S&P revises Japan's AA- credit rating outlook to negative. The culprit: the Japan earthquake that just as predicted, has become the scapegoat to excuse another quarter of "non-recurring" EPS misses. And while according to Wall Street the economic devastation is GDP positive, Japan may soon be a single A credit, which of course will send it 10 year bond trading with a 0 yield handle. From S&P: "The negative outlook signals that a downgrade is possible if Japan's public finances weaken further over the next two years in the absence of fiscal consolidation to offset them. We believe that uncertainty over the country's fiscal and economic outlook will lessen over the next six to 24 months. If the government's debt trajectory remains on its current course or begins to erode the nation's external position, the long- and short-term ratings could be lowered. If reconstruction costs place less burden on public finances than we expect–either because of lower outlays or increased revenues to cover them–and the government makes progress in strengthening Japan's fiscal profile, we could revise the outlook back to stable."
While the majority of the world was in a sleepy mood courtesy of closed core capital markets, events in Syria were anything but. From Reuters: "Syrian security forces killed almost 90 protesters on Friday, rights activists said, the bloodiest day in a month of escalating pro-democracy demonstrations against the rule of President Bashar al-Assad." Yet while many are quick to dismiss "yet another MENA revolution", Emad Mostaque, MENA strategist at UK's Religare Capital Markets begs to differ. "The market implications of a breakdown in Syria would be profound, but likely not be felt immediately as it doesn’t tick the boxes for proximity (such as Bahrain) or oil production (such as Libya). Iran’s influence would be curtailed, as would support for Hezbollah and Hamas." But the mittelspiel does not end there, and will likely have even greater consequences on Israel: "A third intifada between Israel and Palestine is already likely following a series of rather unpleasant attacks from both sides and a Syrian breakdown would heighten the chances of an Israeli attack on Lebanon, particularly given the success thus far of their new Iron Dome anti-ballistic system (even stops mortars)... A conflict like this would raise the chances of a follow up attack on Iranian nuclear facilities, particularly if Hezbollah’s retaliatory rocket capabilities were neutered." So it appears that the old bogeyman from the summer of 2010, Iran's nuclear power - the source of so much Stuxnet (of unknown origin( consternation, is about to come back front and center all over again. And when one factors in the ubiquitous presence of CIA operatives (flipflops on the ground) in the region (always disclosed well after the fact) one wonders just how staged this latest "revolution" truly is.
Faced with a large capital funding need in advance of a substantial bond redemption next week, Spain had no choice but to hike rates on today's auction of €3.37 billion in 10 and 13 Year bonds. Spain auctioned off €2.49 billion in April 2021 bonds at a yield 5.472% vs. Prev. 5.162% (5.5% interest) at a 2.1 bid/cover Prev. 1.81. it also sold €0.885 billion in 2024 bonds yielding a whopping 5.667% vs. 4.26% previously. The jump in yield caused the bid/cover to rise to 2.3 vs. 1.84 before. From Reuters: "Ten-year Spanish yields eased to 5.46 percent after the sale, having risen to around 5.55 percent since late last week -- just 20 basis points shy of the euro lifetime high. The surge in yields had sparked concern that Spain was being dragged back into the crosshairs of investors looking for the next candidate for an international bailout. The auction was seen as a test of whether Madrid was still seen as insulated from Portugal, Greece and Ireland, which have sought help. ""Spain's debt servicing costs have ratcheted higher and, while not yet providing any cause for alarm in terms of their outright levels, arguably have little in the way of headroom before such concerns might begin to take effect," said Rabobank strategist Richard McGuire. Traders said the 5.6 percent level in 10-year Spanish bonds was key, although yields have failed to break above that level on a sustained basis to date. "If that goes it could turn very nasty," one trader said." Elsewhere both Portuguese and Greek 10 Years hits fresh lifetime highs (low prices), printing 9.5% and 14.68%, even as an oblivious euro surged to a fresh 18 month high.
The reason that the 2008 debacle happened was very simple. The derivatives market, the largest, most leveraged market in the world. Today, the notional value of the derivatives sitting on US banks’s balance sheets is in the ballpark of $234 TRILLION. That's 16 times US GDP and more than four times WORLD GDP. Of this $234 trillion, 95% is controlled by just four banks. And they are... the TBTFs.
