European Central Bank
The last month has seen a considerable amount of the post-LTRO gains in Italian and Spanish Sovereign and Financial credit markets (and stocks for the latter) given back. The stigma priced into LTRO-encumbered banks has also surged to post LTRO record wides - more than double its best levels now. This is hardly surprising - while the LTRO was nothing but a thinly-veiled QE printfest, it is the action that was taken with that newly printed money that has created dramatially more contagion risk and sovereign-financial dependence as an unintended consequence. The collosal (relative and absolute) size of the reach-around Sarkozy carry-trade buying in local sovereign debt for Italy and even more so Spain is highlighted dramatically in these 3 charts for BNP, most notably the increase in banks' holdings of sovereign debt compared to their share of Eurozone sovereign debt - i.e. the banks in Italy, and more so Spain, are hugely more exposed to their sovereign's performance and with Spain's massive budget cuts - a vicious cycle of austerity to growth-compression to credit-contraction to Greece (firewall or not) is leaking into their bond markets, even with an active ECB doing SMP although inflation-constrained from LTRO3 perhaps.
Following Greek Bond Humiliation, Europe's Biggest Equity Investor Is Slashing Its European ExposureSubmitted by Tyler Durden on 03/30/2012 09:20 -0400
Remember this from September 2010? "Norway, which has amassed the world’s second-biggest sovereign wealth fund, says Greece won’t default on its debts. “The point is, do you expect these guys to default?” said Harvinder Sian, senior fixed-income strategist at Royal Bank of Scotland Group Plc, in an interview. “Norway has taken the view that they will not. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default.” Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity."... Uhm, Big Oops. Needless to say, this stupidity was roundly mocked by Zero Hedge at the time. Yet we can only applaud the fact that unlike other European investors (read primarily Italian banks) which are merely sinking ever deeper into the quicksand by dodecatupling down on pyramid scheme assets, the Norwegian SWF finally "plans to sharply reduce its European exposure while raising investments in emerging markets and Asia-Pacific, the finance ministry said on Friday." While we ridiculed their stupidity in 2010, we applaud Norway's prudence in this case, as unlike other insolvent European entities, the crude-rich country is not falling for the latest round of central planning bullshit, and is finally acting as a fiduciary agent. "We're reducing our European exposure because we see that economic development in the global economy is changing and this should also be reflected in our investment strategy," Johnsen said. "Most likely we'll have to sell some assets in Europe." Remember: in game theory he who defects first, defects best. We expect to see many more funds openly declaring they will commence dumping European assets, all of which are buoyed 100% artificially by the ECB, and US taxpayers, shortly.
European markets got off to a bad start following early reports that the Greek PM has not ruled out a further aid package for the country, however European cash equities are now trading higher as US participants come to market. Markets have been reacting to the announcement from EU’s Juncker that the Eurogroup has agreed upon Eurozone bailout funds of EUR 800bln. Elsewhere in the session, FPC member Clark commented that the FPC should not aim to stimulate credit growth in the UK, adding that direct intervention in the mortgage market is too politically volatile, but may be considered in the coming years. Following the reports, GBP/USD spiked lower around 15 pips, however it remains in positive territory, moving above the 1.6000 level in recent trade. In terms of data, the Eurozone CPI estimate for March came in just above expectations at 2.6%, 0.1% above the 2.5% consensus. The market reaction to this data, however, was relatively muted as participants await Eurogroup commentary. Looking ahead in the session, participants await commentary on the Spanish budget, US Personal Spending and Canadian GDP.
As noted earlier, futures this morning are higher despite a plethora of economic misses (and despite 57% of March US data missing as per DB), simply on regurgitated headlines of an "expanded" European €7/800 billion bailout fund. There is one problem with this: the headlines are all wrong, as none apparently have taken the time to do the math. Which, courtesy of think tank OpenEurope, is as follows: "The real amount of cash that is still available to back stop struggling states, should it come to that, is only around €500bn." Of course, that would hardly be headline inspiring: recall that that is simply the full size of the ESM as is. But even that number will hardly ever be attained, and the ECB will have to step in long before Europe needs anything close to a full drawdown: "The problem here is that if it’s too big and terrible to ever be used, it’s likely that it won’t ever be used. Even jittery markets will be able to figure out that a large fund which would damage French and German credit ratings if ever extended will never be fully tapped. So clearly some circular logic at play. And let's not forget that it’s still far too small to save Italy and Spain should if worse come to worse." Circular logic? Check. Another check kiting scheme? Check. Spain and Italy still out in the cold? Check. Conclusion -> buy EURUSD, and thus the ES, which has now recoupled with every uptick in the pair, but not downtick.
