than estimated forthcoming supply. Given the 36% loss in wealth that took place in America during the 2008/2009 period the odds of an asset allocation shift out of bonds and into equities is de minimis in my opinion and so the “Great Compression” will continue.
Looks like yesterday put into practice: Let’s thank everyone to turn around markets, when they sink. Nothing to break the barn stomp in Periphery bonds (but themselves). Italy brilliantly stuffed its primary dealer at a 2-year low. Core EGBs holding quite steady, given ROn in Risk and Periphery. Strong US GDP revision – but, as expected anyway. Given the actual level in Risk, good numbers are seen as given. Nothing weak, no more, never. Swimming in a Sea of (Risk) Love. Watch the Event / Headline risk on FC (& Greece. The math still seems quite odd…). Hard Periphery (especially Spain) slap-back in the afternoon, though.
"Sea Of Love" (Bunds 1,37% unch; Spain 5,32% +1; Stoxx 2579 +1,3%; EUR 1,298 +50)
Ok. It’s not that the Greek deal is nothing. But then again, third strike. Eventually expected, or at least hoped for. Hence, lack of concrete follow-through. So, now it’s there. And now what? You Ain’t Seen Nothing Yet? What is there to see??? Pitch the markets some input, something concrete, something to feed off, something to see!
"You Ain't Seen Nothing Yet" (Bunds 1,43% +2; Spain 5,51% -9; Stoxx 2538 -0,2%; EUR 1,293 -30)
Hard pressed to find anything remotely exciting today. Equities losing a little shine, but understandable given last week’s 5% rush (and 14% tightening in Credit). Bonds stuck in range. Fiscal Cliff hailing back (in yet rather timid manner, though). Waiting on Greek rescue revelations. Yawn!
"Sailing" (Bunds 1,41% -3; Spain 5,6% unch; Stoxx 2542 -0,4%; EUR 1,296 unch)
Greece? Sorry, what’s with Greece? French downgrade. Unexpected, but then again not that much. So what? Fiscal Cliff? As no one speaks about it, it can be ignored. Risk? If it doesn’t fall, it has to rise.
"Rise To The Occasion" (Bunds 1,43% +2; Spain 5,7% -9; Stoxx 2518 +0,4%; EUR 1,282 +10)
The US crashing close yesterday was cushioned in Europe by better than expected (backward-looking) GDP figures in Germany and France. EZ in recession nevertheless. Limited fall-out, albeit lower (equity) levels tested. Periphery okay’ish, then good on better Italian GDP. Spain tag along with limited own dynamics, mainly trailing Risk assessment. EGBs difficult to move lower from here. Watching the US. Someone. Please. Show the way.
"Are You Gonna Go My Way? " (Bunds 1,34% +0; Spain 5,89% -3; Stoxx 2459% -0,6%; EUR 1,279 +50)
As Greek discussions overnight revealed a spat between Europe and the IMF, and given yet another closing slump in the US, Risk started on a weak footing with Risk nearing Friday lows, before being ramped up by rumours, showered again and finally supported by the US opening in negative, albeit tame manner, before moving into positive territory and taking everything along. Given the noon despair, the afternoon relief seems…exuberant. Especially as the US still lead the way.
"That's The Way" (Bunds 1,34% unch; Spain 5,83% -5; Stoxx 2494% +0,8%; EUR 1,272 +1)
Rather quiet. Verdict still out, whether we’ll get a real rebound or whether the last days were already the dead cat bounce, before heading lower. Periphery on the soft side, but with restricted own dynamics and trailing general Risk sentiment. Waiting. For the US to show the way. Or something to happen.
"Show Me The Way" (Bunds 1,34% unch; Spain 5,88% +7; Stoxx 2473% -0,3%; EUR 1,271 unch)
European equities have made tentative progress this morning, led by the technology and basic materials sectors. The European morning was relatively peaceful until a flurry of activity on the back of European sources commenting that Spain are unlikely to seek ESM aid until the end of the year, and the ECB are not in a rush to commence bond-buying using their OMT facility. The delay of expectations of purchases has taken its toll on the Spanish debt markets which, despite completing their 2012 issuance smoothly today, show signs of strain as the 10yr yield breaches 5.81%, and the yield spread approaches 450bps against the German benchmark – the level at which LCH begin to review margin requirements. The pain in Spain has also impacted the EUR currency, with the major EUR/USD pair printing a two-month low of 1.2720 this morning.
On this lonely blustery day, with US equity markets closed, long-only managers around the US can go peacefully back to sleep as 'Kevin' has got our back. S&P futures (ES) managed a glorious ramp into the 915ET close to confirm a close above the vertically challenged 1400 level. Volume, as one would expect, is dismal but the 6500 contracts that ran thru in the last 2 minutes makes perfect sense (to someone we are sure). The equity futures market was on its own in this rampapalooza, as Treasuries slid to the lowest yields in two weeks, USD strengthened, and commodities dropped - all leaving ES significantly divergent from CONTEXT (broad risk-assets). Nothing but another episode of illegally Banging the Close (but don't hold your breath for the regulators to prosecute anyone, least of all the Liberty 33 residents) with your friendly New York Fed (and Citadel). Gold is higher - even with the USD up 0.25%.
If it wasn’t because the government sponsorship doping Q3 US GDP, we wouldn’t have much on the bright side.
European equities still desperate to shoot up. Feels like too many fickle shorts and too many uncomfortable longs at the same time.
Markets uneasy after round-tripping back to OMT / QE unleash levels and no follow-up stimuli to be seen.
Puh… Why don’t we just wait for Apple? They might pitch a maxi iPhone 6? Or so…
Otherwise, rather Bad Karma day.
Flat start, bullish morning, refreshing afternoon. Nothing concrete or fundamental, so it’s a spiritual thing.