As Greece Sells 3 Month Debt At Record 4.1% Yield, CreditSights Explains The Negative Downstream Effects Of A Greek RestructuringSubmitted by Tyler Durden on 04/19/2011 07:29 -0400
Even as Greek debt hits new and improved daily record highs each and every day, with the Bund spread for 10 years hitting a ridiculous 1,140, the country continues to pretend it has capital markets access. Although in theory it still does. Even with a Greek restructuring now virtually assured, although as the CreditSights note below notes this would be a political suicide event, the country still managed to sell €1.625 billion of 3 month Bills at the stunning rate of 4.10. Reuters reports: "Greece sold more than 1.6 billion of three-month debt on Tuesday, raising funds to roll over 800 million euros ($1.14 billion) of maturing government paper later in the month, with yields rising above 4 percent. It was priced to yield 4.10 percent, up 25 basis points from an auction in February and around the rate of about 4.2 percent Greece pays on its EU/IMF bailout loans." Yet even with the "attractive" yield the Bid To Cover plunged from 5.08 to 3.45, as the only bidders were banks themselves propped up by the ECB and China: according to PDMA foreign investors accounted for 36% of the issue.
Live blogging the S&P conference call. The Q&A session will be critical. A rather interesting one: "Did the Federal Reserve Board's program of quantitative easing contribute to your decision to revise the outlook to negative? Answer - No. We find that risks of deflation in the U.S. have lessened and that there are few indications that inflation expectations have become untethered. Although it will be challenging to sequence the unwinding of these operations while raising policy interest rates once the recovery has become firmly rooted, we believe that the credibility of monetary policy will continue to be a credit strength for the U.S."
Would you qualify for a QRM? I think few will.
Contrary To Previous Lies, Greece May Not Be Able To Access Capital Markets After All; Likely To See 50% Creditor HaircutsSubmitted by Tyler Durden on 04/13/2011 14:48 -0400
Following the just completed teleprompted preaching of concentrated, yet inverse, truthiness, we find that yet another bankrupt country has in fact been lying about its economic prospects. Following the recent stunning disclosure out of Portugal that contrary to constat promises to the contrary the country was in fact, broke, now we get another admission, this time from a country already bankrupt. Per the FT: "Greece needs time to convince international investors about its reform programme and may not be able to return to financial markets next year as planned, its finance minister has admitted. Greece’s budget plans are fully funded this year but Athens will have to raise between €25bn-€30bn on financial markets in 2012 – a step that would mark the first stage of its international rehabilitation. But Mr Papaconstantinou suggested that goal was in doubt and the timetable would not become clearer until an EU-IMF agreement had been struck for Portugal, the latest victim in the eurozone debt crisis. “A judgment cannot be made before the summer and before Portugal closes its deal,” he said." So now it is trendy for one broke country to bash another broke country? In retrospect Greece should have a right of first refusal of bailout funding: after all it first (was forced to) disclose its bankruptcy. Surely there should be some brownie points for that. But all this may well be moot: Germany is now openly saying the need for a Greek restructuring is coming. Which means that senior creditor haircuts (supposedly up to 50-60%) are imminent.
Dr.Andrew Bogan is a managing member of Bogan Associates, LLC in Boston, Massachusetts. In an attempt to understand the relatively new but wildly popular Exchange Traded Funds (ETFs), Dr. Bogan did extensive research into the structures used by ETF operators, with a special focus on the potential risks that might arise should they be faced with large and sudden liquidations. Given that there are about 2,000 ETFs in existence, with assets totaling over $1 trillion, we thought it appropriate to find out what Dr. Bogan has learned in his research.
In addition to everything else, The Fed is now in charge of the VIX: "There is compelling evidence the Federal Reserve is artificially suppressing spot volatility through the quantitative easing program. Consider the chart below that shows how the VIX and the S&P 500 index performed on days when the Federal Reserve purchased US Treasury bonds as part of QE2 compared to days without Fed intervention (November 10,2010 to March 30, 2011). On days without debt purchases the VIX index was up +2.14%and the S&P 500 registered as light decline. On days with debt monetization the VIX dropped-0.45%and the S&P 500 index increased. What is even more convincing, the greater the amount of the debt monetization the larger the corresponding drop in volatility and increase in stock prices. During the 44 days on which the Federal Reserve purchased $7 billion+ in debt or more the VIX index dropped-0.57%and the S&P 500 gained0.21%! The connection between lower volatility and QE2 is undeniable. It is not hard to imagine that spot volatility would be much higher absent government intervention in markets. The artificially low volatility in markets may contribute to a dangerous build up in systemic risk."
Not even a full hour of trading can pass anymore without a fresh Chinese fraud getting exposed. Today's plunge target: China Biotics.
