Sovereigns

Exposing American Banks' Multi-Trillion Umbilical Cord With Europe

One of the reports making the rounds today is a previously little-known academic presentation by Princeton University economist Hyun Song Shin, given in November, titled "Global Banking Glut and Loan Risk Premium" whose conclusion as recently reported by the Washington Post is that "European banks have played a much bigger role in the U.S. economy than has been generally thought — and could do a lot more damage than expected as they pull back." Apparently the fact that in an age of peak globalization where every bank's assets are every other banks liabilities and so forth in what is an infinite daisy chain of counterparty exposure, something we have been warning about for years, it is news that the US is not immune to Europe's banks crashing and burning. The same Europe which as Bridgewater described yesterday as follows: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks." In other words, trillions (about $3 trillion to be exact) in exposure to Europe hangs in the balance on the insolvency continent's perpetuation of a ponzi by a set of insolvent nations, backstopping their insolvent banks. If this is not enough reason to buy XLF nothing is. Yet while CNBC's surprise at this finding is to be expected, one person whom we did not expect to be caught offguard by this was one of the only economists out there worth listening to: Ken Rogoff. Here is what he said: "Shin’s paper has orders of magnitude that I didn’t know"...Rogoff said it’s hard to calculate the impact that the unfolding European banking crisis could have on the United States. “If we saw a meltdown, it’s hard to be too hyperbolic about how grave the effects would be” he said. Actually not that hard - complete collapse sounds about right. Which is why the central banks will never let Europe fail - first they will print, then they will print, and lastly they will print some more. But we all knew that. Although the take home is the finally the talking heads who claim that financial decoupling is here will shut up once and for all.

Commodities Inverse Plunge As Treasuries Catch Up To Stocks

We are 30 minutes into the day session. Do you know where your sanity is? Silver and Oil (over $102) are up 3.5% from last week's close, Copper and Gold up 1.5-2% and the USD down 0.7%. The USD weakness, along with Treasury selling, is enough to juice stocks up nicely as they catch up to yesterday's European extravaganza. European sovereigns are giving back a lot of their gains from yesterday so far but ECB buying chatter is supporting BTPs at the moment. US financials are up 2.8% as the Treasury-Stock disconnect of last week converges rapidly.

There Is No Joy In Muddlethroughville: World's Biggest Hedge Fund Is Bearish For 2012 Through 2028, And Is Long Gold

That Ray Dalio, famed head of the world's largest (and not one hit wonder unlike certain others) hedge fund has long been quite bearishly inclined has been no secret. For anyone who missed Dalio's must see interview (and transcript) with Charlie Rose we urge you to read this: "Dalio: "There Are No More Tools In The Tool Kit." For everyone who is too lazy to watch the whole thing, or read the transcript, the WSJ reminds us once again that going into 2012 Dalio's Bridgewater, which may as well rename itself Bearwater, has not changed its tune. In fact the CT hedge fund continues to see what we noted back in September is the greatest threat to the modern financial system: a debt overhang so large, at roughly $21 trillion, that one of 3 things will have to happen: a global debt restructuring/repudiation; global hyperinflation to inflate away this debt, or a one-time financial tax on all individuals amounting to roughly 30% of all wealth. That's pretty much it, at least according to mathematics. And according to Bridgewater. From the WSJ: "Bridgewater Associates has made big money for investors in recent years by staying bearish on much of the global economy. As the new year rings in, the hedge fund firm has no plans to change that gloomy view...What you have is a picture of broken economic systems that are operating on life support," Mr. Prince says. "We're in a secular deleveraging that will probably take 15 to 20 years to work through and we're just four years in." So basically scratch everything between 2012 and 2028? But, but, it was that paragon of investment insight Jim "Bloody Ridiculous Investment Concept" O'Neill keeps telling us stocks will go up by 20%... stocks will go up by 20%....stocks will go up by 20%...

Presenting Six Views Of The EUR

As EURUSD leaks very gently lower into the new year (but stocks popped excitedly across quiet European markets that lacked a bond market supervisor to keep them honest), we thought it might be interesting to look at the relative strength of the Euro against six different measures. From FX option risk-reversals to ECB's European Bank Lending statistics, QE and sovereign risk relationships to Fed/ECB balance sheet dynamics, and finally from futures commitment of traders data to EUR-USD swap spread frameworks, the results are unsurprisingly mixed with a bias towards EUR weakness. Between the European auctions (and redemptions) of the next two weeks, and the FOMC meeting on the 24-25th January, we face quite a rude awakening from the low volume holiday week malaise.

