Rating Agency

Within the European economic context Germany has been a star performer in recent years, outgrowing in GDP terms its Eurozone peer group as a whole in all but one year since 2006 (complete with a magnificent football/soccer team). This was quite a reversal of fortune from the ten years prior, when Germany consistently lagged in wealth creation. Together with its size and unwavering historical commitment to the EU project, this has created the expectation in political and even financial circles that if Europe faces another major economic crisis Germany will have no choice but to support the most vulnerable member states, possibly even relenting to the mutualisation of the Eurozone's debts. While this is a very complex topic, the following graph puts the odds in favor of one outcome: the next time push comes to shove in a big way, Germany will likely say NEIN!

• Espirito Santo Financial Suspends Shares, Bonds on ESI Exposure (BBG)
• Europe Stocks Drop for Fifth Day as Espirito Santo Sinks (BBG)
• Espirito Santo Creditors Doubt Containment on Missed Payment (BBG)
• French Stocks Seen Extending Losses on Economy Concern (BBG)
• Stocks Slide With Portugal Bonds as Yen Gains; Oil Drops (BBG)
• U.S. Probes Hacking of Government Computers at Personnel Agency (WSJ)... finds terabytes of porn 
• It's Congress' fault: Obama rejects criticism over border crisis (Reuters)
• Israel Mobilizes 20,000 Troops for Possible Gaza Invasion (BBG)
• Chinese hackers pursue key data on U.S. workers (NYT)
• Donetsk Primed for Siege as Ukraine Army Hems In Rebels (BBG)

FDIC: “the largest positive contribution to the year-over-year change in earnings came from reduced loan-loss provisions..."

• Obama Decries Big Bonuses at Bank Trading Desks as Risky  (BBG)
• India central bank seeks to swap gold to improve reserves quality (Reuters)
• There goes Q3 GDP: Arthur Strengthens to Become First Atlantic Hurricane (BBG)
• Airports Serving U.S. Tighten Checks on Stealth-Bomb Threat (BBG)
• Fear, cash shortages hinder fight against Ebola outbreak (Reuters)
• Brent Declines as Libya Rebels Say Ports Are Open (BBG)
• Shiites Train for Battle in Iraqi Holy City (WSJ)
• Dimon’s Cancer Has 90% Cure Rate With Demanding Therapy (BBG)
• Goldman says client data leaked, wants Google to delete email (Reuters)
• ECB Watchers in the Dark Look to Draghi for Illumination (BBG)

As reported yesterday, The SCOTUS dealt a major blow to Argentina hopes it would avoid making payments on its "holdout" bonds when it enforced a lower-court ruling that said Argentina can't make payments on its restructured debt unless it also pays holdout hedge funds headed by Elliott Management, best known for briefly seizing an Argentina ship in late 2012. The immediate result was a major rout in the country's sovereign bonds, which also sent Argentina CDS soaring. Sadly for Argentina, this would hardly be the end of it, and about an hour ago, Standard & Poor added insult to injury and lowered its long-term foreign currency rating on Argentina to CCC- from CCC+ citing a "higher risk of default on the country's foreign currency debt." As a result, yesterday's drop in bonds has continued, if at a more moderate pace, and the country's USD bond due 2024 hav continued to sink in intraday trading.  So what is next for the cash-strapped Latin American country for which the road ahead is suddenly quite "challenging" and default appears increasing like the only way out? For the answer we go to Citi's Jeffrey Williams who has laid out the five most likely developments.

With China's shadow banking system's collateral chain's collapsing amid government crackdowns on the ponzi, the 'desperate for liquidity' borrowers have increasingly turned to global capital markets' suckers to fund the next malinvestment. As China's currency becomes more internationalized and yields around the world collapse (thanks to central bank largesse), demand from investors has driven, for the first time ever, the Chinese corporate bond market has overtaken the United States as the world's biggest. As S&P warns, this is raising global credit risk as "as much as 10% of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," or around $4-$5 trillion, "causing overall corporate risk to increase globally," and it's not expected to slow anytime soon. It appears the authorities are starting to recognize the bubble as they plan to 'limit individuals' purchases of risky bonds'.

A dispassionate look at the week ahead.  

Since it's not Tuesday (the only day that matters for stocks, of course), call it opposite, or rather stop hunt take out, day. First, it was the BOJ which, as we warned previously, would disappoint and not boost QE (sorry SocGen which had expected an increase in monetization today, and now expects nothing more from the BOJ until year end), which sent the USDJPY sliding, only to see the pair make up all the BOJ announcement losses and then some; and then it was Europe, where first German retail sales cratered, printing at -1.9%, down from 2.0% and on expectations of a 1.7% print, and then Eurozone inflation once again missed estimates, and while rising from the abysmal 0.5% in March printed at only 0.7% - hardly the runaway inflation stuff Draghi is praying for. What happened then: EURUSD tumbled then promptly rebounded a la the flash crash, and at last check was trading near the high of the day.