- Greek PM does not rule out new bailout package (Reuters)
- Euro zone agrees temporary boost to rescue capacity (Reuters)
- Madrid Commits to Reforms Despite Strike (FT)
- China PBOC: To Keep Reasonable Social Financing, Prudent Monetary Policy In 2012 (WSJ)
- Germany Launches Strategy to Counter ECB Largesse (Telegraph)
- Iran Sanctions Fuel 'Junk for Oil' Barter With China, India (Bloomberg)
- BRICS Nations Threaten IMF Funding (FT)
- Bernanke Optimistic on Long-Term Economic Growth (AP)
A bevy of economic data misses overnight, including German and UK retail sales, Japan industrial production, UK consumer confidence, and a European economy which is overheating more than expected (2.6% vs 2.5% exp, although with $10/gas this is hardly surprising), and futures are naturally green. The reason: the broken record that is the European FinMins who are now redirecting attention from the slowly fading LTRO impact to the good old standby EFSFESM, which according to a statement by de Jager has now been agreed on at €800 billion, lower than last week's preliminary expectation for €940 billion in joint firepower. That this is nothing but a headline grabber is as we have noted before, as there is much doublecounting, capital allocation to and by the PIIGS as well as funding already assigned. It will likely take stocks some time before the realization dawns that this is not new capital and liquidity entering the markets, unlike QE on either side of the Atlantic, while the amount is largely inadequate to fill the multi-trillion liquidity shortfall, let alone "solvency" of European sovereigns and banks. So for now enjoy the greenness all around.
Much of the fiscal and monetary insanity that has come out of the EU over the last two years can be summated by one of my central global theses: politics determine Europe's policies, not economics. And Europe now appears to be shifting towards a more leftist/ anti-austerity measure political environment. If this shift is cemented in the coming Greek, French, and Irish elections/ referendums, then things could get ugly in the Eurozone VERY quickly.
European equity prices fell for the third day in a row and pulled back near six week lows, breaking below the 50DMA for the first time since it crossed above on 1/16. Today's drop was the largest in three weeks as Italian banks were halted, plunging their most in over three months and back at levels not seen since mid January. Most Italian banks are down 9-11% in March but BMPS is down over 24% as Italian sovereign yields start to come unhinged again (ironically a day after Monti announced the crisis was over). 10Y BTPs broke back below last Friday's lows (the moment the ECB stepped in last time to save the day) up over 5.2% yield - catching up to CDS levels (and ITA spreads are +23bps on the week). Spain is also weak (+15bps on the week) and heading for 3 month highs in its yields. Since the CDS roll (March 20th), the sell-off has accelerated with equity and credit markets tracking lower together (as opposed to the last few months where credit underperforms and then snaps back higher). We discussed the LTRO Stigma trade earlier and that has continued sliding notably wider today as LTRO-encumbered banks hugely underperform. We suspect hedges (sovereign credit, financial credit, and equity) placed early in the year for the 3/20 Greece event (among other things) have run off and now managers are reducing risk in real terms (selling) as opposed to replacing hedges which is why the uber-supported markets of Italy and Spain are losing the battle now. Lastly, Europe's VIX is its richest relative to US VIX since the rally began, jumping dramatically today.
The last time the S&P 500 rallied in such a serene manner as the current trend was March 1987 - a few months before monetary imbalances came undone and crashed in October 1987. Further, JPMorgan's Michael Cembalest notes that prior to WWII, the previous rally as calm and uninterrupted as this was in November 1928 - a year before the crash. The JPM CIO points out how the Fed's ZIRP has created a 'Portfolio Rebalancing Channel' (PRC) transmission mechanism from cheap credit to wealth effect through spending and profits (that has worked as planned) but the last leg on this mechanism has not functioned so well. Payroll growth has been underwhelming and the housing market remains stunted - leaving the real economy remaining fragile despite the market's appearance. The Fed remains committed to driving this 'channel' but, as Cembalest points out this could easily be derailed by inflation, a bond market revolt towards funding our 'Ecuadorean' deficits, or the pending fiscal cliff legislated for 2013. "So the PRC keeps chugging along, until the Fed's job is done (and Goldilocks continues), or something breaks." History does not rhyme; ninety years ago, money-printing led to calamity in Germany, and eventually, to disaster in Europe. Today, money-printing is designed to save it.
