When all else fails, pretend it's all good. Like what Australia did, following the just released announcement by the RBA that it is keeping the cash rate unchanged at 4.25% on expectations of a 25 bps rate cut. Which begs the question: is China re-exporting the lagging US inflation it imported over 2011? So it appears to Glenn Stevens, who just said that "Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels." Or maybe they are not pretending and inflation is still alive and very much real? It also means that Chinese inflation continues to be far higher than what is represented, but we probably will just take the PBoC's word for that. Or not, and wonder: did the RBA just catch the PBOC lying about its subdued inflation? And if that is the case, does anyone really wonder why that very elusive RRR-cut is coming with the same certainty as the Greek creditor deal? Either way, the AUDJPY spikes by 80 pips on the news, however briefly, and if the traditional linkage between the AUDJPY and the market is preserved, it should have a favorable impact on risk as it means at least one hotbed of inflation remains. On the other hand, it also means that Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good. And amusingly, just as we write this, Bloomberg release a note that the PBOC is draining funds: "China’s money market rates rose after PBOC resumed fund drain via a repo operation, showing it remained cautious toward policy easing." Translation: "Hopes for a near-term RRR cut could be dashed, Credit Agricole CIB strategist Frances Cheung writes in note to clients." Oops. Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withrawing liquidity when the market expects RRR cuts? Fughetaboutit. (and reread the Grice piece on why only idiots define inflation by the CPI or the PCE).
With the IMF cutting its global growth forecasts and signs of slowing evident in the dramatic contraction in World Trade Volume in the last few months, it is perhaps no surprise that the central banks of the world have embarked upon what Goldman Sachs calls an 'Unprecedented Alignment of Monetary Policy Across Countries'. Our earlier discussion of the European event risk vs global growth expectations dilemma along with last night's comments on the impact of tightening lending standards around the world also confirms that this policy globalization is still going strong and is likely to continue as gaming out the situation (as Goldman has done) left optimal CB strategy as one-in-all-in with no benefit to any from migrating away from the equilibrium of 'we all print together'. Perhaps gold (and silver's) move today (and for the last few months) reflects this sad reality that all your fiat money are belong to us, as nominal prices rise (but underperform PMs) in equities (and risky sovereigns and financials).
There are two pillars that have supported the recent cross-asset class rally: 'improving' macro news and a reduction in concerns about European and financial risks. While this pattern is not new, as the interplay between the two has been a key focus for some time, Goldman manages to differentiate the impact of both and quantifies which assets have more sensitivity to each pillar. Unsurprisingly, European assets have been driven more by Euro area risks than non-European assets, equities (even in Europe) have been driven more by growth views, and credit spreads (including in the US) have been more responsive to Euro area risks. A number of other assets are much more closely to the market's view of growth than to the Euro are risk perceptions and global FX ranges from highly cyclical to highly Euro-sensitive while many of the major EM currencies are stuck in the middle. Overall they find that the market has more confidence in global growth (with markets pricing little more than +1.75% US growth for instance so not over-confident) but that Euro-area risk has been discounted excessively given the nature of the ECB's actions relative to the underlying problems (as we discussed this morning). Goldman provides a good starting point for consideration of which risks (and how much is priced in) across global asset classes.
You're about to hear a big boom come from across the Atlantic, but I've yet to hear a peep from the rating agencies. And many of you guys think they were delinquent during the other credit bubble!!!????
It appears from the Treasury's announcements and the Treasury's Borrowing Advisory Committee (TBAC) recommendations that we will shortly see Treasury FRNs. While details remain murky (what maturities, the underlying index, reset frequency, and so on) we would be surprised if they did not after all this analysis and the potential problems they may face. Given the weight of short-dated maturing Treasury debt, if the Treasury were roll/term this debt out at the same pro-rata distribution of maturities as it has currently, then the weighted average maturity of their debt would rise significantly. While avoiding the short-term limit of zero-date issuance that many European sovereigns face is a positive clearly, the problem for the Treasury lies in the non-domestic (read Fed) demand is waning significantly for any longer-dated Treasuries (while bid-to-covers on Bills remain very high and active for foreign buyers). FRNs would implicitly provide the lender with upside coupon on a rise in rates (a potential plus for foreign demand given their angst and the low level of rates priced into the market) and would benefit the Treasury by reducing potential demand issues at the long-end (and potentially offering the Treasury upside if rates stayed low for longer). The bottom line is that the structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Of course, the benefits to the Treasury from issuing FRNs also relies significantly on the Fed's monetary policy stance - savings are likely to be greater when the change in the funds rate is negative, and especially when such change is more negative than the expectations priced into forwards (and it seems reasonable to assume that the risk to short-rates is somewhat one-sided against the Treasury FRN).
