So stepping aside from the biggest aggregator of private data for a few minutes, and focusing on what actually matters, here is Citigroup telling our European readers who have those fancy multi-colored bills in their wallets, that they are in deep trouble.
To summarize from Citi:
- There are many scenarios for a Greek exit; almost all of them are likely to be EUR negative for an extended period
- Some scenarios could be positive in equilibrium but the run-up to the new equilibrium could be nasty, brutal and long
- The positive scenarios for the euro involve aggressive reduction of tail risk; none of these seem likely
- It is unlikely that central banks busily substitute EUR for USD in their portfolios during periods of intense political uncertainty.
The failure to form a coalition government in Greece this weekend has prompted risk averse trade across the asset classes this morning with publications across Europe continuing to speculate about the potential exit of Greece from the Euro-area. As a result of this the Spanish 10yr yield touched 6.2% and the respective spreads over benchmark bunds in Spain and Italy have traded as wide as 30bps so far today. The knock on effect has been a sell-off in the financials which has seen the IBEX and FTSE MIB under perform in the equity markets with a relative safe-haven bid into the USD weighing on crude futures and precious metals. Spanish t-bill auctions and a variety of lines tapped out of Italy did stem the tide after selling around the top end of their indicative ranges but focus will remain solely on Greece given a lack of tier 1 data out of the US. Moving forward the next meeting of party heads in Greece is scheduled to commence at 1730BST, however, the head of the Syriza party has already indicated he will not be attending with the leader of the democratic left suggesting he is doubtful that a coalition can be formed.
European equity markets are seen trading in negative territory across the board at the midway point as the lack of a Greek governing coalition continues to weigh on sentiment. As such, an earlier Greek T-Bill auction passed by with an unsurprising increase in borrowing costs for the country. The concern over sovereign debt is clear elsewhere, as the spread between peripheral 10-year government bond yields remain wider against the German Bund. Very strong German Industrial Production data has failed to provide relief for the DAX index as concerns on the periphery outweigh the strength in the core. The monthly reading for March beat expectations, coming in at 2.8% against estimates of 0.8%. Overnight reports from the Spanish press concerning a government intervention in the lender Bankia have been denied by the Spanish Ministry, commenting that the aim for the company is a cleanup and restructuring, not a seizure. EU’s Almunia has commented on the developments, saying that it seems likely the bank will receive state aid.
There is hardly any more long-suffering investor in this market than anyone who has held the stock of that worst of breed American bank: Bank of Countrywide Lynch (BAC), which following the worst M&A transaction in history, namely its purchase of Countrywide, has found out that one does not pay billions for hundreds of billions in contingent liabilities, which will manifest themselves in tens of billions in putback claims against the underreserved bank over time. But all that is now known, grudgingly, after being pointed out here back in 2010, and when all is said and done, BofA will be finished, with the contingent liability pool spun off in a special purpose entity which files for bankruptcy, while the equity remaining at the successor entity will be worth pennies on the dollar. The question is what are the catalysts that get the bank there. Luckily, yesterday the bank itself highlighted what the key driver to put events in motion may be, after it disclosed that should the bank be downgraded, which it will be as Moody's has warned, it would need to post up to $6.2 billion in collateral: an amount which would cripple the bank's liquidity, and send its stock plunging as visions of AIG resurface, and concerns about a toxic downward spiral emerge.
Likely glowing from his glorious victory (h/t Trish Regan) over Krugman in Bloomberg's recent Paul vs Paul debate, Rep. Ron Paul destroys the central-planning arrogance of Bernanke and his ilk in an Op-Ed released by the FT today.
Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.
European equities are trading higher at the midway point, with modest risk appetite observed ahead of the ECB rate decision and subsequent press conference. A large volume of corporate earnings has helped European stocks from the open, with the large cap names such as SocGen and BMW posting a strong set of results. A smooth set of auctions from both Spain and France have helped tighten the European government 10-yr bond yield spreads against Germany. The French results saw a reduction in borrowing costs and solid demand across all lines, with the Spanish auction selling to the top of the indicative range, albeit with an increase in yields. Elsewhere, Services PMI data from the UK has disappointed to the downside, however the figure still indicates growth in the services sector with the figure coming in at 53.3. A breakdown in the data has shown that clients do remain cautious, but optimism is on an upward trend. Looking ahead in the session, market focus will be on Barcelona as ECB’s Draghi prepares for his press conference at 1330BST/0730CDT.
