Oil is battling hard with Greece to top the tail-risk-du-jour in financial markets recently. As Credit Suisse notes, the US economy so far seems to have shrugged it off as 'gasoline-sensitive' economic data for Feb have ignored the price rise for now. The extreme (warm) weather may be shielding the economy from the effect of these higher energy costs, as are consumers habituation with relatively high prices, and while CS remains more sanguine than us on energy's negative impulse they set forth some useful implications (rules-of-thumb) for what oil means for gas prices, headline inflation, real disposable income, and GDP growth pointing to $150 Brent as a critical threshold for the economy (or equivalently $4.50 retail gasoline prices). Of course, Fed policy precedents and implications are necessarily situational as the hope for this being a 'temporary' situation but the circular reaction to the consequences of any growth drag will merely exacerbate the situation. Was Bernanke's recent less unconditional dovishness an implicit effort to 'tighten' expectations and manage the war-premium out of oil prices?
If one chart was worth a thousand words, it is the difference in 'value' between strong and weak covenant bonds in Greece. Since we first brought this 'arbitrage' to the market's attention back in mid January, explaining the subordination impacts of the ECB and the legal implications of bonds issued under various law-regimes, the spread between English-Law (strong) and Greek-Law (weak) bonds has widened dramatically and today reaches a new high. Ignoring accrued interest for simplicity, investors are willing to pay over EUR46 for the strong UK protection relative to less than EUR20 for weak Greek protection for similar maturity bonds. It seems some bondholders are very much set not to partake of the Troika Greek's generous offer.
The problem with the latest hare-brained scheme in Europe, namely to organize Greek bondholders among the various institutions that for 2 years did everything in their power to dump said Greek bonds in the open market, is that said institutions end up having no Greek bonds in inventory just at the time when they are supposed to have Greek bonds, 24 hours ahead of the Greek PSI deadline. As a reminder, participation in the PSI has to be 75%, with a CAC threshold of 66%, and according to some interpretations even 50% of Greek bondholders voting for the PSI will be sufficient. Which means that with the PSI conclusion just around the corner, or 8 pm Athens time time tomorrow, the IIF, which is the consortium of entities that have every interest in perpetuating the status quo (i.e., do not have Europe ransom demands) and more than happy to "volunteer" for a 70%+ haircut, the IIF only has...
Markets appear to be tentatively recovering some of yesterday’s heavy losses, recording modest gains so far this morning. Comments made overnight by the German finance minister as well as senior officials from the Greek finance ministry may have mercifully given market participants some hope as they are confident the Greek PSI deal will be completed by the deadline tomorrow evening. The DAX index has underperformed the other European equity indices in recent trade following the release of some disappointing factory orders data for January, with markets expecting an expansion of 0.6%, however the reading came in at -2.7%, moving DAX stock futures into negative territory. WTI crude and Brent have also retraced some of their losses made earlier in the week following a drawdown in US gasoline inventories reported last night as well as a generally weak USD index in the FX markets today. Markets are awaiting US ADP employment change later in the session, as well as the weekly DOE oil inventories casting further light on the US energy stocks.
Following yesterday's broad risk off day, some positive sentiment has returned to markets despite ugly economic data from Germany, and an odd indefinite halt of trading of Greek bonds on the Milan Borse. As BAC notes, for the third straight day, Asian equity markets sold off, as investors are concerned about a Greece debt-swap deal. The regional MSCI Asia Pacific Index slid 0.9%, to finish at its lowest close in a month. The worst-performing market was the cyclical-sensitive Korean Kospi. Its economy, along with many other emerging Asia economies, is highly dependent on exports, so yesterday's data that showed that the Euro area's economy contracted in the fourth quarter added to the bad news. The Hang Seng also lost 0.9%, while the Shanghai Composite fell 0.7%. Japan's Nikkei lost 0.6% and the Indian Sensex fell 0.2%. In Europe, equities are rebounding from their biggest drop since November. Part of the rebound is investors returning to equities to buy the dip, while investors are also expecting a strong ADP employment report later in the day - at 8:15 am. In the aggregate, European equities are up 0.4%. At home, futures are pointing to a solid opening later today. The S&P 500 is set to open 0.5% higher. Elsewhere, German factory orders plunged -2.7% M/M on expectations, from a +1.6% December print, driven by a total collapse in orders from outside the Eurozone which imploded by 8.6% down from +12.1% in December (more shortly). And Europe is now bracing for a Greek default as the Milan Bourse earlier announced it has suspended Greek bonds from trading indefinitely - perhaps related to this is the fact that after trading in the triple digits yesterday, the Greek 1 Year just slid to an all time record 1114% - looks like there is not much value in that post-reorg Greek package offered to PSI volunteers. Finally, the deposit money held at the ECB barely budges, as it prints at €817 billion, down just modestly from yesterday's record print as Europe's banks brace for Thursday's PSI announcement with a big cash buffer.