Complete European Sovereign Issuance Calendar

Earlier in the week, we discussed at length the funding gaps that various European sovereign nations face as the gap between supply and coupon/redemptions can't be assumed to be rolled away (and Europe faces EUR43.5bn of net cash-flow surplus from sovereigns into the 'market'). In order to better comprehend the timeline, Morgan Stanley has published both the complete issuance calendar for European bonds and bills over the next five weeks as well as a breakdown of the flows that are dominated by next week and the first week of February. It seems the market this week is starting to reprice for this risk in Italy and France not being able to roll so easily (and perhaps front-run that 'cash-flow' into US Treasuries as a haven) as the latter faces a considerable supply and flow on Thursday January 5th.

European Stocks Surge As Sovereigns Slump

UPDATE: Spanish bonds are leaking wider after the defiict projection looks set to be significantly worse than previously expected.

Something strange is happening in European risk markets this week. While that sentence is entirely 'normal' for what has become a diverging/converging flip-flopping correlation microstructure but the clear trend this week has been European Sovereign derisking and European Stock rerisking. The Bloomberg 500 index (that tracks a broad swathe of European stocks) is up 0.75% from Christmas Eve (and 1.6% from yesterday's lows) while 10Y sovereign spreads are wider by 10 to 30bps in the same period. France stands out as one of the worst performers - more than 25bps wider this week alone. Only Spain is notably improved on the week (-17bps) but all 10Y sovereigns are well off their best levels as stocks make new highs. Whether this is a front-run on asset rotation into the new year or expectations of the same risk-on ramp-job we saw on the first trading of this year is unclear - we do remind those front-runners that mutual fund cash levels are significantly lower this year than last. It is clear that yet another 'sensible' correlation (such as BTPs to equities) has broken but when volumes return and the reality of the huge supply calendar we face in the next month alone sinks in, perhaps equity ebullience will pull to bond bereavement. If stocks are reacting to a quasi-QE from the ECB, why wouldn't sovereigns who are the direct beneficiaries in that surreal LTRO-driven-carry trade?

European Credit Weakens As Stocks Rally

European markets are thin this week, thinner even that in the US from what we see in credit runs and equity volumes, but today saw a notable divergence between credit (sovereign, financial, and corporate) and equity markets continue. The broad BE500 equity index (of European stocks) rose majestically in the European afternoon (after US day session began), ending the day nicely positive, while spreads were wider in every category. Financials were the worst performers in European credit as they didn't see any bid into the close even as investment grade and crossover credit rallied modestly. There are a lot of divergences (and breakdowns in correlation) occurring in and across asset-classes as we see EURUSD weaken - unch now on the day (weak auctions, macro data, or market recognition of ECB QE that is not QE occurring), Gold down (because the dollar is up? liquidation/collateral/cash needs?), Stocks up (QE that is not QE again?), Corp and financial credit wider (nothing is solved and QE does not help a spread-based not currency-based numeraire), Sovereigns wider (nothing is solved and even ECB buying is not working now). Its always tricky to read too much into Christmas week trading - low volumes, high marginal impact, and year-end rotations and window-dressing (cash management), but the trend in risk assets overall seems to be lower not higher, no matter how you squint at it (even though last year's opening-day rampfest is fresh in most people's memories).

Gold And Silver Plunge As EUR Reaches 15 Month Lows

It seems funds left redemptions until the last minute in the vain hope that everything will be fine in the European dis-Union as we see renewed selling pressure in EURUSD - taking out the January 2011 swing lows (as a mediocre Italian auction and failed Hungarian auction weigh heavily on the expectations for a 'solution' or firewall). Gold and Silver are also legging down hard (the latter now -9.5% from Christmas Eve) and the former loses $1550. Gold took out its September 2011 swing lows back to near six-month lows.