Bill Gross Explains Why "We Are Witnessing The Death Of Abundance" And Why Gold Is Becoming The Default "Store Of Value"Submitted by Tyler Durden on 02/01/2012 09:44 -0400
While sounding just a tad preachy in his February newsletter, Bill Gross' latest summary piece on the economy, on the Fed's forray into infinite ZIRP, into maturity transformation, and the lack thereof, on the Fed's massive blunder in treating the liquidity trap, but most importantly on what the transition from a levering to delevering global economy means, is a must read. First: on the fatal flaw in the Fed's plan: "when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street." And secondly, here is why the party is over: "Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Yet most troubling is that even Gross, a long-time member of the status quo, now sees what has been obvious only to fringe blogs for years: "Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper." Let that sink in for a second, and let it further sink in what happens when $1.3 trillion Pimco decides to open a gold fund. Physical preferably...
The post-hoc (correlation implies causation) reasons for why the initial LTRO spurred bond buying are many-fold but as Nomura points out in a recent note (confirming our thoughts from last week) investors (especially bank stock and bondholders) should be very nervous at the size of the next LTRO. Whether it was anticipation of carry trades becoming self-reinforcing, bank liquidity shock buffering, or pre-funding private debt market needs, financials and sovereigns have rallied handsomely, squeezing new liquidity realities into a still-insolvent (and no-growth / austerity-driven) region. Concerns about the durability of the rally are already appearing as Greek PSI shocks, Portugal contagion, mark-to-market risks impacting repo and margin call event risk, increased dispersion among European (core and peripheral) curves, and the dramatic rise in ECB Deposits (or negative carry and entirely unproductive liquidity use) show all is not Utopian. However, the largest concern, specifically for bondholders of the now sacrosanct European financials, is if LTRO 2.0 sees heavy demand (EUR200-300bn expected, EUR500bn would be an approximate trigger for 'outsize' concerns) since, as we pointed out previously, this ECB-provided liquidity is effectively senior to all other unsecured claims on the banks' balance sheets and so implicitly subordinates all existing unsecured senior and subordinated debt holders dramatically (and could potentially reduce any future willingness of private investors to take up demand from capital markets issuance - another unintended consequence). We have long suggested that with the stigma gone and markets remaining mostly closed, banks will see this as their all-in moment and grab any and every ounce of LTRO they can muster (which again will implicitly reduce all the collateral that was supporting the rest of their balance sheets even more). Perhaps the hope of ECB implicit QE in the trillions is not the medicine that so many money-printing-addicts will crave and a well-placed hedge (Senior-Sub decompression or 3s5s10s butterfly on financials) or simple underweight to the equity most exposed to the capital structure (and collateral constrained) impact of LTRO will prove fruitful.
Back in January 2010, when in complete disgust of the farce that the market has become, and where fundamentals were completely trumped by central bank intervention, we said, that "Zero Hedge long ago gave up discussing corporate fundamentals due to our long-held tenet that currently the only relevant pieces of financial information are contained in the Fed's H.4.1, H.3 statements." This capitulation in light of the advent of the Central Planner of Last Resort juggernaut was predicated by our belief that ever since 2008, the only thing that would keep the world from keeling over and succumbing to the $20+ trillion in excess debt (excess to a global debt/GDP ratio of 180%, not like even that is sustainable!) would be relentless central bank dilution of monetary intermediaries, read, legacy currencies, all to the benefit of hard currencies such as gold. Needless to say gold back then was just over $1000. Slowly but surely, following several additional central bank intervention attempts, the world is once again starting to realize that everything else is noise, and the only thing that matters is what the Fed, the ECB, the BOE, the SNB, the PBOC and the BOJ will do. Which brings us to today's George Glynos, head of research at Tradition, who basically comes to the same conclusion that we reached 2 years ago, and which the market is slowly understand is the only way out today (not the relentless bid under financial names). The note's title? "If 2011 was the year of the eurozone crisis, 2012 will be the year of the central banks." George is spot on. And it is this why we are virtually certain that by the end of the year, gold will once again be if not the best performing assets, then certainly well north of $2000 as the 2009-2011 playbook is refreshed. Cutting to the chase, here are Glynos' conclusions.
