Risk assets are not quite (yet) back to the ‘melt-up' of May but equity markets are trading in a confident mood after Bernanke caused sentiment to flip from glass ‘half empty' to ‘half full'. China Q2 GDP data did not derail price action as equity futures anticipate a positive start of the week. The semi-annual testimony of the Fed Chairman is typically a seminal event on the market calendar but do we dare say that the one coming up this week is a non-event following last week's message on policy accommodation? The VIX index dropped 7 points over the last three weeks of which 2 points alone came last Thursday and Friday as stocks roared to new highs and shrugged off the candid observation on the Chinese economy by finance minister Lou Jiwei. If a 6.5% growth rate is tolerable in the future, there is little doubt that commodities and the AUD have further to fall. Chinese GDP slowed from 7.7% to 7.5% according to data released overnight and prospects for the second half don't look much brighter after evidence of slowing credit growth. Data on Friday showed declines of narrow money from 11.3% yoy to 9.1% in May, with broad money growth slowing to 14% yoy. Non-bank credit and new foreign currency bank lending also weakened.
When Bloomberg blasts headlines like this: S&P FUTURES UP 1PT, AT SESSION HIGH, ERASE EARLIER 3.4PT DROP, you know Bernanke hasn't spoken in over 24 hours if a 4 point swing is headline worthy. That said, the exhausted S&P ramp is now going for the 6th consecutive session as all the losses since the June FOMC meeting have now been erased, the S&P is making constant all time highs, and seemingly the Fed's message on tapering and communication has been clarified. The message being that the Fed is tapering its monthly purchases but short-term rates aren't being lifted. Sadly, the market's first reaction was the right one but the herd of cats has once again been herded by the trading desk at Liberty 33.
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.
In one of a few early hints that Europe might surprise the world with its Cyprus bailout, on February 10th the Financial Times leaked the content of a secret EU memo. It reported that bank depositor haircuts were among three options being considered to reduce bailout costs. And the memo also warned ominously that “such drastic action could restart contagion in eurozone financial markets.” Clearly, policymakers decided to take their chances. And now we’re living through the contagion that the memo’s authors predicted. But what exactly does that mean? Sure, we can see volatility in asset prices, but how long will it last? Some pundits say it’ll blow over like a late afternoon shower on an otherwise sunny day. I disagree. I’ll suggest there’s more to it than rising market volatility and that we should take a closer look at the meaning of contagion. I’ll argue there are three different types at work today: vanilla contagion, latent contagion and stealth contagion. And when you add up the three effects, Cyprus will have a bigger global impact than many expect.
A successful entrepeneur's take on the European sitaution...
Commenting on the incredible circle-jerk that Europe (sovereign-to-banking-system) has become, the outspoken UKIP MEP Nigel Farage exclaimed to FOX Business in this best-ever-rant clip that "The whole thing is a giant Ponzi scheme, isn't it?" Goaded somewhat by the interviewer's questions citing Barroso's intimation that the US is to blame for Europe's problems, Farage opines that "Barroso is a deluded idiot" and a communist who supported Chairman Mao. The contagion effect from the US financial crisis did have impacts on Europe, there is no doubt, but as the frustrated Farage notes: the reason the Euro is in the state it is in is that they put together a completely artificial currency with countries that never fitted together on top of which was added a regulatory cost burden through excess regulation on the environment and employment legislation that is driving parts of Europe towards being a third world country; "America, you are not to blame". The clip goes on to discuss the circular bailout fantasy, the taxpayer burden leading to a democratic revolution, and at the end of the day "this whole thing is going bust" as the likable libertarian notes that European leaders believe that "well-educated bureaucrats know better than we the poor peasants how best our lives should be led" which is the same path that led to the economic and social crash-and-burn in the Soviet Union.
