Greece

Get It While You Can

Investors are being hit from all sides now. We face the fiscal cliff and the quite real possibility that we will go over it, the debt ceiling and then we are assuaged by various tax and spending schemes. The stock market chugs along with their “What me worry” attitude. Just because we are now in a world drowning in apathy do not think that this will go on forever. The problems have become magnified by the slush of capital thrown about by the world’s central banks so that when the bough breaks; it will be a systemic break. It will flash right across the world and we will have another “Oh My God” moment which, as I peer into the future, may come in the next year.

Frontrunning: December 12

  • Here come the low margin products: Apple Tests Designs for TV (WSJ)
  • Obama and Republicans Trade Offers to Avert Fiscal Crisis (BBG)
  • Carney broaches dumping inflation target (FT)
  • Bernanke Critics Can’t Fight Bonds Showing No Inflation (BBG)
  • Corporate Taxes on Table in Cliff Talks (WSJ)
  • US business chiefs back tax rise (FT)
  • Greece Confident Bond Buyback Needed for Aid Succeeded (BBG)
  • New Faith in Europe's Banks (WSJ)
  • European Bank Sees Little Room for Rate Cuts (WSJ)
  • North Korea Claims Success in Rocket Launch (WSJ)

Overnight Sentiment: All About QE4EVA

Today is probably the first day in a while in which minute-by-minute rumors on the Fiscal Cliff will not be on the frontburner (with yet another late day rumor yesterday of an imminent deal turning out to be a dud, when it was reported that Obama's latest grand compromise was to lower his initial tax hike demand from $1.6 to $1.4 trillion, or still $600 billion more than last summer's negotiated number), with Ben Bernanke and QE4 taking center stage instead. By now it is a foregone conclusion that Ben will proceed with extending Twist as first predicted here, into an unsterilized bond buying operation, in effect confirming that there has been zero improvement in the economy, as another $1 trillion is about to be injected until the end of 2013, and more trillions after that. The good thing is that all pretense that the Fed cares about anything but the market is now gone. The bad thing is that the Fed will continue to take over the capital markets until it and the other central banks are the only traders remaining. The only question is whether the market, now well into massively overbought territory, will fizzle and snap back after Bernanke's news announcement, and will QE4EVA (as we believe QE3+1, aka QEternity-er, should be called) have been fully priced in by the time it was announced?

AVFMS's picture

Markets recovering quite nicely from the Italian shock. Add some better outlook figures and we’re all friends again. The Spanish bill auction was less punishing than could have been feared. US opening stronger. Everything else is all good again. Greek bonds stellar.

"(Ain't That) Good News" (Bunds 1,32% +2; Spain 5,45% -9; Stoxx 2623 +1,0%; EUR 1,299 +60)

Marc To Market's picture

Draghi's pledge to do what is necessary, within the ECB's mandate, to save the euro cleared reduced the extreme tail risk in the euro zone. Greece is about to receive a large dollop of aid so it can continue to keep its public sector creditors whole at the expense of domestic financial institutions. 

 

While the risk of a Grexit, which many thought was so imminent, has receded, euro skeptics have turned their attention to Spain and/or Italy.

Daily US Opening News And Market Re-Cap: December 11

In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.

Overnight Sentiment: ZEW Rises, Greek Buyback Scheduled To End

In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.

Presenting The Fund-tastic Four: Ireland, Greece, Spain And... The U.S.

Behold the fund-tastic four: Ireland, Greece, Spain and... the US? These are the four countries that in the past four years have accumulated the greatest deficit as a % of GDP (and yes, at just under 50%, the US is worse than Spain whose cumulative deficit has been over 40% of GDP), which in turn they have had to fund with what else: new debt.

AVFMS's picture

Surprisingly stable Risk. BTPs shot down in style. Italy? Down. Chinese data? Partially weak. Japan? In recession. French data? Weak. German data? Strong. Wow! Better have Friday’s PMI numbers really good. Analysts having to reinvent themselves once more as political experts to glare into a smoky crystal ball… Italian contagion contained, for now. Uh…Uh…!

"Uh...Uh - Bingo Bongo " (Bunds 1,30% unch; Spain 5,54% +9; Stoxx 2598 +0,0%; EUR 1,293 -20)

Marc To Market's picture

The Target2 imbalances caused much consternation earlier this year as some economists focused on them as either signs that a transfer union was a fact on the ground, or alternatively, as a sign of the pending costs to Germany, which German politicians fail to acknowledge. 

 

This Great Graphic comes from the Brussels Blog at the London School of Economics, who in turn got it from Place De Luxembourg

 

Much ink has been spilled trying to decipher the true meaning, but we know that the Target2 imbalances are nothing more or less than a reflection of the intra-euro area current account imbalances.  Before the crisis those imbalances were financed largely by the private sector.  That was part of the financial integration process whereby creditors would recycle their surpluses by primarily buying bond in the debt countries.

The Sheer Comedy Of Erroneous Economist GDP Forecasts In 13 Simple Charts

If anyone needs a definitive confirmation that when it comes to predicting the future, "expert economists" are not only completely clueless but always approach the future with a baseline of endless and unquestioned bullishness, which in the past decade has ended up being humiliatingly wrong, we present the following charts from Deutsche's Jim Reid, showing the jawdropping cumulative error rate in GDP forecasts in the past decade among those countries that make the headline news every day. What do the charts show: in the 9 years since the first forecast in October 2003, these 6 countries are 20.5% (Italy), 16.9% (Spain), 10.4% (France), 3.7% (Germany), 11.3% (UK), and 15.8% (US) behind on a cumulative basis what economists forecast back in 2003! This forecasting error has become more severe since the crisis begun. Since October 2007 (i.e. for the 5 years between 2008-2012) we are 16.4% behind cumulative forecasts in Italy, 18.1% in Spain, 10.6% in France, 7.0% in Germany, 14.7% in the UK and 10.6% in the US.

GGBs Soar As Buyback Backfires

Greece failed to persuade enough of its bondholders to complete the buyback that is so politically mandated by the Troika and so instead of admitting defeat, they have extended the deadline (til tomorrow at 12pm London). Current participation is around EUR26bn vs the EUR30bn target. The bottom line is that the buyback has created an upsurge in price for long- and short-dated GGBs as the 'Greater Fool' theory comes fully into play. Of course, with the Troika making the GGB (and its buyback) now the fulcrum security for Europe's 'break-up' risk, holding out for bigger and better offers seems the game for hedgies at least - there is always the Greatest Fool of EU leaders ready to step in. The paradox, of course, is that the more bonds are being bought the longer the buyback lingers on hopes Greece will keep on bending and keep rising the repurchase price; culminating with these being bought at par and replacing 30bn in old debt with 30bn in new debt. The buyback process has driven prices up dramatically - backfiring considerably on any real gains for the Greek people - but that's hardly the point eh?

So Many Hoaxes; So Little Time

The hoaxes remain and grow more cumbersome and obvious every day - and yet, the headline-reading machines and self-referentially-biased managers of stocks justify just one more BTFD episode. To wit, Mark Grant discusses the Greek buyback debacle with its political (and entirely not economic) mandate, noting "Mr. Draghi knows the truth and Ms. Lagarde knows the truth and their credibility is whacked once again;" Berlusconi's potential return in Italy and the hoax of any pretense of an entente cordiale re-emerging between north and south flies out the window; the 'tax the rich' hoax as a solution for years of profligate spending and the 'then vs us' meme that is increasingly spewed forth from DC; and the ultimate hoax of Bernanke's money printing morasse. Happy Monday.