A Strategic Alpha Preview Of 2012: Hope And Expectations

The EU is still a massive risk to the global economy but so is political inaction, over- regulated or manipulated markets, high unemployment and geo-political shifts. QE is a concern as central banks abandon inflation targeting and indeed growth to maintain ratings. The EU is still throwing liquidity at a solvency crisis at both sovereign and banking level. EU banks not only have a cash problem, more specifically, as ECB President Mario Draghi says : "hoarding at the ECB signals that the problem afflicting the Euro-zone is not so much about the amount of liquidity but that this liquidity is not circulating around the region's banks". I am not surprised as they all know that each has a similar or worse problem sitting in the vaults.... In the first throes of the new deflationary cycle the Dollar will do well, as the fight intensifies and the US uses the Dollar as a monetary tool and prints more Dollars, it will fall precipitously. Correlations will break this year and many of the “relative value” trades will implode. Gold will break away from being pressured by a strong Dollar as the hunt for alternatives to Fiat currency explode. The likes of the AUD will fall steeply as the global growth story rolls over as we have suggested for a long time. But it is China that holds the key. Hard or soft landing is the question. Can they really have a soft landing if the developed world implodes? No chance.

Market Snapshot: Asia Down, Europe Stable

Despite more ramblings from Juncker this morning, the overnight session in Asia saw comments on downside risks from the BoJ drive risk assets modestly lower. Led by Japan, Asia-Pac equities were down around 0.3%. While EURUSD is higher by 25pips or so from Christmas Eve's close (and implicitly USD weaker), commodities are broadly underperforming with Copper worst (-1.3%), Gold (under $1600) and Silver in line -0.8%, and Oil just underwater from 12/23 close. European credit markets just started trading and are a smidge tighter - though liquidity is questionable for now - but sovereigns are leaking wider in spread with Italian 10Y worst for now +13bps (and BTP yields now breaking 7% again). US TSYs are 1-2bps lower in yield from the afternoon surge on Christmas Eve's discorrelated action. Given the markets that are open so far, CONTEXT (a broad risk market proxy for where ES - the e-mini S&P futures contract - should trade) is practically unchanged, which given the late-day surge on 12/23, leaves us looking for modest weakness when it re-opens later today.

Hold On Tight: European Bond Issuance In January Is About To Get Very Bumpy

While someone continues to guietly push the EUR offer ever higher in the quiet holiday session, the reality is that with only 5 days to go in 2011, the holiday for Europe is ending, and "the pain"TM it about to be unleashed. All 740 billion worth of it. Because while Japan is monetizing its deficit (and having to issue more debt than it collects in taxes), and America is hot on its heels (as a reminder the US also issues roughly one dollar of debt for each dollar in taxes collected), Europe is still unsure whether it will monetize explicitly (that said, we did clear up that little bit of confusion over implicit monetization, with the ECB's balance sheet having exploded by €500 billion since June, or more than all of QE2). Unfortunately, as the following analysis from UBS indicates, it won't have much of a choice. Here are Europe's numbers: €82 billion in gross debt issuance in January, €234 billion in gross debt issuance in Q1, €740 billion in gross debt issuance in 2012. And then it really picks up because what is largley ignored in such "roll" analyses are the hundreds of billions in debt that financials (i.e., banks) will also have to roll in 2012. In other words, the biggest risk for 2012, in our humble opinion, is that the global repo perpetual ponzi engine (where every primary dealer buys sovereign debt than promptly repos it back to its respective central bank, and courtesy of Prime Broker conduits is allowed to do so without ever encumbering its balance sheet - explained in detail here) is about to choke.

"A Markets Carol" - Goldman Scrooge Gets A Visit By The Three Ghosts Of The Global Economy

In its "pre-Christmas" note, it is somehow appropriate that Goldman's Jose Ursua reprises the role of Ebenezer Scrooge, and explains how, in this contemporary Christmas Carol, "The world economy is struggling: to begin with. There is no doubt whatever about that" and, logically, gets a visit from the three ghosts of the world's past, present and future. However, while the narrative is similar for the most part to the Carol morality play, where it diverges is in the Hollywood ending: "As in Dickens’ story, avoiding this outcome will require decisive actions. Unlike Ebenezer Scrooge’s overnight redemption, however, we believe the solution to the current global problems will potentially take much longer. So, although some steps are clearly visible in the right direction, the post-holiday environment will likely continue to be challenging for both policymakers and markets alike." And that's only for the macro; the "micro", as Morgan Stanley explained yesterday, is already slipping regardless of how long the US pretends that Europe is irrelevant for the big picture. The only question is whether the macro follows suit (which in Morgan Stanley's case was left as the optimistic case with full resolution), in which case the ghost of the coming "Great Stagnation" will be one scary dude.