Borrowing Costs

Update: sure enough "EU says accommodative ECB has little scope for more stimulus"

In a headline that is far less than meets the eye, we read the following:

• EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS
• EURO ZONE SHOULD MOVE TOWARDS BANKING UNION

As a reminder, this is the EU... not the ECB... and not Germany. The same EU which has for a while now been pushing for Germany to foot the bill. The same EU which without Germany's funding agreement, is a faceless zombie. Recall yesterday's Reuters story that made the rounds: EU proposes cross-border bank rescues. and which as Reuters admitted is "likely to upset some members, particularly Germany." Same here. As expected the record number of EUR shorts send the currency into the sky, but we expect it to come right back down once it is understood that Germany has yet to say anything on this plan.

All you need to read

While most of the early action today was driven by a baseless rumor that the ECB would announce some magical recapitalization plan that would put everything back into its normal (by this we mean somehow sustainable) place, the alleged time when Draghi would make such an announcement came and went... and nothing. Instead, the ECB, using the FT as its mouthpiece, came out late in the day, however not with news that Europhiles wanted to hear. As a reminder, as part of the proposed Bankia nationalization scheme, Spain would inject Spanish debt into the insolvent entity, thereby allowing it to pledge the debt for ECB repo cash. Or so the thinking went. This was, in effect, Spain's bluff. The ECB has just called it.

All you need to read and some more.

• JPMorgan dips into cookie jar to offset "London Whale" losses: firm has sold $25 billion to offset CIO losses (Reuters)
• Storied Law Firm Dewey Files Chapter 11 (WSJ)
• The European "Wire Run" - Southern Europeans wire cash to safer north (Reuters)
• Bankia Tapping Depositors for Bonds Leaves Spain on Bailout Hook (Bloomberg)
• Glitches halt new Goldman trade platform (FT) such as reporting prices and seeing trading spreads collapse?
• Japan, China To Launch Yen-Yuan Direct Trading June 1 (WSJ)
• Another fault line? Italy Quake Kills Nine in North of Country (Bloomberg) shortly following another Italian quake
• RIM Writedown Risked With $1 Billion Inventory (Bloomberg)
• China’s Wage Costs Threaten Foreign Investment, EU Chamber Says (Bloomberg)
• Dollar Scarce as Top-Quality Assets Shrink 42% (Bloomberg)

The US may be closed today but Europe sure is open. And while the general sentiment may be one of modest optimism in light of four highly meaningless Greek polls which fluctuate with a ferocious error rate on a daily basis, now showing New Democracy in the lead (and soon to show something totally different - after all Syriza had a 4 point leads as recently as Friday according to one of the polls), pushing equity futures higher, Spain has so far failed to benefit from either this transitory spike in optimism driven by record number of EUR shorts forced to cover (more below), with its yields touching a fresh record overnight, the 10 year hitting 6.50% and 450 bps in the spread to bunds, while re-re-nationalized Bankia, now with explicit ECB support plunging nearly 30% only to make up some of the losses and trade down 20% at last check. An earlier 2 year bond auction out of Italy did not help: the country raised the maximum €3.5 billion in zero coupon bonds, however the OID was high enough to send the yield soaring to 4.037% average compared to 3.355% just a month ago, while the Bid to Cover dropped from 1.80 to 1.66. In summary: Europe is walking on the edge right now, and the only thing preventing it from imploding this morning is some short covering as well as a furious statement out of Germany, which has to understand that its precious ECB is now directly funding nationalized banks: something Merkel and BUBA's Weidmann have said in the past is dealbreaker.

All you need to read.

A "failed state" — but Germany is still trying to save the euro, up to a point....

All yu need to read.

Maybe the real reason that the Treasury offered China direct access (thus cutting out the middleman and offering China cheaper access than ever) was precisely because China was selling, and because the Treasury was concerned about the effect on rates, and wanted to give China some incentive to keep buying. As Jon Huntsman noted in a 2010 cable leaked by Wikileaks, the PBOC has felt pressured to keep buying, and as various PBOC officials have hinted in recent months, China is actively seeking to convert out of treasuries and into gold. And that makes sense — treasuries are yielding ever deeper negative real rates. People holding treasuries are losing their purchasing power. No wonder the treasury is willing to cut Wall Street out of the deal. And it isn’t like the Treasury would have taken this move lightly — cutting Wall Street out of the equation is a slap in the face to Wall Street

The following chart from Dylan Grice does a good job of demonstrating, once and for all, what is going on in the bond market. And speaking of bond markets, a few hours ago the German debt agency announced that it will for the first time ever, issue zero coupon 2 year bonds, which as the name implies will pay zero cash interest. In other words, Germany, sick and tired of being the only good cash collateral in Europe, is gradually halting the payment of any cash interest on its paper. After all: why should it? Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke.

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.

All you need to read.

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.