As we all wait with baited breath for the events to play out in Greece, I thought it would be fun to have a look at some developments in the manufacturing sector in the Netherlands. I also got a kick out of all the stuff posted yesterday on the Chevy Volt.
Mitsubishi is pulling out of Colt and Smart Forfour manufacturing in Born, Limburg and is looking to sell its assets there. Wikipedia gives some background on Nedcar for those who are interested.
German leaders, particularly Merkel and Schäuble see the writing on the political wall: that both Greece and France are likely going to find themselves with new leadership that is pro-socialism, anti-austerity measures, and most certainly anti-taking orders from Germany. Thus, Germany must be aware (as the EU, IMF, and ECB are to some degree) that it is ultimately fighting a losing battle by participating in the bailouts. Indeed, Schäuble even went so far as to recently call Greece a “bottomless pit” where money is wasted (having just participated in Greek bailouts that exceed the entirety of Greece’s GDP, I have to admit he does have a point here). So while a “deal” may have officially been struck for Greece, there are deep underlying tensions that could bring proceedings to a crashing halt at any point.
So much for Venizelos' best, final, and most importantly only deal. From Reuters: "Most Greek pension funds holding Greek sovereign debt have agreed to take part in a bond exchange to ease the country's debt burden but four have refused to do so, a Greek official said on Tuesday. The pension funds have come under pressure from workers' unions worried the writedown on Greek debt holdings will affect the viability of their funds. About eight or nine funds have agreed to take part but pension funds for journalists, police, the self-employed and hotel workers - which hold Greek debt worth 2 billion euros - have refused, the official said."
As the situation in Greece plays out exactly as we expected, no matter how much confidence Merkel and Papademos believe they have in a successful PSI, we thought it worth looking at the implications of the holdouts being 'punished'. For sure, as Peter Tchir notes, confusion reigns supreme, though we are probably due for a 'China saves the world' rumor any moment now, because too many people enjoy the fact that we haven't had a 1% down day yet this year.
While we have noted the comparative weakness in European credit and sovereign markets, stocks had so far remained hopeful until today. Bloomberg's broad BE500 index of European stocks fell 2.8% today, its worse performance since mid-November when the recent rally began. This one-day drop has wiped out the gains of the last five weeks in stocks and credit is even worse as it continues to lead risk lower. European financial stocks are catching up to European credit's weakness (and we note US financial credit is really coming off today). Whether or not to BTFD is the question. We note that this sell-off is much more broad-based with stocks and credit dropping together (instead of just credit last time) and across asset classes the weakness is in CONTEXT with broad derisking. Furthermore, Sovereign credit stress re-emerged with Spain and Italy up 26bps and 18bps on the week as the former is now at almost 4 week wides. At some point, we wonder when MtM losses will hit all those aggressive Italian and Spanish banks who loaded up on chaotically procyclical carry trades?
Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.
The Chinese population is beginning to realize that the Government is losing control. People are willing to go along with a regime as long as they can “get by” under it. But as soon as it becomes impossible to survive… then situations like Wukan happen. There will be a LOT of Wukans in the coming months and years in China. Whether it’s by inflation or an economic contraction brought about by Europe’s collapse (Europe is China’s largest trading partner), civil unrest and “mass incidents” will be on the rise in the People’s Republic as the Chinese realize that the current system and the supposed wealth it will create for them are in fact a giant fraud.
Markets are exhibiting very risk-averse behaviour ahead of the US open, with European equity markets making heavy losses across the board with flows into the safer assets. This follows Greece dominating the headlines once again, with a report from the IIF warning of dangerous ramifications for Europe should Greece default. These reports got the European session off to a bad start, with losses made throughout the morning. Market talk of a delay in the Greek debt swap deal deadline has also been circulating, however this was swiftly denied by the Greek Debt Agency chief as well as the Greek Finance Ministry, although this failed to reassure markets and they continue on a downward trend into the US open. Eurozone GDP data released earlier in the session showed a contraction in the last quarter of 2011, although expected, this has reignited concerns of a recession in Europe. The ECB have recorded yet another record level of deposits from European banks in its overnight lending facility, with institutions depositing EUR 827.5bln on Monday night.
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