Yesterday's rumor that global central banks may, just may, respond to a Greek exit from the Eurozone, which would send the world into tailspin sent stocks higher. Because without said rumor nobody, repeat nobody would possibly imagine that there could be a coordinated response to an event that would send global risk down over 20%. Today, it gets even dumber:
- ECB MAJORITY SAID TO OVERCOME CONCERN ON CUTTING DEPOSIT RATE.
- ECB POLICY MAKERS HAVE OVERCOME A KEY CONCERN ABOUT TAKING THE BECHMARK RATE BELOW 1%
At least yesterday the source was some discredited G-20 member. Now it appears that the media has a front-row seat to ECB deliberations. Fascinating. And what is even more fascinating is that the market continues to fall for these rumors "breaking news" and rumors time after time after time...
Perhaps all of this has gone on for so long, or perhaps because we keep hearing the cries of “Wolf” each week for the last several years, that the markets are impervious to any new cries for help. An odd kind of complacency seems to have set in where nothing matters too much and everything will just be fine. Yesterday’s equity market rally based upon the central banks providing liquidity is just what any serious observer would expect and yet the stock markets rallied as if this was something out of the ordinary which clearly demonstrates either the market’s lack of understanding of real world events or it represents the hype of some hedge fund that was tossed around in the media like it was a new product at Apple. In any event, don’t wake up on Monday morning and think that Greece will have left the Eurozone and returned to the Drachma. That is not how things will play out. In the final analysis it probably all comes down to what price the Germans are willing to pay for dominating Europe.
If yesterday's global intervention rumor was a feeler of market response to the next latest and greatest intervention then we may have big problems: the EURUSD is now unchanged, Spanish bond yields are now unchanged, stocks are doing their quad witching thing which means all stops will be taken out before the day is done, but most importantly the euphoria such an announcement would have created before is now completely gone (as per The Diminishing Returns Of Central Planning). What is actually worse, and how the G-20 rumor may have backfired, is that as we pointed out, suddenly there has been a significant shift in expectations: if Syriza does not have an outright win on Sunday then there will be no immediate central bank response, which was predicted to be "if needed". Remember: for this market, when all that matters is the next 10 minutes of trading, this is the only relevant metric. Which means that suddenly from a Risk On event, Syriza's loss has become Risk Off! Of course, the reality is that Sunday will almost certainly be a replay of the last election, where the parliament continues to be empty, and Greece continues to be "Belgium" - recall from May 3, "Previewing The First Of Many Greek Elections." In either case, as others have suggested holding on to positions over the weekend may not be the most prudent thing.
More than 80 institutions with collective assets under management of over $8 trillion attended the event and were polled regarding macroeconomic matters and their outlook for various asset classes. Gold is seen as one of the assets likely to outperform again in 2012 due to risks posed to the euro and longer term risks for the dollar. Those polled by UBS were also positive on emerging market debt. Both asset classes, gold and emerging market debt, were the top pick of 22.5% of the assembly – thereby accounting for 45% of the votes. On gold’s role as a reserve asset, the importance reserve managers attach to the yellow metal has slipped back to 2009 levels, with about 14% having the opinion that it will be the most important reserve currency in 25 years. This marks a decline from the past two years’ surveys wherein over 20% viewed gold to be the most important reserve currency.
The announcement by the UK Treasury and BoE to take co-ordinated steps to boost credit and with the central bank re-activating its emergency liquidity facility has resulted in a sharp move higher in UK fixed income futures. GBP swaps are now pricing in a cut of 25bps in the base rate by the end of this year and following on from Goldman Sachs, analysts at Barclays and BNP Paribas are now calling for an increase in QE next month. The new measures have seen the likes of Lloyds Banking Group (+4.3%) and RBS (+7.0%) outperform the more moderate gains observed in their European counterparts. Meanwhile in Europe the focus remains on the possibility of co-ordinated action from the major central banks. However, it would seem more realistic that any new measures will likely come after the Greek election results are known and once ministers have conducted their G20 meetings. Given that there is an EU level conference call this afternoon scheduled for 1500BST the likelihood of rumours seem high but as the wires have indicated already these conversations are purely based upon co-ordination ahead of the meeting which is usual practice. The yields in Spain and Italy have been a lot calmer so far with the 10yr in Spain at 6.88%, off the uncomfortable test of 7% seen yesterday.