Spain marks the fourth bailout during this Euro Zone debt crisis saga, after Ireland, Portugal and Greece, and may need more aid, while Italy is looking good to be the fifth bailout candidate
... Which is not to say that the other usual suspects are fine, they aren't: Spain's 10 year just hit a record 6.72%, a spike of nearly 30 bps on the day, and just shy of the apocalyptic 7.00%, at which point everyone will quietly move to the bomb shelter (and JPM is not helping things, saying the total Spanish bank bailout may hit €350 billion even as the Spanish bailout fund has just €4 billion left in it...), even as the 2 Year rises above 5% for the first time since December 2011 on some rapid curve inversion moves. No: today the market simply had one of those epiphanies where it sat in front of a map, and finally remembered that last year as part of the continental contagion spread that forced the November 30 coordinated global central bank intervention, Italy was at the forefront. Sure enough, 2011 is once again becoming 2012. Today's catalyst was an Italian sale of €5.73 billion in 5 and 10 year bonds, less than the maximum €6.25, where €3.391 billion of the 5 Year was sold at a 5.66% yield, compared to 4.86% on April 27, and the BTC of 1.35 vs 1.34. But the optical killer was the €2.341 billion in 10 Years which priced above 6% for the first time in a long while, coming at 6.03% compared to 5.84% in April, and a dropping BTC of 1.40 compared to 1.48 before. The result is a blow out in the entire Italian curve, with the 10 Year point widening by 28 bps, and sending Italian CDS wider by 21 bps to 543 bps. In other words: welcome to the party Italy. You have been missed.
Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives.
Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.
Germany Begins Quantifying The Cost Of A Greek Exit (And Discovers Contingent Liabilities Are All Too Real)Submitted by Tyler Durden on 05/12/2012 11:28 -0500
First came the rhetorical jawboning, where following announcements by Fitch, European politicians, and finally Germany's finance minister, the scene was set to prepare the general public that despite protests to the contrary, a Greek exit from the euro would not really be quite the apocalypse imagined. Now comes the actual quantification part, whereby in addition to adding numbers and determining what the further sunk costs to a Greek bailout will be (hint: much, much greater than anyone can conceive), Germany has finally understood what we have been warning for over a year: that contingent liabilities become very real liabilities when a threshold event forces the transition from "off balance sheet" to on, and the piper has to be paid. According to an analysis released hours ago in Wirtschafts Woche, Germany "would only absorb losses of 76.6 billion euros in Germany. This amount results from bilateral aid loans, the liability of Germany's share in credit rescue fund EFSF, Germany's share of losses of the European Central Bank (ECB) and the German share of liability to the credit support of the International Monetary Fund (IMF)."
The market appears to be topping out after we were all told that this is one of those can't miss you better jump on board now the train is leaving the station moments that you will certainly regret.
It's all good, and no doubt this can only mean one thing. It's clear sailing ahead. But not so fast.
The top can best be described as a period of discussion. Is the economy sputtering? Will the European contagion effect the US economy? Will the fiscal cliff be realized? And of course, the #1 topic of discussion and the only one that matters: will there be QE3?
Even as we are drowned by yet another avalanche of lies and cow feces that the Greek private sector bailout negotiation is going well, despite everyone knowing very well by now that various hedge funds like Saba, York and CapeView are holding the entire process hostage and the culmination will be a CDS trigger, the underlying dynamics of the Greek "bailout" once again resurface, which are and always have been all about Germany and the tensions within its various political parties. And unfortunately at this point things are looking quite bad for Greece. As Bloomberg reports, "Greece will have to exit the euro area as it struggles under a mountain of debt, unable to regain its competitiveness without having its own currency to devalue, a senior lawmaker in Chancellor Angela Merkel’s party said. The comments by Michael Fuchs, the deputy floor leader for Merkel’s Christian Democratic Union, contradict the chancellor’s stance in a sign of the domestic headwinds she faces in leading Europe’s efforts to keep the 17-member euro area intact. With the debt crisis into its third year, Merkel is due to join CDU lawmakers at a two-day policy meeting beginning tomorrow in the northern German city of Kiel." The truth hurts: "For Greece, “the problem is not whether they are capable of paying their loans -- they will not, not at all, never." So, why are we optimistic on Europe again? Oh yes, because European banks issued tons of equity and now have a capital buffer to the imminent hurricane that will be unleashed once the Greek restructuring finally enters freefall mode and the country leaves the Eurozone. No wait, that's not right: only UniCredit tried that and its stock collapsed by 50%. Must be something else then - oh yes, Italy successfully sold debt maturing in one year!
The possibility of a Euro breakup is looming larger than ever. Forecast by ING sees an immediate fall in individual currencies in 2012, and GDP output falls ranging from 7% in Germany to 13% in Greece.