Following three-in-a-row weak macro prints, the market broadly speaking is not happy. The S&P is 10 points off its pre-Case-Shiller highs, EURUSD is dropping rapidly back towards 1.31, Treasury yields are falling 3-5bps across the curve, and Commodities are giving back their spike gains from pre-US day session open. FX carry seems like a major driver for now with AUDJPY and EURJPY most notable while the drop in the curve and levels of the Treasury complex are adding to downward pressure on stocks. Credit and equity markets are dropping in lockstep for now (with HYG more volatile than its peers). The rally in European sovereigns has stalled here as longer-dated spreads are now widening off their intraday tights (10Y BTP back up to 6% yield) while PGBs give back some of their ECB-enthused rally (~20bps off tights now). US equities and CONTEXT (the broad risk proxy) are in line as they drop here.
The so-called January-Effect is almost at an end and if the market closes near these levels, the S&P 500 will have managed a 4.4% gain or its 20th best January since 1928 (84 years) and best since 1997. The outperformance of banks and sovereigns (LTRO) and the worst-of-the-worst quality names (most-shorted Russell 3000 stocks +9% YTD vs Russell 3000 +5.2%), as Morgan Stanley noted recently, is not entirely surprising since the January effect is considerably larger in mid-cap and junk quality names than any other size or quality cohorts. We have pointed to the seasonal positives in high-yield credit and volatility and along with the obvious short squeeze in S&P futures (which has seen net spec shorts come back to balance recently), we, like MS, are concerned that the tailwinds of exuberance that virtuously reflect from seemingly pivotal securities (such as short-dated BTPs now or Greek Cash-CDS basis previously) very quickly revert to a sense of reality (earnings and outlook changes) and perhaps the slowing rally and rising volatility of the last few days is the start of that turbulence.
The divergence between credit and equity marksts that we noted into the European close on Friday closed and markets sold off significantly. European sovereigns especially were weak with our GDP-weighted Eurozone credit risk index rising the most in six weeks. High beta assets underperformed (as one would expect obviously) as what goes up, comes down quicker. Stocks, Crossover (high-yield) credit, and subordinated financials were dramatically wider. Senior financials and investment grade credit modestly outperformed their peers but also saw one of the largest decompressions in over a month (+5.5bps today alone in the latter) as indices widen back towards their fair-values. The 'small moderation' of the last few weeks has given way once again to the reality of the Knightian uncertainty Europeans face as obviously Portugal heads squarely into the cross-hairs of real-money accounts looking to derisk (10Y Portugal bond spreads +224bps) and differentiate local vs non-local law bonds. While EURUSD hovered either side of 1.31, it was JPY strength that drove derisking pressure (implicitly carry unwinds) as JPYUSD rose 0.5% on the day (back to 10/31 intervention levels). EURCHF also hit a four-month low. Treasuries and Bunds moved in sync largely with Treasuries rallying hard (30Y <3% once again) and curves flattening rapidly. Commodities bounced off early Europe lows, rallied into the European close and are now giving back some of those gains (as the USD starts to rally post Europe). Oil and Gold are in sync with USD strength as Silver and Copper underperform - though all are down from Friday's close.
