Stronger Periphery close will be the usual opportunity for politicians to rant about the lack of clout of rating agencies.
Good Jump in Risk appetite. Question is how far. Lack of absence of negative news, or better, markets simply ignoring the latter, doesn’t make for a convincing bullish rebound.
I’d say: We won’t get fooled again! European Bull trap.
Europe just can't catch a break these days. While French Fitch naturally came out earlier with a AAA rating and a stable outlook, it is Moody's, which has yet to follow through in S&P's footsteps 14 months later and tell the truth about America's AAA rating, that moments ago spoiled the ESM "inauguration" party by branding it AAA, but with a Negative outlook. So much for the most 'supersecure' CDO on earth: looks like we are not the only ones to assign comical value to the ESM's €80 billion first loss "Paid-in" tranche. Because that 12% in buffered protection can disappear very quick if and when the central planners lose control.
And Monday, it became official.
Those confused by yesterday's rapid move higher in stocks, which fizzled by day's end, which was catalyzed by the non-event of the Spanish budget declaration which will prove to be a major disappointment as all such announcement are fated to be, can take solace in the following summary by DB's Jim Reid: "Yesterday's risk rally on the back of the 2013 budget announcement coincided with a trend seen over the last couple of years of rallies into month and quarter ends. We'll probably get a clearer picture of underlying sentiment by early next week with the new quarter starting, especially as it commences with a bang with the Global PMI numbers on Monday." In this vein, tonight's overnight sentiment showing weakness confirms yesterday's move was one which merely used Spain as a buying catalyst without reading anything into it. Because an even cursory read through shows major cracks. Sure enough the sellside readthroughs appeared this morning: "In our view the Spanish 2013 budget is based on a too optimistic GDP growth assumption" from Citi. Once again, the market shot first, and asks questions later, as the weakness in the futures confirms, EURUSD retracing all overnight gains, and Spain now 1.6% lower on this, as well as uncertainty of today's latest non-event - the local bank stress test vers 304.2b - whose results will be announce at noon NY time, and which just may find Bankia (and its Spiderman towel collection) is quite solvent once again.
Protests Reignite On Anniversary Of Japanese Invasion Of China; Boats Enter Japan's Territorial WatersSubmitted by Tyler Durden on 09/18/2012 07:16 -0400
Anyone who thought that anti-Japan protests would quietly go away on the 81st anniversary of the Japanese invasion of Manchuria may have to reevaluate. First, overnight the HKEJ said that China is preparing economic sanctions against Japan, and as the situation again escalates, Reuters reports that at least two of 11 Chinese ocean surveillance and fishery patrol ships sailing near East China Sea islets claimed by both Tokyo and Beijing have entered what Japan considers its territory, public broadcast NHK said on Tuesday, quoting Japan's Coast Guard. Subsequently, NHK reported that "a Chinese fisheries patrol ship has departed after approaching Japan's territorial waters off the Senkaku Islands in the East China Sea. The Japan Coast Guard remains on the alert, saying the Chinese vessel may enter the area again. The Coast Guard spotted the boat some 43 kilometers north-northwest of the largest island, Uotsuri, early Tuesday morning. The Coast Guard confirmed the boat had left the area before 10:30 AM. It said at around 11:10 AM, the vessel again approached Japan's territorial waters off another island and left soon afterward. In response to warnings from Japan's Coast Guard, the Chinese vessel replied the islands are inherent Chinese territory and that its mission is legitimate." Watch this space carefully, especially once the Chinese armada of 1000 fishing boats, which is already en route to Senkaku, engages in a stand off with Japanese battleships: "China's state-run radio has reported 1,000 fishing boats have left the provinces of Zhejiang and Fujian for waters near the Senkaku Islands. But Japan's Coast Guard says it has not yet spotted a large fleet in the area." It will quite soon. Elsewhere, sentiment across mainland China is getting the opposite of better, fast.
Not entirely surprising following the outlook changes for Germany, France, UK, and Holland but still an intriguing move right before Draghi's big unveiling: Moodys maintains AAA rating but shifts to outlook negative.
Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations.
Interestingly they also note that a further cut could occur due to: changes to the EU's fiscal framework that led to less conservative budget management...
September Arrives, As Does The French "Dexia Moment" - France Nationalizes Its Second Largest Mortgage LenderSubmitted by Tyler Durden on 09/01/2012 16:32 -0400
September has arrived which means for Europe reality can, mercifully, return. First on the agenda: moments ago the French government suddenly announced the nationalization of troubled mortgage lender Credit Immobilier de France, which is also the country's second lagrest mortgage specialist after an attempt to find a buyer for the company failed. "To allow the CIF group to respect its overall commitments, the state decided to respond favourably to its request to grant it a guarantee," Finance Minister Pierre Moscovici said according to Reuters. What he really meant was that in order to avoid a bank run following the realization that the housing crisis has finally come home, his boss, socialist Hollande, has decided to renege on his core campaign promise, and bail out an "evil, evil" bank. Sadly, while the nationalization was predicted by us long ago, the reality is that the French government waited too long with the sale, which prompted the Moody's downgrade of CIF by 3 notches earlier this week, which in turn was the catalyst that made any delay in the nationalization inevitable. The alternative: fears that one of the key players in the French mortgage house of cards was effectively insolvent would spread like wildfire, leading to disastrous consequences for the banking system. End result: congratulations France: your Fannie/Freddie-Dexia moment has finally arrived, and the score, naturally: bankers 1 - taxpayers 0.
