...as expected from the previous post. Now, BNP downgrade a matter of seconds.
Ladies and gents, it starts. Credit Agricole and BNP downgrades imminent.
Last week, Zero Hedge first brought to readers the infamous UBS report, which has since made the global rounds, and which essentially laid out the binomial tree for Eurozone survival as follows: either the EUR survives, or we get Civil war. In keeping with the schizophrenia of the TBTF banks whose number one goal is to cover their ass by predicting the two opposite possible outcomes, so as to avoid being sued by sovereigns once the dominos start falling, here is the firm's much respected economist George Magnus, who in his latest release of "By George", does a comprehensive framing of the agenda in the Eurozone. His conclusions: don't believe the European bureaucrat PhDs - there is much more here than meets the eye. To wit: "The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured." Maybe not "about" - give it a few weeks though...
Nothing actually new here, but listening to Art Cashin retall the latest end of the world episode in that wise, grizzled voice of his brings a soothing element to what is set to be another dramamine-friendly week."Over the weekend, the battle has shifted. German authorities talk openly of the likelihood of a Greek default. They are said to be developing a plan to backstop German banks in the event of a Greek default. That puts pressure on other banks, especially French banks, since there is no Gallic backstop plan. Collateral damage could be to bring no bids to the next Greek auction, or make them pay such high rates as to make the auction toxic. The Euro crisis is quickly evolving into a Gordian Knot....U.S. markets are at near-critical levels. The uptrend line that caused the last bounce (S&P 1140) is around 1145. Key support levels are 1140, 1132, 1120 and ultimately 1101. The new Battle of Thermopylae is on the way."
Looking at the weekly chart on Gold (vs. USD), the sell-off from two weeks ago at the rejection of $1900 was impressive not so much in how much it dropped in a single week, but on how well it recovered. The following act in the next week was a solid weekly gain of 3.4% from an opening price of $1822 - 1864 closing towards the highs suggesting buyers were holding into the weekend and thus not taking profits. The following week was a sell-off but very mild in nature and a third week of price rejecting off the weekly lows. Three weeks of selling and three weeks of strong rejections off the lows clearly communicating to us anytime the shiny metal is sold off, buyers are eager to come back in. And each time, they are doing so with more confidence because every time, they are buying at a higher price suggesting they are happy to take any dips as an opportunity to buy (or invest/hold) more gold.
It was a momentous week for markets and the ramifications of the German constitutional court decision and the SNB currency intervention have yet to be realized. The German constitutional court decision has effectively ruled out Eurobonds which has massive ramifications for the European monetary union and the euro. While promoters of Eurobonds suggest that Eurobonds may still be possible – most objective analysts believe they are now highly unlikely. The SNB decision to peg the Swiss franc to the beleaguered euro, thereby effectively devaluing the franc, stunned currency and wider financial markets. It is one of the most significant currency interventions in modern history and led to violent volatility the like of which have never been seen in foreign exchange markets. Incredibly and not widely reported the Swiss franc fell more than 7% against the euro, dollar and gold in just 15 minutes (putting gold’s relatively minor recent price fall into context). Such volatility in currency markets was not seen during 911, the Lehman’s collapse or for any other major macroeconomic or geopolitical event in modern history. The collapse of the Swiss franc in minutes greatly surpassed the collapse of sterling seen on “Black Wednesday” in 1992, when the British pound fell by 2.7% against the German mark on one day.
As bizarre as it is to say, but yesterday felt like a short squeeze in the US. In spite of SPX finishing down 9 points, the price action felt like shorts getting squeezed. How can that make sense? Well, anyone who set a short ahead of Jackson Hole or just after the speech, likely set it in the 1130-1160 range. The memory of stocks rallying up to 1228 is too fresh in everyone's mind, so shorts were nervous, and longs may have been set too, as hope remained that Obama, Bernanke, Trichet, and Merkel would say or do things to support the market. I believe yesterday's bounce from the lows, then late day 10 point down and back up swing cleaned up a lot of shorts, so the market is much more balanced at 1175 than it was at 1175 at Jackson Hole time. This gives us a lot more ability to trade lower. Maybe it is too bizarre to believe that we can have a short squeeze on a massively down day, but it felt like that, and it feels like people are positioned less bearish than they feel. With nothing resolved in Europe, and some signs of continued deterioration, the market is more vulnerable to a sell-off. My favorite spin yesterday was that the US will muddle along even if Europe is in trouble. Wasn't it just a few months ago that analysts were saying it is okay if the US does poorly, because over half of S&P 500 profits come from overseas? Weren't profits being enhanced because companies were selling things in Europe and translating those profits back into dollars at favorable exchange rates? Is that story gone and now globalization doesn't matter?
As widely expected, the Bundesverfassungsgericht (Germany's Federal Constitutional Court) ruled in favor the German government and did not overturn the EFSF bailouts. Of course, this does not greenlight the safety of each and every profligate spending peripheral and core country at the expense of the German taxpayer. The court continued on its path of demanding more from the Bundestag with regard to the strict adherence of conditions, as the budget committee must approve any new guarantees, and this ruling is not a blank check.
Yes, equity markets in Europa and the US are getting the Axe treatment, but the event that is most forboding is still being overlooked by the media. At the end of the day, this will be the cause of continuation of the 2009 global market collapse... CONTAGION!!!
I think we are entering a new crucial phase in the problems in Europe as quarter end reports will drive a notional reduction. During parts of 2007 and 2008, CEO's of banks and other financial institutions, did not want to show any exposure to sub-prime, or to certain banks, or to leveraged loans, etc. The CEO's in particular were convinced that they needed to show ZERO net exposure to the asset classes most in question. As part of the "window dressing", their risk management departments were told to be short and told to reduce notional exposures. It was no longer just an economic decision it had become a "what's best for the share price" decision. The reality, is making money is best for the share price, but that notion gets thrown out the window once CEO's panic. I believe we are there, and there are some real repercussions from that. The main problem is that we will see credit curves flatten and possibly invert. As short dated paper to the current "culprits" (sovereigns and financials) matures, the lenders will not want to roll over the positions.
You know those movies with the bomb set to a timer ticking down to øø.øø where the sweaty hero nervously cuts one wire at a time while holding his breath and then at øø.ø1 he stops the bomb? Well Europe is like that except that the bomb goes off and kills everyone.
The NFP print of 0 today is clearly big news, but Greek 1 year bonds trading at 63 imply an almost 0% chance that they don't default. 2 year bonds are trading at 53. Certainly at those prices, default and recovery are the drivers. If you give any benefit for shorter maturities (which often do get slightly higher recoveries in sovereigns as opposed to corporates) it is hard to see that default isn't being priced in with almost 100% certainty
Even a broken clock could be right at least twice a day....
We want you to prop up the stock markets. Everybody knows it's a Ponzi scheme that will collapse without your support. You don't want us to end up like Bernie Madoff's clients. No, Ben, we love Ponzi schemes. We get in early and get out before they collapse. That's why we're rich. The bad thing is that they sometimes collapse before we can get out. But you've bailed us out twice in the last couple of years.