Equity markets continued to edge higher today as market participants grew hopeful that a full scale bailout of Spain will take place in the very near future. So much so that even though reports that Spain is to seek bailout this weekend was denied, the risk on sentiment held strong. As a result, SP/GE and IT/GE bond yield spreads tightened further, with IT 10s now yielding close to 5%. The renewed sense of security saw EUR/USD squeeze higher towards the psychologically important 1.3000 level, while GBP/USD also benefited from a weaker USD and is trading in minor positive territory in spite of another round of disappointing macro data from the UK. Going forward, the second half of the session sees the release of the latest ISM New York index, as well as the regular weekly API report. Both the BoE and the Fed are due to conduct another round of asset purchases at 1445BST and 1600BST respectively.
In absence of really negative news, outside the heavier macro / sentiment data, the lukewarm Italian auction and US data, markets remained on a slight tentative rebound.
Will need to await further details and overnight analysis of the Spanish budget. Lots of reforms...
Hmm, and in how much time can all that be passed - if at all???
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With the ESM passing through the German high court, and the ECB formally announcing their OMT bond-buying programme, the next headache for European asset classes to digest comes from the will-they-won’t-they speculation regarding a Spanish sovereign bailout. With Spain’s withering finances, elevated borrowing costs and rapidly shrinking tax revenues, the need for governmental assistance is known by all. As such, this report has been compiled to run through each possible bailout scenario and the possible impact across the asset classes.
SNB bond-buying is "exacerbating" the gap between borrowing costs for stable countries like Germany and the rest of the 17-nation euro zone.
Following closely on the heels of our recent (now must read) discussion of the potential illegality of Draghi's OMT, Reuters is reporting the somewhat stunning news that the ECB and Bundesbank are getting lawyers to check the legality of the new bond-buying program. Germany's Bild newspaper - via the now ubiquitous unnamed sources - said in-house lawyers were checking both what proportions the program would have to take on and how long it would have to last for it to breach EU treaties (that specifically ban direct financing of state deficits). While Draghi - full of bravado - likely said whatever he felt was necessary at the time to stop the inversion in the Spanish yield curve, it is becoming clearer that, as usual, the premature euphoria (in the complacent belief that central banks can solve every problem with a wave of the magic CTRL-P wand) was misplaced. Bild goes on to note that this matter could be referred to the European Court of Justice - and the ECB/Buba were preparing for such an event. Of course, since every other rumor in recent months, most of which have originated in credible media, has proven to be a lie, it is likely this is also merely leaked disinformation to push the German case, i.e. anti-Europe.
One of the most astute financial analysts in the world, Jim Grant, founder of highly respected Grant's Interest Rate Observer, was asked by Maria Bartiromo on CNBC yesterday “how high can gold go”? Grant responded that "there is no telling."
As we reported first thing this morning, Spain, while happy to receive the effect of plunging bond yields, most certainly does not want the cause - requesting the inevitable sovereign bailout. To paraphrase Italy's undersecretary of finance, Gianfranco Polillo: "There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say -- ‘I give up my national sovereignty." He is spot on. However, the one thing that will force countries to request a bailout is the inevitable outcome of soaring budget deficits: i.e., running out of cash (as calculated here previously, an event Spain has to certainly look forward to all else equal). Which simply means that sooner or later Mariano Rajoy will have to throw in the towel and push the red button, knowing full well it most certainly means the end of his administration, and very likely substantial social and political unrest for a country which already has 25% unemployment, all just to preserve the ability to fund its deficits, instead of biting the bullet and slashing public spending (and funding needs), which too would cause social unrest - hence no way out. But why would a bailout request result in unrest? Reuters finally brings us the details of what the Spanish bailout would entail, and they are not pretty: "Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package, sources with knowledge of the matter said...The accelerated raising of the retirement age to 67 from 65, currently scheduled to take place over 15 years, is a done deal, the sources said. The elimination of an inflation-linked annual pension hike is still being considered."
As if depressing PMI data out of China overnight was not enough (it was certainly enough to send the Shanghai Composite tumbling 2.08% to 2024.8 and just off fresh 4 year lows), we then got Europe to join in the fray with a composite PMI print of 45.9, down from 46.3, and a miss to expectations of a modest rise to 46.6 (driven by a manufacturing PMI of 46.0 up from 45.1, and a Services PMI down from 47.2 to 46.0). The biggest surprise was the sheer collapse in French manufacturing data which tumbled from 46.0 to a 4 year low of 42.6 on expectations of a rise to 46.4, which sent the EURUSD firmly into sub 1.30 territory and not even several good paradoxical bond auctions from Spain (because a good auction here means no bailout, means those who bought the bonds will soon suffer big losses) have managed to dent the very poor overnight sentiment which now implies a European GDP contraction of -1% of more. Reality has also halted the global easing euphoria (the USDJPY is now 40 bps below where the BOJ announced the injection of another Y10 Trillion), and has everyone wondering, now that QEternity is priced in, what next?