Following yesterday's frankly stunning news that the Troika politely requests that Greece hand over its first fiscal, then pretty much all other, sovereignty to "Europe", here is the Greek just as polite response to the Troika's foray into outright colonialism:
- GREEK GOVERNMENT SPOKESMAN DECLARES THAT THE BUDGET IS SOLELY ITS RESPONSIBILITY - DJ
What is interesting here is that unlike the highly irrelevant IIF negotiations which will end in a Greek default one way or another, the real plotline that should be followed is this one: because unless Germany, pardon the Troika, gets the one condition it demands, namely "absolute priority to debt service" and "transfer of national budgetary sovereignty", as well as a "constitutional amendment" thereto. there is no Troika funding deal. Furthermore, since as a reminder the PSI talks are just the beginning, the next step is ensuring compliance, as was noted yesterday ("[ceding sovereignty] will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access"), any refusal to implement such demands is an automatic dealbreaker. Which means anything Dallara and the IIF say, as representatives of a steering committee that at this point probably constitutes of one bondholder, with the bulk having shifted to the ad hoc committee, is irrelevant. Germany just got its answer. And the next step is, as Zero Hedge first suggested, an epic LTRO in precisely one month, whose sole purpose will be to prefund European banks ahead of the Greek default with enough cash to withstand Europe's Bear Stearns. Although as a reminder, in the US, Bear Stearns only led to Lehman and the global "all in" gambit to preserve the financial system by shifting bank insolvency risk to the sovereigns (a chart showing bank assets as a percentage of host countries' GDP can be found here). But who will bailout the world's central banks which already collectively hold over 30% of global GDP in the form of "assets", or as this term is better known these days, debt?
Festive Friday fun:
- FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
- ITALY LT IDR CUT TO A- FROM A+ BY FITCH
- SPAIN ST IDR DOWNGRADED TO F1 FROM F1+ BY FITCH
- IRELAND L-T IDR AFFIRMED BY FITCH; OUTLOOK NEGATIVE
- BELGIUM LT IDR CUT TO AA FROM AA+ BY FITCH
- SLOVENIA LT IDR CUT TO A FROM AA- BY FITCH
- CYPRUS LT IDR CUT TO BBB- FROM BBB BY FITCH, OUTLOOK NEGATIVE
And some sheer brilliance from Fitch:
- In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery.
And just as EUR shorts were starting to sweat bullets. Naturally no downgrade of France. French Fitch won't downgrade France. In other news, Fitch's Italian office is about to be sacked by an errant roving vandal tribe (or so the local Police will claim).
While the ubiquitous pre-European close smash reversal in EURUSD (up if day-down and down if day-up) was largely ignored by risk markets today (as ES - the e-mini S&P 500 futures contract - did not charge higher and in fact rejected its VWAP three times), some cracks in the wondrously self-fulfilling exuberance that is European's solved crisis are appearing. For the first day in a long time (year to date on our data), European stocks significantly diverged (negatively) from credit markets today. While EURUSD is up near 1.3175 (those EUR shorts still feeling squeezed into a newsy weekend), only Senior financials and the investment grade credit index rallied today, while the higher beta (and better proxy for risk appetite) Crossover and Subordinated financial credit index were unchanged to modestly weaker today (significantly underperforming their less risky peers). European financial stocks have dropped since late yesterday - extending losses today - ending the week up but basically unch from the opening levels on Monday. High visibility sovereigns had a good week (Spain, Italy, Belgium) but the rest were practically unchanged and Portugal blew wider (+67bps on 10Y versus Bunds, +138bps on 5Y spread, and now over 430bps wider in the last two weeks as 5Y bond yields broke to 19% today). The Greek CDS-Cash basis package price has dropped again which we see indicating a desperation among banks to offload their GGBs and needing to cut the package price to entice Hedgies to pick it up (and of course some profit-taking/unwinds perhaps). All-in-all, Europe's euphoric performance has started to stall as perhaps the reality of unemployment and crisis in Europe combine again with US's GDP miss to bring recoupling and reinforcement back.
Formal central bank independence is increasingly under pressure as societal preferences for a lender of last resort savior grow ever stronger (and more priced into nominal risk markets) as do demands for politicizing the monetary authorities under the pretext that they should more politically independent. Morgan Stanley takes on the question of constitutionality among the G3 Central Banks and rather unsurprisingly finds the mandates, targets, and prohibition treaties to be 'flexible' at best and 'practically meaningless' at worst. We-the-people appear to have little if any remit to constrain - even if our collective call for more printing leads to 'be careful what you wish for' reactions, as Michael Cembalest noted yesterday, "first prize in the Central Bank balance sheet expansion race is not necessarily one you want to win".