When we last discussed what now appears certain to be a TBAC announcement tomorrow that Floating Rate Treasurys are about to be launched by the US during the Treasury, we cautioned, using an analysis by the IMF's Singh, that "the US Treasury may be telegraphing to the world that it, or far more importantly, the TBAC, is quietly preparing for a surge in interest rates." We then continued that "What is also obvious is that if the TBAC is quietly shifting the market into preparation mode for "a steady (or rocky) rise in rates from near zero to a "neutral" fed funds rate of 400 bps and a "normal" 5 percent yield on 2 year U.S. Treasuries" as the IMF warns, then all hell is about to break loose in stocks, as by now everyone is aware that without the Fed liquidity, and not just liquidity, but "flow" or constant injection of liquidity, as opposed to merely "stock", VIX will explode, equities will implode, and all hell would break loose. It is not yet certain if the TBAC will proceed with implementing FRNs. Although, since the proposal came from the TBAC, read Goldman and JPM, and what Goldman and JPM want, they get, it is almost certain that in about a month, concurrent with the next quarterly refunding, America will slowly but surely proceed with adopting Floaters." Judging by the amount of press coverage this topic has received in the past week, the advent of FRNs is now a given. What is unclear is why: our take is that this is simply a move to make Treasurys more palatable to investors, simply to avoid capital losses when rates finally resume their inevitable surge higher. The flipside of course, is that the guaranteed coupon payments in a rising rate environment means that more cash will leave the Treasury to cover interest. It is this corollary to increasing demand that has made the "father" of Treasury floaters warn on Bloomberg that now is the worst possible time to being sales of FRN Treasurys.
When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell's work on optimum currency areas that provided much of the theoretical cover. However, the concept was flawed from the start.
Another day of ugly news out of Europe, with both macroeconomic and monetary data coming in to confirm that downward slope of the European forward trajectory (not to mention funny: below is a chart of Greek retail sales. Hardly any commentary is necessary). Yet despite some recently gravity in the EURUSD, for the time being the futures are trending flat to slightly down, perfectly ambivalent as to how will ease first as long as someone eases. Will this sustain, or will a disappointing Chicago PMI at 9:45 am once again send stocks first plunging then soaring on hope of imminent NEW QE? We will find out shortly. In the meantime, here is a recap of the overnight market action.
Forget Competing Theories … What Do the Facts Say about Quantitative Easing?
Krugmann fails to address even a single one of the arguments forwarded by Spitznagel. This is no surprise, as he has often demonstrated he does not even understand the arguments of the Austrians and moreover has frequently shown that his style of debate consists largely of attempts to knock down straw men. After appraising us of his economic ignorance (see the idea that time preferences can actually 'go negative' implied by his argument on the natural interest rate above), he finally closes a truly Orwellian screed by claiming that everybody who is critical of the Fed and the financial elite is guilty of being 'Orwellian'. As we often say, you really couldn't make this up.
Better late than never. All you need to read.
After rising in the overnight session following the overbought momentum chasing yesterday's hawkish tone by the Fed (don't ask), futures, European stocks, and sovereign spreads took a turn for the worse following the big miss in European confidence and sentiment, all of which posted material declines, and slid to two and a half year lows. And while the traditional upward stock levitation will resume once the European market close is in sight, only one thing can spoil the party and derail the most recent pseudo-hawkish statement out of the Fed: initial claims, which are expected to decline to 375-380,000 from 386,000 last week. Instead what will most likely happen is a print in the mid to upper 380,000s, while last week's number will be revised to a 390K+ print, allowing the media to once again declare that the number was an improvement week over week. In other words, SSDD.