- Greece is Relevant: Central Banks Warn Greek-Led Euro Stress Threatens World (Bloomberg)
- Greece is very Relevant: World Economies Prepare for Panic After Greek Polls (Reuters)
- ECB's Draghi flags euro risks, spurs rate cut talk (Reuters)
- And as usual, beggars can be choosers... Hollande Urges Common Euro Debt, Greater ECB Role (Reuters)
- Wait and flee - Electoral uncertainty sends the economy into suspended animation (Economist)
- The EU Smiled While Spain’s Banks Cooked the Books (Bloomberg)
- Osborne’s £100bn Plan for UK Economy (FT)
- Two Cheers for Britain’s Bank Reform Plans: Martin Wolf (FT)
- BOJ Holds Policy Ahead of Greek Vote with Eye on Global Markets (Bloomberg)
- China Hits Back at U.S. Criticisms at WTO (Reuters)
With Greece preparing to go to the polls this weekend for the second time in a little over a month, BAML's credit strategy group addresses three potential outcomes of the election on a number of asset classes. While they do have concerns about all of the possible post-election scenarios they do not necessarily lead to an exit from the eurozone, at least not in the very short term, and some of them could even lead to an initial market rally that could temporarily strengthen the euro. Their analysis focuses on the near-term (four-week) market implications and assumes that neither Spain nor Italy will have a sovereign crisis during this time frame, though those concerns will likely persist. The three scenarios are: Base case (high probability): election result allows Greece to form a pro-EU government; limited European policy response; Bull case (low probability): election result means Greece does not form a pro-EU government; substantial ECB & European policy response; and Bear case (low to medium probability): election result means Greece does not form a pro-EU government; limited ECB/ European policy response. The one-month asset price response for rates, credit, equities, FX & commodities are detailed below.
For all the news out of Spain: tumbling sovereign bonds, bailed out banking sector, there really is just one driver of everything: the same one many have been warning about for years: the artificially inflated valuation of the Spanish housing sector. Because the only reason why banks are suddenly finding that their assets are worth much less than previously expected, is because it is now impossible for local banks to keep the real-estate "assets" on their books at marks-to-model (read par) as the bulk of them have long since become impaired, delinquent or outright defaulted.... Which is the worst news for holders of Spanish bonds, now that the entire banking sector is effectively pari passu with the sovereign debt courtesy of priming ESM debt: recall that every incremental dollar, or in this case, euro, of bank capital deficiency will be one more priming bailout euro behind. Effectively there is now an inverse relationship between the Spanish housing sector and the country's sovereign bonds. And for those who are still naively are clutching to Spanish bonds, even as they tumble to all time lows (that's the local law, as opposed to the legal arbitrage trade we have been promoting and which today is making even more money), we have some bad news: that perpetual of optimists, S&P, just said that the Spanish housing sector has, wait for it, another 25% to drop!
This means a comparable drop in store for Spanish bonds and all the related securities in Europe, which courtesy of the bailout are all now daisy-chained.
Here Comes The Mother Of All Rumors: G-20 Sources Say Central Banks Preparing For Coordinated ActionSubmitted by Tyler Durden on 06/14/2012 15:08 -0400
Update 1: and here comes the revision:
- G20 SOURCES SAY CENTRAL BANKS PREPARING FOR COORDINATED ACTION AFTER THE GREEK ELECTIONS IF NEEDED
So... if Syriza wins, and Greece leave the Eurozone, there will be a response? Unpossible.
* * *
And the mother of all rumors strikes:
- G20 SOURCES SAY CENTRAL BANKS PREPARING FOR COORDINATED ACTION AFTER THE GREEK ELECTIONS
One small problem. Central banks NEVER indicate in advance what they will do. This is merely a desperation attempt to ramp markets into the close, and sucker even more retail into stocks ahead of Sunday. Now we wait for the denial because otherwise some pathetic G-20 leak just made central banks everywhere irrelevant and obsolete: remember what happened to Jamie Dimon when in March he front-ran the Fed...
Has the Spanish bank bailout set a precedent for all other insolvent EMU member countries to follow? Of course. The only question is when is the stigmata of demanding a bailout (which Europe now has no choice but to grant courtesy of set precedent, be it via ESM or otherwise) less relevant than national pride, than preserving one's banking sector, and preferably preempting the kinds of bank runs that pushed Spain to demand a bailout in the first place. For one small Eurozone member country the answer may be if not now, then very soon. Slovenia's Dnevnik asks a simple question: "How serious is the situation of Slovenian Finance - are we on the way of Spain?" The answer, in not so many words: very likely yes.
Tony Robbins warned about the risk of dollar devaluation and spoke about the opportunities in gold
"The most important election this weekend may have nothing to do with the Eurozone - at least directly. The election in Egypt may change the face of the Middle East. The implications to Israel, Iran and Saudi Arabia are enormous. Will the most populous Arab nation become a theocracy? This will be some weekend."
My stop loss over the next 4-6 weeks while I expect this risk-on phase to play out is simple: a weekly S&P close below 1267 would for me be very bearish and likely change things. But as mentioned, instead I expect to see markets struggle with headlines and volatility, but ultimately climb the wall of worry up towards 1400, perhaps 1450 S&P....
And then?... My forecast for this extremely bearish risk-off phase over late Q3 and Q4 is that the S&P500 trades below the low of last year, perhaps as low as 1000 +/- 20. The iTraxx Crossover index should over that period widen from around 550/600bp (my end July/early August risk-on target) out all the way to certainly 800bp, and more likely closer to 1000bp. And we should see core bond yields rally hard – I expect 10yr UST yields to rally from my 2.35%/2.45% end July or early August target, all the way down to 1.5%, maybe even lower.