The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring. With the growing influence of SCDS, questions arose about whether speculative use of SCDS contracts could be destabilizing - and this caused regulators to ban non-hedge-related protection buying. The prohibition is based on the view that, in extreme market conditions, such short selling could push sovereign bond prices into a downward spiral, which would lead to disorderly markets and systemic risks, and hence sharply raise the issuance costs of the underlying sovereigns. The IMF's empirical results do not support many of the negative perceptions about SCDS. In particular, spreads of both SCDS and sovereign bonds reflect economic fundamentals, and other relevant market factors, in a similar fashion. Relative to bond spreads, SCDS spreads tend to reveal new information more rapidly during periods of stress, admittedly with overshoots one way or the other. Given the current apparent 'stability' in many nations' bond market spreads, the chart below suggests an alternative way of judging what the credit market thinks - the volume of protection bid - and in this case some interesting names emerge.
Last week we laid out the apparent 'blueprint' from the EU Commission for every other country with a banking system in which non-performing loans are soaring. With Mario Draghi's patsy in place at the Cypriot Central Bank, happy to hand over the nation's gold at the beck-and-call of the EU leaders - despite the Cypriot President's disgust at the 'coercion' of the new deal chiding the central bank for "catching the government by surprise," it now seems, as this Cyprus Mail op-ed explains, that the people of this nation are ready for change - real change, , otherwise, "we may wake up one morning and find the country has completely shut down, crushed under the weight of its mounting, unserviceable debts with no banks, businesses or services able to operate."
The Central Bank of Cyprus (CBC) said last night however that selling the island’s gold had not been on the table. “Such an issue has not been raised, has not been discussed and is not being discussed at the moment,” CBC spokeswoman Aliki Stylianou said. Stylianou added that sale of the gold was a matter handled exclusively by the CBC board. A spokesperson for the Central Bank of Cyprus told the Cyprus News Agency (CNA) that reports of the $523 million gold sale have not been, “raised, discussed or debated,” with the bank’s board of directors. The Central Bank of Cyprus denied the gold sale after reports on Reuters said that Cyprus officials had agreed to sell around 400 million euros in excess gold reserves to contribute to the country's bailout. Stylianou, the spokesperson for the Central Bank of Cyprus said that the gold sale was, “never discussed nor are there current or future plans to do so on the board’s agenda.” Reuters based its story on a draft report from the European Commission which assessed the nation's financing needs.
Highlights from the pre-leaked minutes, which are along the lines of previous releases, in which there is a hint of an early QE tapering and halt by year end. Here is the key excerpt:
In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year.
Algos unsure if this means QE may be ending. The answer, of course, is no. But the Fed is doing everything to gauge market impact to increasingly more ominous and harsh language.
Economic conditions in Italy are as depressed as they've been since the end of WWII, the economy is still contracting, Italy's banks are in terrible shape, private sector lending is very strained, and the ECB's policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. Bersani, the top vote getter in the recent elections, has been unable to form a government, new elections this year are increasingiy likely, and recent polling suggests a dead heat among Bersani, Berlusconi and the anti-establishment party of Grillo. Surge in support for Grillo creates a risk because it is not entirely clear what he would do if he came to power. He has made a clear promise to put the euro to a vote and generally thinks that the European fiscal and monetary policies have been a bad deal for Italy. Obviously, an attempt to revisit those policies by a country as systemically important as Italy could destabilize things fast, and the risk of a radical outcome is growing. And over the past few months there are indications of that risk getting priced in and putting pressure on Italy, particularly on its banking system. Italian banking spreads are up; there has been a modest pullback in banks' wholesale funding, a modest increase in their ECB borrowing and no bond issuance.
Witches Brew: Part 4 - Reality Bites
- The Specter of Things to Come
The road to ruin is on plain display and the playbook is easily seen at this juncture. Let’s take a look at how that playbook will unfold. Contrary to popular outrage of the SOLUTION being IMPOSED it is the correct one once the insured depositors where PROTECTED. In this edition the elites suffered FIRST followed by the private sector depositors who foolishly believed false BALANCE sheets which were POLITICALLY CORRECT but PRACTICALLY incorrect fictions approved by fiduciarily (regulations and regulators allowed ONGOING insolvent operations rather than protect the public by ending and prohibiting them) challenged governments (work for the banks and crony capitalists not for the public at large).
After leaving rates unchanged and following Kuroda's efforts overnight, it appears Draghi had to do something in his press conference. Despite Barroso's assurances that the worst of the crisis is over, ECB's Draghi admits:
*DRAGHI SAYS ECONOMIC WEAKNESS EXTENDED INTO BEGINNING OF YEAR
*DRAGHI SAYS RISKS TO ECONOMIC OUTLOOK ARE ON DOWNSIDE
*DRAGHI SAYS RECOVERY IN 2H IS SUBJECT TO 'DOWNSIDE RISKS'
*DRAGHI: WEAKNESS IS EXTENDING TO COUNTRIES W/OUT FRAGMENTATION
*DRAGHI SAYS ECB WILL ASSESS DATA AND STANDS READY TO ACT
This 'negativity' jawboning, which is really nothing new to anyone who looks at real data, has battered EURUSD 80 pips lower and implicitly smacked S&P 500 futures down 5-6 points as the verbal currency wars continue.