• Russia should withdraw all assets, accounts in dollars, euros from NATO countries to neutral ones
• Russia should start selling NATO member sovereign bonds before Russia’s foreign-currency accounts are frozen
• Central bank should reduce dollar assets, sell sovereign bonds of countries that support sanctions
• Russia should limit commercial banks’ FX assets to prevent speculation on ruble, capital outflows
• Central bank should increase money supply so that state cos., banks may refinance foreign loans
• Russia should use national currencies in trade with customs Union members, other non-dollar, non-euro partners

It has been a largely event-free weekend except, of course, for the previously reported re-escalation in Ukraine following what was a lethal shooting in the east Ukraine city of Slavyansk blamed on Ukraine's Right Front, which has made a mockery, as expected, of the Geneva Ukraine de-escalation announcement from last Thursday. Overnight in Asia, Japan reported its largest ever trade deficit, providing yet more evidence that Abenomics has been an abysmal failure: all we are waiting for now is confirmation that basic Japanese wages have fallen yet again, which would make nearly 2 years in a row of declines. Still, the USDJPY, gamed as usual by HFT algos for which FX is now the last respite as the equity market crackdown gets louder, is doing its best to ramp from the overnight lows and ahead of the traditional US market open surge, as a result equity futures are modestly higher.

The risk that creditors, savers and bondholders, rather than taxpayers will bear the brunt of rescuing a bank in trouble form part of the first credit ratings given to 18 of Europe's biggest banks yesterday by new ratings agency, Scope.

Hot on the heels of what S&P said was not a "politically motivated" shift to rating watch, Moody's (who did not downgrade the USA and are not currently in a lawsuit over such terrible misrepresentations) has decided now is the time to put Russia on rating downgrade watch. The decision was triggered by 3 key factors: the weakening of Russia's economic strength, potential shifts in investor sentiment, and susceptibility to event risk. Full report below...

• Putin Threatened With More Sanctions as Russia Out of G-8 (BBG)
• China Faces ‘Mini Crisis’ on Debt Defaults, Ex-PBOC Adviser Says (BBG)
• Don't laugh too hard: Obama to propose ending NSA bulk collection of phone records (Reuters)
• SEC Is Probing Dealings by Banks and Companies in Loan Securities (WSJ)
• Japan GPIF asset review not aimed at supporting domestic stocks (Reuters)
• Chinese families clash with police, slam Malaysia over lost plane (Reuters)
• Russian Capital Flight Surges in First Quarter, Fueled by Ukraine Crisis (WSJ)
• Democrats ditch Nate Silver after data whiz predicts dismal midterm outcome (DN)
• China’s Urbanization Loses Momentum as Growth Slows (BBG)

Once again there has been little fundamental news or economic data this morning in Europe with price action largely driven by expiring option contracts. In terms of key events, Putin says Russia should refrain from retaliating against US sanctions for now even as Bank Rossiya discovered Visa and MasterCard have stopped servicing its cards, and as Putin further added he would have his salary sent to the sanctioned bank - the farce will go on. Continuing the amusing "rating agency" news following yesterday's policy warning by S&P and Fitch on Russian debt (was that a phone call from Geithner... or directly from Obama), Fitch affirmed United States at AAA; outlook revised to stable from negative, adding that the US has greater debt tolerance than AAA peers. Perhaps thje most notable move was in Chinese stocks which rallied overnight after major domestic banks said to have stopped selling trust products which were blamed for encouraging reckless borrowing and diluted credit standards. Speculation of further stimulus and the potential introduction of single stock futures also helped the Shanghai Comp mark its biggest gain of 2014 closing up 2.7%.

Has the market done it again? Two weeks ago, Putin's first speech of the Ukraine conflict was taken by the USDJPY algos - which seemingly need to take a remedial class in Real Politik - as a conciliatory step, and words like "blinking" at the West were used when describing Putin, leading to a market surge. Promptly thereafter Russia seized Crimea and is now on the verge of formally annexing it. Over the weekend, we had the exact same misreading of the situation, when the Crimean referendum, whose purpose is to give Russia the green light to enter the country, was actually misinterpreted as a risk on event, not realizing that all the Russian apparatus needed to get a green light for further incursions into Ukraine or other neighboring countries was just the market surge the algos orchestrated. Anyway, yesterday's risk on, zero volume euphoria has been tapered overnight, with the USDJPY sliding from nearly 102.00 to just above 101.30 dragging futures with it, in advance of Putin's speech to parliament, in which he is expected to provide clarity on the Russian response to US sanctions, as well as formulate the nation's further strategy vis-a-vis Crimea and the Ukraine.