The Moody’s outlook change on Germany lets us know that this time around the debate is more than political posturing. If Germany loses its AAA status, then it’s GAME OVER for the EU: the German population, already outraged by the EU bailouts, and now facing a recession will NOT tolerate a credit rating downgrade.
As I’ve stated many times, Germany is THE REAL backstop of the EU. And it’s comprised its own solvency as a result: the country is only €328 billion away from reaching an official Debt to GDP of 90%, the level at which national solvency is called into question. Moreover, that €328 billion has already been spent via various EU props. Indeed, when we account for all the backdoor schemes Germany has engaged in to prop up the EU, Germany's REAL Debt to GDP is closer to 300%.
It would be odd to suggest that one of the most scathing critiques of the ECB's attempts to talk up the market on nothing but hope, promises and expectations would come from rating agency Moody's, yet that is precisely what has happened. With Swiss, Dutch, Finnish, and German short-dated bonds once again hitting new record low (negative) rates (and Italian 10Y is weakening), it would appear that at least some of the market is not drinking the all-things-risk kool-aid.
- Bundesbank Maintains Opposition to ECB Bond Buying (WSJ)
- Greek Budget Talks Stumble as EU Urges Samaras to Deliver (Bloomberg)
- Fortified by euro, Finns take bailouts on the chin (Reuters)
- China Job Market for Graduates Shows Stress on Slowdown (Bloomberg)
- China Exports Fade as Inflation Eludes Targets: Cutting Research (Bloomberg)
- Japan Falters as Ito Calls for Euro Buys to Rein in Yen: Economy (Bloomberg)
- Government weighs social insurance reforms (China Daily)
- Colombia’s Split Central Bank to Weigh First Rate Cut Since 2010 (Bloomberg)
The major European bourses are down as US participants come to their desks, volumes still thin but higher than yesterday’s, and underperformance once again observed in the peripheries, with the IBEX down 2.5% and the FTSE MIB down 1.2%. Last night’s outlook changes on German sovereign debt caused a sell-off in the bund futures, with the effect being compounded as Germany comes to market with a 30-year offering tomorrow. The rating agency moves, as well as softer Euro-zone PMIs and reports that Spain is considering requesting a full international bailout have weighed on the riskier asset classes, taking EUR/USD back below the 1.2100 level. Furthermore, with Greece and a potential Greek exit now back in the news, investor caution is rife as the Troika begin their Greek report of the troubled country today.
In a first for Moody's, the rating agency, traditionally about a month after Egan Jones (whose rationale and burdensharing text was virtually copied by Moody's: here and here), has decided to cut Europe's untouchable core, while still at Aaa, to Outlook negative, in the process implicitly downgrading Germany, Netherlands and Luxembourg, and putting them in line with Austria and France which have been on a negative outlook since February 13, 2012.The only good news goes to Finland, whose outlook is kept at stable for one simple reason: the country's attempts to collateralize its European bailout exposure, a move which will now be copied by all the suddenly more precarious core European countries.
Morgan Stanley reported earnings this morning, and showed that unless one has massive loan loss reserves to release, US banks are in big trouble. The firm just reported $0.28 EPS including DVA benefit, on expectations of $0.29. But it was the top line that got blown out, with the firm reporting $7.0 billion in revenue including the DVA fudge, but more importantly $6.6 billion. The expectations was for a $7.58 billion top line: a 14% miss. The top line number plunged over 25% compared to a year ago. The main reason for the collapse in profit: the virtual disappearance of any cash from combined fixed income, commodity and equity sales and trading, which imploded from $3.7 billion a year ago, to just $1.9 billion this quarter. And while the company slashed comp in Q2 as was to be expected following such horrible results, by over 33% to $1.4 billion from $2.2 billion, here is what most are focused on: "As a result of a rating agency downgrade of the Firm's long-term credit rating in June, the amount of additional collateral requirements or other payments that could be called by counterparties, exchanges or clearing organizations under the terms of certain OTC trading agreements and certain other agreements was approximately $6.3 billion, of which $2.9 billion was called and posted at June 30, 2012." In other words, the company has yet to post more than half of its contractually required collateral. In the aftermath of these atrocious earnings, we wish them all the best in getting access to this cash.
Because once the dominoes start, they don't stop. Stockton, Mammoth, San Bernardino and now legendary rap and LA riots nexus - the City of Compton. Fear not: the ESM, and the German population whose retirement age will have to be in the quadruple digit range to fund a broke world, has got this, too, covered. Also, only squares don't make fun of Meredith Whitney for saying municipal America is insolvent, so please do.