When I first attempted to find a more realistic debt to GDP ratio for Spain, Belgium, Italy et al I did it on a stand-alone basis; no inclusion of their European liabilities. When I approached Germany, given their size and importance in the EU, I focused upon their liabilities to the European Union. Several institutions have since asked me to consider the total liabilities for each country as every nation in the European Union has national debts as well as debts for their percentage of ownership for the EU and the European Central Bank. Using the combination of national liabilities and any nation’s percentage of EU/ECB liabilities one then could ascertain a final and complete picture of a real debt to GDP number that, unlike the Eurostat data, would be inclusive of sovereign guarantees, contingent liabilities and their responsibilities to the EU and the ECB. This schematic then would tell each of us what a given country actually owed so the total reality could be assessed for judgment. Given that Spain is currently in focus and that nowhere that I have ever seen has there been an accurate national debt coupled with Spain’s European debt schematic; I have decided to provide you one.
The Greek central bank - whatever that is: some local subsidiary of the ECB? - released February corporate and household deposit data. The chart below explains it all: back to May 2006 levels and the run shows no sign of abating And remember Venizelos' sage February words of advice? "VENIZELOS SAYS NOW IS THE TIME FOR DEPOSITS TO RETURN TO BANKS"... that didn't work too well.
Austerity hasn’t worked for countries. So far the austerity path has made situations worse, rather than better. Without stimulus, economies have seen their problems compound. So now virtually everyone is against the idea that austerity is helpful. That takes us back to spending. Maybe it’s just me, but spending is what got us into this mess in the first place. If spending worked so well and was so easy we wouldn’t have a sovereign debt crisis in the first place. Virtually every country was spending, yet deficits grew and economies shrank. Why is there any faith that spending now will work? Are we so good at targeting specific things that will really, truly, work? Not a chance. Spending will ensure debt grows just as fast, make the problem even bigger in the end, but will make people slightly happier in the near term. So if austerity doesn’t work, and spending hasn’t worked, what will? PSI, or Default, or Restructuring.
- Obama budget defeated 414-0 (Washington Times) yes, the Democrats too...
- German Central Banker: ECB Loans Only Buy Time (AP)
- Baku grants Israel use of its air bases (Jerusalem Times)
- Japan May Understate Deflation, Hampering BOJ, Economist Says (Bloomberg)
- BRICS flay West over IMF reform, monetary policy (Reuters)
- Five Portugal Lenders Downgraded by Moody’s (Bloomberg)
- SEC Registration Captures More Hedge Fund Advisers (Bloomberg)
- EU Nears One-Year Boost in Rescue Fund to $1.3 Trillion (Bloomberg)
- Consumers plot emergency oil release as Saudi decries high prices (Reuters)
- Japan Plans to Draft Stopgap Budget for First Time in 14 Years (Bloomberg)
Is A Bad NFP Print Days Away - Goldman Says Warm Weather Added 70,000-100,000 Jobs; Now It's Payback TimeSubmitted by Tyler Durden on 03/28/2012 21:20 -0400
Three months ago, this site was the first to discuss the impact of abnormally high temperatures on "better than expected" economic data, which the mainstream media in its perpetual permabullish bias attributed to economic "growth", and not even to $1.3 trillion in ECB liquidity, which today even the ECB's Constancio admitted was nothing but QE: "The purpose of the European Central Bank's two three-year longer-term refinancing operations was to address banks' short-term funding issues and "nothing else." "The sole aim of the LTRO was to cater to the funding stress of euro area banks in general," Constancio said at a colloquium on macro-prudential regulation here. "It never crossed our minds that we were solving the sovereign debt crisis" with these measures. Hence QE, albeit masked by worthless collateral exchange to make the naive Germans believe the ECB was not outright printing money. It was. Now that the 'economy', and by that we mean the stock market of course, is finally turning over, the topic of the weather will start being far more prominently featured, as there will have to be a validation to unleash QE at either the April or the June FOMC meeting (something which the Chairman hinted at on Monday, and which Bill Gross has been saying for months). Why blame it on the weather of course. It is in this context that we show the latest Goldman Sachs economic outlook piece from Zach Pandl who now states that "unseasonably warm temperatures have lifted the level of nonfarm payrolls by 70,000-100,000 as of February." Call it erroneous seasonal adjustments (as we have for the past two months), call it a trigger happy BLS, or just call it people leaving their home more than if there was 6 feet of snow outside, the point is that now up to 100,000 jobs will have to be "given back." Which in turn means that next Friday's NFP forecast of +213K may just end up being as low as 113K, with the print coming just in time for the Chairman to commence warming up the printers, and soon enough to where more QE will give the president the sufficient bounce in stocks he needs to mask the debt ceiling breach in September.