Those who expected a major response following the surprising, and "preemptive" easing by the Bank of Japan which has now joined the freely CTRL-Ping club of central banks, and went to bed looking for a major pop in risk this morning will be disappointed. The reason is that with every passing day that Spain does not request a bailout, all those who bought Spanish bonds on the assumption that Spain will request a bailout look dumber and dumber (a dynamic we explained nearly two months ago). As a result, the EURUSD has been dragging ever lower, and is now playing with 1.30 support. Providing no additional clarity was Spanish deputy PM Soraya Saenz de Santamaria who said Spain will decide if and when to trigger an ECB bailout once all details have been analyzed. Well the details have been more than analyzed, and Spain has been more than happy to receive the benefits of its bailout, it has yet to trigger the cause. Ironically in a Barclays study,over 78% of investors see Spain requesting a bailout by year end (even though as we explained over the weekend Spain really has to do this ahead of its major cash drawing bond redemption schedule in October when it may well run out of cash). And so, just like the US Fiscal Ceiling, the global markets are expecting some Catchy 22 deus ex machina, where traders can get their cake and politicians can eat it too. Alas, there never is such a thing as a free lunch. And what is making the much needed outcome even less probable is that Spanish bonds this morning are actually trading tighter once again making a bailout less than likely. The Spanish zombie has left its grave and is now romping through the neighborhood unsupervised.
Pump it up, until you can feel it, Pump it up, when you don't really need it...
Marc Faber, one of the few analysts, to have predicted the current crisis correctly and to have protected his clients in the process, remains very bullish on gold. In another excellent Bloomberg interview, Faber said that “the trend for gold prices will be steady but the trend for the dollar and other currencies will be down. So in other words gold in dollar terms will trend higher.” “How high it will go, you will have to call Mr Bernanke and at the Fed there are other people who actually make Mr Bernanke look like a hawk and so they are going to print money.” Faber is on record as to the importance of owning physical gold and he again warned about the importance of owning gold but not storing it in the U.S. “You ought to own some gold but don’t store it in the U.S., the Fed will take it away from you one day,” Faber astutely noted. He said that Bernanke is a money printer and this could lead to massive inflation and the Dow Jones at 20,000, 50,000 or 10 million. Faber cheerily predicted that the “the Federal Reserve’s monetary policy will destroy the world” and “eventually we will have a systemic crisis and everything will collapse.”
In two weeks the Greek economy will once again suffer the consequences of European indentured servitude when it two main labor unions will grind the system to a halt with a general strike against planned austerity measures on September 26. Spain, however, can't wait, and is already out in the streets (video of today's protest can be found at BBC). From Al Jazeera: "Thousands of Spanish anti-austerity protesters have taken to the streets of Madrid to rally against government cuts aimed at cutting the public deficit. The demonstrators assembled in groups at noon on Saturday along the central streets of the capital city in a protest against spending cuts and tax rises. The developments came as Luis de Guindos, economy minister, said that Spain's borrowing costs still do not reflect the country's economic and fiscal adjustment, despite their recent easing." The key word uttered that makes this whole protest a moot point: "referendum" - silly Europeans don't seem to get quite yet that Democracy has been dead for decades, supplanted by kleptofascist globalization with just enough handouts for the lower and middle classes (usually in terms of welfare promises) to keep everyone happy. Actually make that silly Americans and Asians too.
The answer, of course, is yes: they are after all, economists (who somehow, with no real world experience, determine the daily fate of billions of productive and capital-allocation decisions every day). But it is one thing for everyone to discuss the obvious anecdotally by the water cooler. It is something else for this verbal heresy to be printed in a "serious" publication. Such as Reuters, which today asks if "the Federal Reserve has watched the U.S. recession and painfully slow recovery through rose-colored glasses?" And answers: "A look at the U.S. central bank's economic forecasts over the past five years suggest it has." It then explains: "Since October 2007, when the Fed's policy committee began giving quarterly predictions for GDP growth and the jobless rate, the central bank has downgraded its nearer-term forecasts almost two-and-a-half times as often as it upgraded them. The gap between Wall Street's expectations for 2012 growth and the Fed's own current view points to yet another downgrade on Thursday, when policymakers wrap up a two-day meeting that has world financial markets rapt." It concludes: "The trend of back-pedaling shows how poorly the central bank has fared at reading the economic tea leaves, with the Fed's optimism a likely factor in policy decisions through the Great Recession and its fallout, economists say." In summary: the world's most ebullient and permabullish forecasters, who incidentally happen to constantly be wrong in their desperate attempts to affect the only thing that matters: consumer and investor sentiment and confidence via the increasingly irrelevant myth that are asset prices, happen to run the monetary world and "determine" just what the future looks like. Needless to say, if the Fed's presidents were actually employed in the private sector, they would have been fired ages ago. Only in a fiat world do they not only keep their jobs, but keep on running the world.