According to the latest Lundberg survey the average price for a gallon of gasoline in the United States has moved closer to $4, jumping more than 19 cents since mid-March to a level less than 10 percent below its all-time high. And it's not even peak driving season, which typically sees a seasonal jump of at least 15-20% from early spring levels. Per Reuters: " The Lundberg Survey said the national average price of self-serve, regular unleaded gas was $3.765 on Friday, up from $3.573 on March 18, and up 91.3 cents from $2.852 a year ago. Prices in several western U.S. cities are already above $4 per gallon, led by San Francisco at $4.13. Chicago was close behind at $4.11 a gallon, the survey said." What is not surprising is that demand saturation is starting to set in, meaning refinery margins are now going through the window: " The national average would have been higher had refiners and retailers not resisted passing on rising crude oil prices as customers grow less willing to pay what it takes to fill their gas tanks, analyst Trilby Lundberg said in an interview. "Demand has been falling at these prices," she said."
Intragovernmental debt holdings have been one of the more underreported topics during the last few economic cycles. This isn’t surprising. We’ve turned the federal debt argument into a legal, rather than financial or moral, debate where the fairness doctrine of universal applicability means any inconsistency of logic on the part renders the whole invalid. The result of this is the public grossly misunderstands the burden of proof to be the lack of controvertible evidence, and with it any hope of meaningful discourse is lost in the chicanes of grandiose political gestures. Arguments get boiled down into easy-to-swallow pills ready for mass consumption. We rally against illegal immigration without questioning who built our houses, and condemn illegal drug use while washing down an oxycodone with a highball of scotch. National debt is now far too high and government spending and waste far too pervasive. We must stop at nothing to rid ourselves of this indentured servitude... Oh, dear Faust, if it were only that easy.
With Portugal about to enter the warm embrace of the EFSF, even though nobody still knows just what the constantly updated and revised EFSF actually is, and the IMF (read America) is far more likely to end up footing the cost of the latest European bailout, it makes sense to find out just what the status of the latest incarnation of the EFSF is, or as Peter Tchir of TF Market Advisors calls it, the EFSF V1.5. This is especially important as in 14 hours, Jean Claude Trichet will most likely announce a 25 basis point increase in the ECB funds rate, even as more and more of the European periphery is struggling with solvency and liquidity access. That tightening by the Central Bank will either make life for the PIGS even more complicated or make their lock out from traditional capital markets complete. On the other hand the ECB has no choice with inflation in Europe surging, and Trichet forced to do something, anything. Therefore, courtesy of the EFSF, Europe will quite literally have its cake and eat it too: it will have a QE-like debt monetization instrument in the form of a €400 billion monster CDO, while at the same time it will be removing market liquidity: this is supposed to achieve one goal and one goal only - keep cheap liquidity flowing for the insolvent part of Europe and slow down growth in the healthy part, read Germany. This has never been tried before, and nobody is willing to risk their career with a statement that it will work. On the other hand, this set up provides some perspective on how Bernanke may proceed in the future: he may be forced to tighten even as he continues to monetize various pieces of debt. Although by the time such a "solution" is implemented, there will be enough precedent to determine if the latest European experiment has been a complete or just partial failure.
Marc Chandler, head of currency strategy at Brown Brothers, shares Zero Hedge's healthy dose of skepticism over two things: the pace of tightening in Europe, which the market is now taking for granted (the EURUSD hit 1.4315 earlier following rumors of Petrodollars now being recycled by purchasing European currency, not dollars: deja vu 2005 anyone?), and Fed tightening following a purported QE2 end. Summarizing: "our argument is two-fold. First, in Europe, we suspect the market is ahead of itself on the likely pace of ECB tightening. The market appears ripe for buy (the euro) on the “rumor” of an ECB rate hike and sells on the fact type of action. Second, similarly, the market appears too aggressive in pricing in Fed tightening after QEII is finished. The pendulum of market sentiment has swung too hard and we expect it to adjust in the weeks ahead." The problem is how to trade this: if the market is expecting too much tightening in both the EUR and USD, shouldn't the two offset? Then again, with the Yen carry trade now being put on en masse by everyone in the aftermath of the reserve-repo carry end, what happens with the two currencies may be quite irrelevant as everyone rushes to short the Yen. That said, there appears to be further EUR upside before the strong Europe trade finally fizzles: "Prudent investors should also consider what is potentially on the euro’s upside. An initial barrier is seen in the $1.4280-$1.4300 area. A break could signal another 1-2% euro rise to the $1.4450 and possibly $1.4600. To be sure, we suspect further euro appreciation in the face of tightening of monetary and fiscal policies will exacerbate the pressure in the periphery and act as further headwinds to European growth."