There was a time in 2011 when every European auction, particularly those in Spain and Italy, was followed with great interest due to a morbid fascination that it may well be their last. In 2012 this time has come much faster than last year. Earlier Italy sold a total of €4.5 billion in 3, 7and 8 year bonds which was at the top end of the range of expected issuance. The problem was in the unsustainable yields this debt sold for:
- €3 billion in 2015 bonds, B/C 1.59 vs 1.52 in May 14, yield soared to 5.30% vs 3.91% a month ago
- €627 million in 2019 bonds, B/C dropped from 2.27 on April 27 to 1.99; yield soared from 5.21% to 6.10%
- €873 million in 2020 bonds, B/C dropped from 2.08% on May 14 to 1.66%, yield soared from 5.33% to 6.13%
We were wondering how long Europe's insolvent, and very much scorned, banks would take the constant downgrade abuse (or reacquaintance with reality as we like to call it, but that is irrelevant) by the rating agencies without retorting. After all the same organizations that allowed bank "credit analysts" to pretend they did work for years, when they all merely fell in place in some lemming-like procession, patting each other on the back, pocketing record bonus after record bonus and praising groupthink encapsulated by the made up letters AAA, are now largely non-grata first in Europe, and soon, following the imminent downgrade of American banks, in the US as well. It appears that the response is finally coming. Sky News reports that "some of Europe's largest banks are intensifying discussions about a move to reduce their co-operation with the big three credit ratings agencies amid widespread dissatisfaction with their decision-making." After all, when all they do is downgrade, as opposed to the old standby, upgrade, who needs them. In fact, why not just shut their mouths entirely. Sadly, this is precisely what is on the horizon.
On the surface, the overnight Spanish bond auction, in which the country sold a tiny €2.1 billion of 2, 4 and 10 year bonds was a success, simply because it wasn't a failure. Anywhere below the surface and things get fishy. The Treasury sold €638 million of a 2-year bond, €825 million of a four-year bond and €611 million of a benchmark 10-year bond. And while the bid-to-cover ratios were higher than at recent auctions, with the 2012, 2014 and 2022 bonds covered 4.3, 2.6 and 3.3 times respectively, so were the yields: the 2014 bond was issued at a yield of 4.335 percent, the 2016 bond at 5.353 percent and the 2022 bond at 6.044 percent, a lower price than the 6.14 percent the same maturity bond trades at in the secondary market. In other words, Spain is back to using the same tricks it did back in the fall when bonds would magically price well over 10 bps inside of fair value. Just don't ask why. More notably, as Bloomberg reminds us, this was the lowest amount allotted to a 10 year note since 2004. In other words Spain sold the bare minimum of the longer-bond just to keep up with appearances: an amount likely recycled by its broke banks, which scrambled to get the last remaining LTRO cash and to show just how strong the demand for the country's debt is. In fact as Nicholas Spiro of Spiro Sovereign said, "If it wasn't for its banks' continued support at auctions, Spain would be unable to sell its debt. Right now confidence in Spain is at an all-time low." Either way, the good news is that according to Spain it has now covered 58% of its borrowing needs for 2012. the bad news: 42% remains uncovered. Especially in the aftermath of an EU announcement that not only has it not received an aid request from Spain, but that there is no EU rescue plan for Spanish banks. Europe has now completely lost the script and is making up day by day.
Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly.
The failure to form a coalition government in Greece this weekend has prompted risk averse trade across the asset classes this morning with publications across Europe continuing to speculate about the potential exit of Greece from the Euro-area. As a result of this the Spanish 10yr yield touched 6.2% and the respective spreads over benchmark bunds in Spain and Italy have traded as wide as 30bps so far today. The knock on effect has been a sell-off in the financials which has seen the IBEX and FTSE MIB under perform in the equity markets with a relative safe-haven bid into the USD weighing on crude futures and precious metals. Spanish t-bill auctions and a variety of lines tapped out of Italy did stem the tide after selling around the top end of their indicative ranges but focus will remain solely on Greece given a lack of tier 1 data out of the US. Moving forward the next meeting of party heads in Greece is scheduled to commence at 1730BST, however, the head of the Syriza party has already indicated he will not be attending with the leader of the democratic left suggesting he is doubtful that a coalition can be formed.
Mixed Results As Spain Sells More Bonds Than Expected, But Pays Up As Yields Again Spike - Analyst ViewSubmitted by Tyler Durden on 05/03/2012 06:38 -0400
Traders were watching Spain cautiously this morning which at around 4 am Eastern sold €2.52 billion of three- and five-year government bonds, in its first bond auction since Standard & Poor's cut its sovereign rating by two notches last week. The results were mixed because while more than the maximum range of €2.5 billion was sold (on solid total demand of €8.07 billion) or €2.52 billion, Spain paid up for the privilege, with yields rising across the board, reaching just why of 5% for the 2017 bonds and more importantly pricing with tails to secondary market prices, confirming that the trend in rising yields at primary issuance is very much unsustainable. This in turn caused the EURUSD to get spooked and slide to overnight lows, a move not mimicked by broader equity futures which this morning are again in a world of their own, and now simply await to see if the Initial Claims number later will be far worse than expected in order to soar.