Some people believe that by imposing losses on investors and reducing the Cyprus banking system liabilities, the European powers have addressed the problems in Cyprus (if harshly). A dangerous dynamic has been set in motion, which will likely bring many unintended consequrences.
It seems equity markets at all-time highs, high-yield funding markets near all-time low yields, and supposed money on the sidelines flooding back into stocks are just not enough to provide cover for the latest IPO:
*TOYS R US FILES TO WITHDRAW IPO :TOYS US
Not citing any specific reasons for the withdrawal, we suspect the weather and market conditions will be blamed as they just reported abysmal earnings of $239mm vs $343mm last year and sales down $155mm from last year (with Q4 comp sales -4.5% domestically and 5.4% international). Back to the drawing board for KKR and Bain to push this off to the next greater fool.
Below are portions of a comment letter submitted by R.T. Leuchtkafer to the SEC on April 16, 2010, just 3 weeks before flash crash. The second paragraph in the excerpt below, unknowingly describes exactly how the flash crash was started. The letter goes on to alert the SEC on the dangers of High Frequency Trading (HFT), phantom liquidity and other concerns.
Cyprus Contagion Spreads As European "Omnishambles" Return; Euro Under 1.28 For First Time Since NovemberSubmitted by Tyler Durden on 03/27/2013 05:59 -0500
While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory. Then Bersani, who has been tasked to form a government until tomorrow, said that the possibility of a broad coalition government does not exist, adding that no lasting government is possible without him as a premier, and requesting that Grillo's Five Star party not block his path to government, for which we wish him the best of luck as moments later Five Star ruled out all external support for a broad government and would vote no confidence for Bersani. Then we got news that the Italian financial police has searched the Nomura in Milan in connection with the Monte Paschi case, which means even more skeletons in the closet are about to be uncovered. Finally, Italy just held a 3.5% 5 and 4.5% 10 year bond auction in which the country raised less than the maximum targeted €7 billion, and in which the Bid to Cover on the 5 Year dumping to the lowest since 2002, with bidding quite soft and the yield rising to 3.65% versus 3.59% previously. This has resulted in a blow out in Italian yields by 16 bps to 4.73% compared to 4.705% earlier. End result, as noted yesterday, has been an acceleration in the rush out of the EUR, with the EURUSD sliding to under 1.28 for the first time since November 21, a blow out in Greek bonds with yields pushing up 55 bps to 12.68% and a push for real safety (sorry, not the DJIA) in the form of German 2 Year bonds, which have dipped to -0.018%, the lowest since December, on rising fears that despite endless lies out of its bureaucrats, Europe may not be fixed after all.
The developed world has now become a fully operational Something-for-Nothing society. Once a Something-for-Nothing psychology has been fully implemented the majority of its citizens have become the functional equivalent of LOCUSTS!
Unable and unwilling (they no longer have the skills to make the wages they believe they are entitled to) to produce more than they consume and support themselves they set off the consume those that do to FEED on and SUPPORT themselves. The TAKERS or WEALTH EAT the MAKERS of WEALTH, Cannibalism of the worst sort.
Ignore corporate margins tumbling to a three year low: the Philly Fed is here to kiss and make it all better, after surging from -12.5 to +2.0 , beating expectations of a -3 headline print. This was driven by a bounce in New Orders from -7.8 to +0.5, Inventories up from -10.0 to 0.0, and number of employees rising from 0.9 to 2.7. Curiously, the average employee workweek plunged from -1.6 to -12.9, but who needs to actually put in hours when one has a part-time job. Alas, if today's Philly Fed, which printed at levels seen last in 2012, 2011, 2010 and 2009, was supposed to push the market higher, it has failed, as economic data is so "pre-QE" - now all that matters is if a central bank will inject a few trillion into the "market", and if yet another sovereign bankruptcy can be prevented at a time when the DJIA has never been higher.
February Inflation Rises By Most In One Year; Empire Fed Misses Even As Optimism Rises To Highest In 12 MonthsSubmitted by Tyler Durden on 03/15/2013 07:47 -0500
Following last month's surprising surge in the Empire Fed from a deep negative number to 10.04, the March print was less exciting, declining modestly to 9.24, on expectations of an unchanged number. Per the report, the new orders and shipments indexes also remained above zero, though both were somewhat lower than last month’s levels. Price indexes showed that input price increases continued at a steady pace while selling prices were flat. Employment indexes suggested that labor market conditions were sluggish, with little change in employment levels and the length of the average workweek. The Number of Employees index dropped from 8.08 to 3.23, back to September 2012 levels. Naturally, with reality worse than expected, all hopes were put in the future as indexes for the six-month outlook pointed to an increasing level of optimism about future conditions, with the future general business conditions index rising to its highest level in nearly a year. This is only the 4th year in a row in which optimism about the future is orders of magnitude higher than the current reality. Thank the Fed's "wealth channel to support consumer spending." In other economic news, headline inflation came slighlty higher than the expected 0.5%, with the 0.7% sequential print the highest in one year, driven by a surge in the gasoline index which rose 9.1% in February, "to account for almost three-fourths of the seasonally adjusted all items increase. The indexes for electricity, natural gas, and fuel oil also increased, leading to a 5.4 percent rise in the energy index. The food index increased slightly in February, rising 0.1 percent."
The reversal begun yesterday in the FX market is continuing today. Although we are skeptical of the factors being cited as causes of the price action, we suggest it should be respected and will look for opportunities next week to get back with what we suspect is the underlying trend.