France

We finally get to continue what we started in 2008. Becuase the TPTB insisted on kicking the can down the road, the resulting pain will be excruciatingly devastating versus simply horrible! Alas, once you get you short positions/puts/futures in before the inevitably ill-informed short ban, money can still be made. 

“Gear up!” That is what I say to you this morning. Open your closet door, drag out the flak jacket from 2009, lace up your boots, unlock your guns, bring out the ammo and get ready to go at it one more time because the placid fields of Verdun, long silent, finds the Germans and the French at it once again and we are all about to be dragged back into it; like it or not. There is quite serious business afoot and, just like in war, the political statements made are nothing more than propaganda to mislead the enemy and the enemy is YOU.

• Germany shifts, gives Spain more time on deficit (Reuters)
• Europe must prepare an emergency plan (FT)
• EU Spain reveals €100bn capital flight (FT)
• Spain’s Guindos says future of Euro at stake in Spain (Bloomberg)
• ECB, EU officials warn euro’s survival at risk (Reuters)
• China can ‘cope’ if Greece exits Euro, NDRC Researcher says (Bloomberg)
• Japan Warns Against Rising Yen (WSJ)
• Global stocks investors head for exits (FT)
• Hot Copper Shorts Burning Commodity Firms (Caixin)

Everyone knows that Europe is divided into the Periphery (aka the PIIGS), and the Core (aka the countries that are supposed to be safe). What everyone also knows, is that the core, naively represented by Germany and France, supposedly has homogeneous distribution of economic growth and prospects. That all changed last year, when France moved from being a AAA-rated country, to a fallen superduper angel following the Moody's downgrade to AA+. Yet nowhere is the glaring divergence between these two formerly comparable economies than in the two articles cited below, both from the same publication, and both from today.

The most significant event of yesterday was not the Spanish banking system unlocking the door to the horror chamber and clicking the melt-down button that it found on the wall but what happened at the European Union. Brussels turned, and looking Berlin squarely in the eye, it used impolite words and gestures and essentially said: "Stick it." Brussels has now called for Eurobonds, has called for the ESM to fund the European banks and it a sign of their new felt independence, has thrown all of this squarely in the face of Germany, the Netherlands, Finland et al who are providing the money. The game has changed. It will no longer be push and shove and muddle through but convictions and ideology that are in stark opposition so that surprises and inflamed statements will become the order of the day and not the exception. If it is to be either Germany for the Germans or Germany for the citizens of Athens, make no mistake in your thinking; Berlin will prevail regardless of the outlying costs to either the nation or to the future of the Union that theoretically governs Europe.

Gene Arensberg of the Got Gold Report says that the COT data “suggests that dips for gold and silver should be exceedingly well bid just ahead.  Indeed, the structure of the COT is about as bullish as we have seen it for silver futures.” The supply demand fundamentals remain very sound with gold demand expected to exceed supply again this year, according to the World Gold Council who have said that gold has bottomed or close to bottoming. Gold will extend annual gains for a 12th year as bullion is “near” a bottom and demand will keep exceeding mine output, according to the World Gold Council. Mine production will grow 3% this year from last year’s 2,800 metric tons, while demand may be unchanged or slightly lower from a record 4,400 tons, said Marcus Grubb, managing director of the WGC in an Bloomberg interview in Tokyo. Mine supplies will remain in a deficit “for a foreseeable future,” Grubb said.  Bullion is “near to the bottom at current prices, indicating gold will move back up again,” he said. Recycling has risen to make up for the gap between demand and mine output, he said.  “Some of the drivers of the increase in demand are structured, central banks for example, the rise of Chinese demand and the wealth increase in Asia, including India and China as well as smaller economies,” he said. Central banks have increased gold purchases on concern about the dollar, the euro and the sovereign debts, Grubb said. The banks’ net purchases last year were the most since 1964. In 2010, they turned to a net buyer for the first time in 15 years.

• Dublin in final push for EU treaty Yes vote (FT)
• Spain cries for help: is Berlin listening? (Reuters)
• Crisis draws squatters to Spain's empty buildings (Reuters)
• EU World Bank Chief Urges Euro Bonds (WSJ)
• but... EU: Current Plan Is Not To Let ESM Directly Recapitalize Banks (WSJ)
• Graff pulls Hong Kong IPO, latest victim of weak markets (Reuters) - was MS underwriter?
• EU Weighs Direct Aid to Banks as Antidote to Crisis (Bloomberg)
• Dewey's bankruptcy: Let the rumble begin (Dewey)
• More are cutting off Greek trade: Trade credit insurers balk at Greek risk (FT)
• Rosengren wants more Fed easing; Dudley, Fisher don't (Reuters)
• EU throws Spain two potential lifelines (Reuters)
• Fed's Bullard says more quantitative easing unlikely for now, warns on Europe (Reuters)

Empire Interrupted: Short-Selling Europe - How Far Will This Empire Fall?

Between headlines of Bankia's demise and the growing deposit outflows from Spanish banks, perhaps the market is doing its job. According to the EC's Stability Report, via UBS, one measure of bank sector capacity and efficiency (population per bank branch) shows Spain in a dismal worst place with the least efficiency (or highest over-capacity). Of course, we would suspect that whatever state-funded reach-around bailout the Spanish government comes up with next will not contain a 'revert staff/branch levels to European norms' provision - better to pay up for mis-allocation of capital. Nonetheless, the large number of local bank branches in countries like Germany, France, Italy and Portugal indicates a potential for further consolidation and restructuring there also.

Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative  The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."

Europe was a sea of red (apart from Bund prices) today. With yesterday's window-dressing done and overnight dismissal of Spain's hopeful ECB-workaround, European equity and credit markets were dismal, EURUSD ended under 1.2400, and 2Y Bunds at 0.00% yield. Financials underperformed in stocks and credit with senior bank spreads back up to 300bps and LTRO Stigma jumping 12bps to 177.5bps (near record wides). Spain and Italy dominated both single-name banking and non-banking credit and equity moves as well as sovereigns with Spanish 10Y now +45bps on the week and Italy +37bps (with Belgium, France, and Austria all around 9bps wider). All European equity indices are down for the week with Spain down almost 8%. EUR-USD 3Y basis swaps turned back lower (worse) back to -70bps - not a good sign for funding (especially in light of the drop in LTRO we noted yesterday). On a final note of despair, Spanish 2s10s is now flatter than at any time since LTRO1 - implying that any LTRO debt used to fund a real carry trade is now a loser.

We're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

You know the something is really, really wrong when the best rapper is a white guy, the best golfer is a black guy, the tallest guy in the NBA is Chinese, the Swiss hold the America's Cup, the Pope is German, Europe's central banker is Italian, France is accusing the U.S. of arrogance and Germany doesn't want to go to war.

Risk-averse sentiment dominated the session yet again as market participants continued to focus on Spain and speculated whether the country will soon be forced to seek some sort of monetary assistance. As a result, credit markets continued to deteriorate, with the EURUSD cross-currency basis-swaps under pressure, while the spread between Spanish and German benchmark bonds widened to a fresh Euro-era wide level. Less than impressive demand for the latest Italian debt issuance where 2017 was underbid by EUR 0.20, while the 2022 issue was underbid by EUR 0.30 also resulted in aggressive bond yield spread widening. However, as we head into the North American open, reports that the EU is willing to envisage direct ESM bank recapitalizations saw Bunds spike lower by around 33ticks and EUR/USD by 44pips to the upside. EU stocks made an impressive recovery, but remain in negative territory. Going forward, the second half of the session will see the release of latest housing data (pending home sales), as well as the weekly API report.

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