Relevant news (better late than...)
Volatility continued across European equities in early trade supported by a short-selling ban imposed by countries including France, Italy, Spain and Belgium. However, prices came under pressure following news that Chancellor Merkel may not be able to keep her promise of getting changes to the EFSF before end-September, together with lower than expected GDP data from France. As the session progressed, appetite for risk emerged as the dominant theme as equities moved higher, led by financials, whereas the Eurozone 10-year government bond yield spreads tightened across the board, with aggressive narrowing witnessed in the French/German spread. This was supported by market talk of the ECB buying in the Italian and Spanish government debts, with the 10-year yield in Italy falling below 5% and France below the 3% level. Elsewhere, CHF weakened across the board partly on the back of market talk that the SNB was conducting currency swap operations via small Swiss corporate banks. Also, a weakening USD-Index supported EUR/USD and GBP/USD, whereas the latter received further boost following an upward revision to the UK's construction output data, which is said to add 0.1% to country's Q2 GDP. The release of Project Merlin data showing an enhanced lending by UK banks in Q2 as compared to Q1 helped the GBP currency further. Moving into the North American open, markets look ahead to key economic data from the US in the form of retail sales, business inventories, and University of Michigan confidence report. Fed's Dudley and President Obama are also scheduled to speak later in the session.
While the president makes yet more speeches about how the time to leave the past behind us is now (while newly scapegoating Europe for the economic catastrophe), the sniping war against S&P continues, only this time with a twist. According to the FT, the SEC has asked the rating agency to disclose who at the company knew about the downgrade, "as part of a preliminary look into potential insider trading." The funny thing is that while the answer will be everyone, even in that case the SEC will end up doing nothing as it always 'does' (pun intended), and the whole process is nothing but a sham to humiliate the rating agency. "The inquiry was made by the SEC’s examination staff, which has oversight of credit rating firms, one person familiar with the matter said. The exam staff can make referrals to the SEC’s enforcement division if it believes any laws have been violated, but the inquiry might not result in a referral....Proving someone leaked information about the downgrade, or traded ahead of it, could be challenging. Many traders anticipated the downgrade and bets could occur across numerous securities or currencies without inside information. In a traditional insider trading case, there is often a more predictable correlation between a company’s stock price and a particular development." Of course the next question is what is the null hypothesis: that leakees would buy or sell bonds based on the info? Because the natural response would be to dump treasuries even as the real outcome was a plunge in equities and a scramble to safe one-ply paper. So is PIMCO about to be charged with insder trading for having sold 10 Years even though in reality the spread tightened by a record 60 bps in the following week?
Relevant news by www.thetrader.se
- To Reassure Markets, Europe Needs Bigger Bailout Fund, Says Geithner (WSJ)
- European Central Bank acts to prop up debt of Italy, Spain (WaPo)
- ECB bond intervention set to spur debate (FT)
- Debt Issuers Brace for Impact from Downgrade (Reuters)
- G-7 Seeks to Calm Investor Fear After World Stock Selloff(Bloomberg)
- S&P Affirming U.S. Short-Term Debt Ratings May Keep Money Markets in Check (Bloomberg)
- New Rules in Game of Sovereign Debt Risk (FT)
- Japan Would Sell Yen to Dissuade Speculators (Bloomberg)
- China Sells Japan Medium-, Long-Term Debt 1st Time in 9 Months (Business Week)
While the impact on Treasurys as a result of the downgrade may be limited (after all the other side of the Atlantic is about as ugly as the US, so where could $8 trillion in marketable USTs practically go... at least for now), the same may not be said about the far smaller, $2.9 trillion municipal market, which is about to see a blanket downgrade tomorrow as S&P warned on Friday night, and of which Matt Fabian of Municipal Market Advisors earlier said that "There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence." The scary bit: "Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about." Indeed, with futures already trading, and most risk assets experiencing a brief knee jerk reaction on a global coordinated PPT response by the G-7, there is still little clear understanding of what will really happen to not only the traditional system but to shadow liabilities such as repos and money markets. And munis are just one part of all of this. So what will happen if tomorrow the muni market starts unravellling, as Whitney, among so many others, has predicted? For that we turn to JP Morgan's Peter DeGroot for some quick observations.
Around the world, starting Monday, all eyes are on the markets. The tension is palpable. The uncertainty is ample. And anger is heavy in the air. As predicted, the debt ceiling deal was not only NOT enough to assuage economic fears, it actually exacerbated them, triggering a flight from the Dow, and creating a decisive opportunity for ratings agency S&P to cut the once perfect U.S. credit rating from AAA to AA+. At Alt-Market, we often talk about points of balance, and how certain moments in history become highly visible indicators of balance lost. If we pay close attention, and know what we are looking for, these moments can be recognized, allowing us time to shield ourselves from the explosion and the resulting financial shrapnel. The past two weeks have culminated into one of these defining events that tell us the tide has fully turned, and something new and dangerous is just over the horizon. The question now is; what should we expect? The nature of the credit downgrade situation is not necessarily “unprecedented” in history, but it is surely unprecedented on the scale we see currently in the U.S. It is difficult to predict how exactly the investment world will react. Some consequences, though, are probable, if not inevitable. Let’s examine the events we are likely to see in the coming weeks as well as the coming months, as nations attempt to adjust to America’s final plunge…
Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA.
As The World Turns, The Contagion Spreads: I Can Hear The Pitter-Patter Of Feet Running From European Banks - Are YOU Ready ForSubmitted by Reggie Middleton on 08/05/2011 11:30 -0500
More evidence of European bank runs as both banks AND sovereign domicile states start to pull liquidity at the same time that said banks are trying to pull liqiodity from their customers. How do you think this will end?
Relevant news by www.thetrader.se
It is premature to say something like "If U.S. debt is downgraded, will anyone care?" thinking the markets should have priced all this in, because there will be consequences to pay.
Moody's Sells Out As Usual: Leaves US At AAA, Puts Outlook On Negative Not To Appear Overly Corrupt Or IncompetentSubmitted by Tyler Durden on 08/02/2011 17:00 -0500
As that uber-sycophant, Mark Zandi (who has yet to be right about one thing in his entire career), put it so well a few days ago, when discussing the deal that will bring the US to 110% debt/GDP within a year "I'm not in the rating agency... but listening to what they have to say, I think this would be sufficient... but this is substantive and should avoid a big downgrade." Sure enough, the former Moody's top "economist" certainly knows his own, and as of several minutes ago Moody's has confirmed it will not touch America's AAA rating. However, it will put the rating outlook on negative. That should shut them up. Full report of how to sell out like the best of them is attached. And the kicker: "Moody's has also confirmed the Aaa ratings of certain US government-guaranteed bonds issued by the governments of Israel and Egypt, which had been on review for possible downgrade as a result of the review of the US government's bond rating." Well at least America's direct protectorate states (as opposed to its indirect ones) can sleep well.
Relevant News by www.thetrader.se
Debt Deal Puts U.S. on Austerity Path as Economy Falters (Bloomberg)
Short-term US Funding Highly Restricted (FT)
China Halts Offshore Yuan Borrowing to Tighten Policy (Reuters)
Fed Confronts Limited Tools to Stir Economy (Hilsenrath)
Australia Leaves Key Rate Unchanged (WSJ)
N.Z. Second-Quarter Wages Rise at Faster Pace, Adding to Inflation Signs (Bloomberg)
China’s Expanding Naval Reach Worries Japan Over Routing Warship Presence (Bloomberg)
Geithner Says Debt-Limit Deal Good for Economy in the Long Term (BusinessWeek)
UK borrowing costs brush close to record low (FT)