So we have the Greek debt crisis, the European Union budget problem and the European bank oversight issue and twenty-seven countries all wanting “this, that and the other” except “the other” is not that much fun unless Ms. Merkel surprises everyone by saying she is a little tired and pulling a Mae West and telling all twenty-seven nations that one will have to leave. The scenario is unlikely of course but then everyone involved is now playing the grand old game of “Work Around” where someone must pay and it is going to be anybody but them. “Not this little piggy,” says the IMF and “not this little piggy” says the ECB and “not this little piggy” says the European Union. This is all because no one wants the political winds to “blow their house down.”
Brazil’s aggressive efforts to weaken its currency by buying dollars – about $132 billion since the beginning of 2008 – have left the country with the sixth biggest international reserves in the world, about 80% of which is denominated in the US currency. However, recent turmoil in currency markets and concerns over the global financial crisis and fiat currencies in general has given Brazil’s authorities even more reason to diversify their holdings. It has frequently stated its intention to diversify assets and reduce its exposure to currency risk. Recent sharp weakness in Brazil’s real (see table) and systemic risks are leading central banks, including the BCB to diversify into gold. Brazil raised its gold holdings by 17.2 tonnes in October to 52.5 tonnes, the highest level since January 2001. The move comes on the back of Brazil’s 1.7 tonne increase in September, the country’s first significant gold purchase in a decade. However, there are concerns that the increase in the Brazilian central bank gold holdings' and tonnage are not all that they seem. It appears that the central bank in Brazil has not actually bought London Good Delivery bullion bars but rather fixed term gold deposits with bullion banks. Recently, the Brazilian central bank was asked about their gold reserves and about a section on gold on their website under 'Official Reserve Assets' lists gold as "gold (including gold deposit and, if appropriate, gold swapped)" with a footnote of "Includes available stock of financial gold plus time deposits."
First it was Greece, which Europe couldn't "resolve" on Monday night despite Juncker's vocal promises to the contrary, and was embarrassed into postponing until next Monday when everything will surely be fixed. Now, the time has come to delay the "resolution" of the EU budget, which was supposed to be implement last night, then a decision was delayed until today, and now every European government leader is saying a new meeting will likely be needed to resolve the budget impasse. As BBG summarizes, "Divisions between rich and poor countries flared over the European Union’s next seven-year budget, leading German Chancellor Angela Merkel to rule out an accord until the new year. France defended farm subsidies, Britain clung to a rebate and Denmark demanded its own refund, while countries in eastern and southern Europe said reduced financing for public-works projects would condemn their economies to lag behind the wealthier north. “Positions remain too far apart,” Merkel told reporters early today after the first session of a summit in Brussels. “Probably there will be no result at the end of this summit. There may be some progress but it is probable that we will need to meet again at a second stage." In other words the same old absolute and total chaos from the European Disunion we have all grown to love, in which the only solution each and every time is to delay reaching a solution, at least until after Merkel is reelected and in the meantime kicking the ever greater ball inventory in Draghi's court, where he too will promise to make everything better as long as he actually dosn't have to do anything.
Technically, a technical default may still be avoided, but it is now unlikely. As the following presentation from JPM's Vladimir Werning shows, the market has already decided what the "next most likely big picture step" will be. The big question is what the less than big picture next steps will be. And as the following flow chart of options to all "potentially" impaired parties shows, there are quite a few possible steps as the variety of causal permutations has suddenly exploded. For everyone who has gotten sick and tired with following the sovereign default story of one Greece and Spain, please welcome... Argentina, where things are about to get a whole lot more interesting.
That Greek suicide rates have exploded over the past two years is very much expected: after all, in order to preserve the sanctity of the failed monetary status quo, the Greek economy and its less than prosperous population have been sacrificed by the legacy elite and the wealthy. The socio-economic collapse has resulted in a total crash in economic production of goods and services, an nosebleed-inducing unemployment rate which increasing at a mindboggling 1% per month, and the rise of neo-nazism, with the Golden Dawn party now the third most popular political organization in the country (and rising rapidly). Sure enough, Kathimerini has confirmed that the" Greece's suicide rate increased by 37 percent between 2009 - 2011, To Pontiki newspaper reported quoting police data. The data, which was presented in Parliament by Public Order Minister Nikos Dendias following a request by SYRIZA MPs, showed that 3,124 suicides and attempted suicides have occurred in the debt-stricken country since 2009, the weekly newspaper said." As noted, no surprise in this very tragic headline on the day in which the world's still wealthiest nation gives gratitude for all its "wealth."
US closing fine, Asia closing fine. PMIs a tick better than expected. Fine. Spanish auction fine. Greek bonds fine. All fine. Slight Risk On. Fine. Fine, fine, fine… All is good. Free that Bird – or Eat it!
"Free Bird" (Bunds 1,43% +0; Spain 5,64% -6; Stoxx 2534 +0,6%; EUR 1,288 +60)
S&P 500 futures limped 3-4 points higher from last night's close helped by a surge in EURUSD (and its correlated-ness). The most liquid FX pair in the world jumped like a penny stock up to a 1.2899 high this morning (up at three-week highs) just shy of its 50DMA. Merkel sprinkling some hope of a somehow favorable EU budget accord, no news is good news for Greece, and a Spanish reacharound auction seemed the catalysts for hope but we note two significant shifts today from the very recent risk-on regime: 1) credit markets in Europe diverged flat to lower from equities today; and 2) US equity futures also did not follow the path of least resistance higher with FX carry. Whether this is simple illiquidity is unclear; but typically on thin days, everything correlates and levitates - today in European corporate and sovereign bonds and US equities, that was not the case... and 2Y Bunds end the day back at 0.00%
The Austrian central bank keeps most of its 280 metric tons of gold reserves in the United Kingdom, Vice Governor Wolfgang Duchatczek was quoted as saying in the finance committee of the country’s parliament today, according to Bloomberg. Answering lawmakers’ questions, Duchatczek said 80%, or 224.4 metric tons of the metal was stored in the U.K., 17% or 48.7 metric tons in Austria and 3% in Switzerland, according to a summary of a closed-door committee meeting provided by the parliament. The reserve has been unchanged since 2007, Duchatczek was quoted as saying. The central bank has earned 300 million euros ($385 million) over the last ten years by lending the gold, he said.