With a Labour Day market holiday across the continent, focus turns to the FTSE-100. The UK market is trading modestly higher with some strong earnings reports overnight lifting the index. Lloyds Group posted stronger than expected profits and reported confidence in the delivery of their financial guidance. The report has boosted Lloyds shares to become one of the top gainers of the day. Despite this, the financials sector is being held back from outperforming as Man Group fail to deliver on their sales figures, pushing their shares lower throughout the session. The only notable data release of the European session was UK Manufacturing PMI, coming in below expectations with a reading of 50.5 as manufacturing output was dampened across April by Eurozone weakness and contracting new orders. Following the release, GBP weakness was observed, with GBP/USD touching upon session lows. Pre-market, the RBA cut their cash target rate by 50BPS, a larger cut than expected. The board cited skittish market conditions and below trend output growth as the triggers for the rate cut. As such, AUD weakness is observed across the board and AUD/USD stops just short of breaking through 1.0300 to the downside. Looking ahead in the session, participants look toward US ISM Manufacturing for March due at 1500BST/0900CDT as the next key data release.
While Europe is still keeping up a facade that all is well in the aftermath of the Spanish downgrade, but far more importantly its sheer economic collapse as noted earlier, just so Italy could price €4.916 billion in two On The Run 5 and 10 year bond issues (compared to a target of €5 billion), the tension is there, as can be seen in a decidedly week Italian bond auction, which saw yields soar, Bids to Cover slide, and tails spike. Italy also sold less than the maximum in off the run 2016 and 2019 bonds. All in all, while the market may experience a brief recovery rally that Italy managed to sell anything at all (that was not a Bill of course - that gimmick always does the trick), the reality that these yields are not sustainable will slowly seep in within a few hours.
- Merkel Pushes Back Against Hollande Call to End Austerity Drive (Bloomberg)
- ECB's Draghi throws crisis ball back to governments (Reuters)
- Greek Bank Chief Warns of a Possible Euro Exit (WSJ)
- China’s Wen Says Economy Will Maintain Robust Expansion (Bloomberg)
- North Korea's nuclear test ready "soon" (Reuters)
- Hong Kong Peg Architect Says Convertible Yuan `Long Way Off’ (Bloomberg)
- Hollande seeks wider EU fiscal pact (FT)
- Gavyn Davies: Why UK GDP continues to lag the G7 (FT)
- U.S. Lost AAA on Danger of Liquidity Crisis, S&P’s Kraemer Says (Bloomberg)
Here is a recap of today's European bond issuance as well as the Wall Street "instaview" response to each
Eurozone periphery concerns continue to loom as Italian and Spanish spreads against the German 10yr remain elevated, but have come off their widest levels in recent trade amid some unconfirmed market talk of real money accounts buying Spanish paper. Despite the concerns in Europe, the major European bourses are trading higher with individual stocks news from over the weekend propping up indices with reports of intra-European M&A and a string of good news for mining stocks pushing up markets today. Some stock stories of note include the agreement of an offer between France’s GDF Suez and UK’s International Power for GBP 4.18 per share, and a speculated merger of BHP Billiton’s and Rio Tinto’s diamond units by private equity firm KKR. The financials sector, however, is showing the strain, as the 3m EUR basis swap moves sharply lower to -53.87 from approximately -50 on Friday, with particular underperformance noted in the French banking sector. The session so far has been very data-light, with Eurozone trade balance coming in slightly lower than expectations but markets remained unreactive to the release.
- With a 2 Year delay, both FT and WSJ start covering the shadow banking system. For our ongoing coverage for the past 2.5 years see here.
- Trouble in shipping turns ocean into scrapheap (Telegraph)
- First-Quarter Home Prices Down 20.7% in Capital (China Daily)
- Bernanke Says Banks Need Bigger Capital Buffer (Reuters)
- Monti’s Overhaul Can’t Stop Pain From Spain: Euro Credit (Bloomberg)
- Spain Confronts Crisis Threat as Rajoy Seeks Deficit Cuts (Bloomberg)
- Japan’s Noda Announces Anti-Deflation Talks as BOJ Sets Policy (Bloomberg)
- White House makes case for Buffett Rule (CNN)
- Cameron to Make Historic Myanmar Trip (FT)
- 'Time for Closer Ties' With India (China Daily)
Oh where to begin. The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480MM on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to "observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil." So who is exporting? Nobody knows, but everyone knows why the Aussie dollar plunged on the headline. The shock sent reverberations across Asian markets, which then spilled over into Europe. Things in Europe went from bad to worse, after Germany reported its February factory orders rose a modest 0.3% on expectations of a solid 1.5% rebound from the -1.8% drop in January. But the straw on the camel's back was Spain trying to raise €3.5 billion in bonds outside of the LTRO's maturity, where the results confirmed that it will be a long, hard summer for the Iberian country, which not only raised far less, or €2.6 billion, but the internals were quite atrocious, blowing up the entire Spanish bond curve, and sending Spanish CDS to the widest in over half a year.
- Greek PM does not rule out new bailout package (Reuters)
- Euro zone agrees temporary boost to rescue capacity (Reuters)
- Madrid Commits to Reforms Despite Strike (FT)
- China PBOC: To Keep Reasonable Social Financing, Prudent Monetary Policy In 2012 (WSJ)
- Germany Launches Strategy to Counter ECB Largesse (Telegraph)
- Iran Sanctions Fuel 'Junk for Oil' Barter With China, India (Bloomberg)
- BRICS Nations Threaten IMF Funding (FT)
- Bernanke Optimistic on Long-Term Economic Growth (AP)