With America shut for Thanksgiving today, what was going to be an abysmal volume day, coupled with the usual any news is good news levitation following the lowest volume day of the year, will be even worse. Sure enough, the overnight session started off with a bang, when in the vacuum of night, a lift everything algo sent the EURUSD soaring by 40 pips higher on no news. With the entire risk complex firmly anchored to the EURUSD pair as the key driver, it pushed risk across the entire market well higher to set the early session mood with the very first trade. Followed light trading and a gradual drift lower which could not be offset even with a China HSBC Flash PMI print of 50.4, up from 49.5 in October, and the first 50+ print in 13 month (to accompany the new political regime: after all, the US is not the only nation where economic data mysteriouly levitate with key political events). This continued until about Europe open, when the monthly release of European PMIs came out, which once again were confusing to say the least with France posting the biggest and most surprising pick up, after its Manufacturing PMI rose from 43.7 to 44.7, on expectations of 44.0, while the Services PMI increased from 44.6 to 46.1, well above the expected 45.0 print. Germany was less exuberant with manufacturing rising from 45.5 to 46.2, although the Services PMI dropped from 48.4 to 48.0, missing expectations of 48.3, sending the series to its lowest in 41 months.
2012 was a tough year for some European government bond markets (Spain +100bps). Even with the rallies of the last few months, we remain dramatically wider than at the beginning and primary issuance is becoming increasingly reliant upon domestic bank reacharounds and/or ECB handouts. UBS expects 2013 to be similar in terms of gross supply to 2012 (around EUR 772bn) and aggregate net supply to fall slightly to EUR 208bn. However, these modest improvements overall (driven by drops in France, Germany, and Holland gross issuance) hide the biggest concern. Spain's gross (and net) issuance is likely to rise to EUR 124bn in 2013 (up 20% over 2012!) and Italy's net supply will rise notably next year (even with significant redemptions). Portugal, also faces a very significant increase in net supply in 2013.
The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund ProfitsSubmitted by Tyler Durden on 11/21/2012 15:06 -0400
What is the latest state of play that has the biggest support from all parties? It appears that the plan which is now back in play, is one which Greece had previously nixed, namely a partial Greek bond buyback of the private bonds at a discount to par: with numbers currently rumored anywhere between 25 cents and 50 cents on the euro. And even if Greece agrees with this proposal, there is a question of where Greece will get the money for this distressed debt buyback? After all Greece is completely broke, and any new cash would have to be in the form of loans, as not even the most nebulous interpretation of the Maastricht treaty would allow an equity investment, or to use the proper nomenclature, "a fiscal investment" into Greece. But the kicker is when one traces the use of funds. Because what is will happening is a payment not to Greece, obviously, but to its creditors: entities which for the most part are hedge funds, and which have bought up GGB2s in the mid teen levels as recently as 4 months ago (recall Dan Loeb's major position in Greek bonds).
Greece? Sorry, what’s with Greece? French downgrade. Unexpected, but then again not that much. So what? Fiscal Cliff? As no one speaks about it, it can be ignored. Risk? If it doesn’t fall, it has to rise.
"Rise To The Occasion" (Bunds 1,43% +2; Spain 5,7% -9; Stoxx 2518 +0,4%; EUR 1,282 +10)
Forget for one moment that the region is mired in a recession-to-depression state; wipe from memory the faltering capital base of the EFSF/ESM mechanisms; dismiss the overnight failure of a Greece agreement; ignore Schaeuble's dismissal of any joint-and-several liability; all you need to do is buy in Europe. Buy dips, buy rips, buy bad news, buy good news - s'all good. Sovereign debt spreads continue to compress on the week - Portugal -99bps and Spain -26bps for example (and GGBs soared on buyback hope). Equity and credit markets have just gone 'Birinyi-rule'-like from lower left to upper right this week without pause or contemplation. Whether EURUSD dips or rips, whether oil prices dip or rip; you buy risky stuff with both hands and feet. Meanwhile LTRO-encumbered bank spreads are underperforming and Swiss 2Y rates deteriorated today.
At the beginning of World War II, the term "shell shock" was banned by the British Army, though the phrase "postconcussional syndrome" was used to describe similar traumatic conditions. Pick whichever words you like but lately it seems to me that the world’s investors are in this state of economic reaction; shell shocked. Yes, France is downgraded, no decision about Greece, no truce in Gaza, Spain joining Alice in the rabbit hole, recession in Europe, America fiddling about with no resolution in sight and “ho hum, ho hum pass the cookies if you please.” The world’s central banks have manufactured the money, we have enough sloshing about to invest it, corporate earnings are down, well, nevermind, we have to do something with the stuff so we may as well put it somewhere and the investment world lulled into lethargy by all of the shells that have flown overhead and landed nowhere. It is like the investment world is on Xanax where the sea is perceived as dead calm, regardless of the eight foot swells. It all seems very reminiscent of the blase attitude in Spring 2008 to no-doc loans and CDO-cubeds.
The simple Bloomberg chart below summarizes the running insanity that is the ongoing Greek bailout. To date, the existing bailouts - already completely wasted - amount to well over 100% of Greek GDP.