Sovereigns

Reggie Middleton's picture

Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.

The Lull

We are in “The Lull” which has been caused by the injection of capital by the Fed and by the ECB. This is exactly, exactly, what took place I remind you during the weeks after the subprime mess exploded. Massive injections of capital, run-ups in equities, compression in bonds, higher prices for commodities and then the reversal of course took place. When easing ends then the course back tracks and I predict a re-do of this in the coming months. It will not take some trigger event, though there may well be one, to cause this; just the easy money being placed and no more manufactured money to follow.

“As the well runs dry the throat parches and dehydration begins.”

-The Wizard

Sean Corrigan Crucifies MMT

While hardly needing a full-on onslaught by an Austrian thinker, when even some fairly simplistic reductio ad abusrdum thought experiments should suffice (boosting global GDP by a few million percent simply by building a death star comes to mind), Diapason's Sean Corrigan has decided to take MMT, also known as "Modern Monetary Theory", to the woodshed in his latest missive in a grammatical, syntaxic (replete with the usual 200+ word multi-clause sentences) and stylistic juggernaut, that only Corrigan is capable of. So sit back in that easy chair, grab your favorite bottle of rehypothecated Ouzo, and let the monetary hate wash through you.

A Strange Chart, In More Ways Than One

Everyone and their mum knows by now that Italian bonds have rallied since the first LTRO and we are told that this is symptomatic of 'improvement'. While we hate to steal the jam from that doughnut, we note Peter Tchir's interesting chart showing how focused the strength is in the short-end of the bond curve (which we know is thanks to the ECB's SMP program preference and the LTRO skew) but more notably the significantly less ebullient performance of the less manipulated and more fast-money, mark-to-market reality CDS market as we suspect, like him, the CDS is pricing in the longer-term subordination and termed out insolvency risk much more clearly than the illiquid bond market does, and perhaps bears closer scrutiny for a sense of what real risk sentiment really looks like.

Europe Closes On Lows As Stigma Trade Ramps Up

As we have discussed extensively, and noted this morning specifically, the LTRO is stigmatizing credit markets in Europe, no matter what European leaders or bank CEOs tell you. European credit and equity markets dropped dramatically post LTRO 2 and accelerated on Bernanke's lack of monetary exuberance. Financials underperformed but most notably, subordinated credit spreads widened significantly more than seniors holding at yesterday's wide levels. The Stigma trade is occurring in single-name credit also with the spread between LTRO and non-LTRO banks widening once again after compressing for a few days but it is the Senior-Sub spread decompression that is the liquid trade for European bank's implicit subordination for now (as the entire capital structure of LTRO banks just became subordinated at best and more levered and subordinated at worst). The EUR tumbled over 100pips towards 1.3350 as the USD rallied back to the week's highs. Silver (and Gold) crashed into the European close (down over 7% on the day at one point) while Treasuries sold off and European sovereigns leaked wider (except Portugal which crashed and Italy which compressed modestly). Quite a day.

With LTRO Out Of The Picture, Portugal Is Back In Play - Bonds Sliding

As the ECB has stopped its SMP bond-buying and now the LTROs are all done (until the next one of course), Portuguese bond spreads have been increasing rapidly and post-LTRO today even more so.  While broadly speaking European sovereign risk is modestly higher this week (and notably steeper across the curve) leaving funding costs still very high for most nations, Portugal has exploded over 100bps wider (and almost 70bps of that today post-LTRO) to back over 1200bps wider than Bunds. Only Italian bonds are better and even there they are leaking back to unch from pre-LTRO. Perhaps, shockingly, more debt did not solve the problem of too much debt and with growth and deficits being questioned in Ireland and Portugal (and Spain), it's clear the newly collateralized loan cash the banks have received won't be extended to the medium-term maturities in sovereign bonds.

Summary Of Wall Street's Opinions On LTRO 2

The following people are paid to have an opinion, whether right or wrong, so it is our job to listen to them. Supposedly. Reuters summarizes the professionals kneejerk reaction to the LTRO 2. Because when it comes to explaining why Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits soon to be handed over to the ECB, one needs all the favorable spin one can muster.

Initial Rally Fades In PMs, FX, And Equities Post LTRO

UPDATE: European Sovereigns not excited and PORTUG getting ugly...and corporate credit spreads leaking wider

EURUSD and equity markets are undecided, European sovereigns have rallied modestly back to earlier day tights but no further (and Portuguese debt is underperforming), and credit markets in Europe are leaking modestly wider so far. The biggest movers initially appeared to be AUD (carry FX as we noted earlier) and the precious metals (with Silver outperforming Gold so far). Cable (GBP) is weakening relative to USD and EUR and that is holding DXY up a little here. Treasuries are doing better. As we post, the USD is now strengthening, ES is losing steam, and gold and silver are slipping back. CONTEXT is lower than pre-LTRO as risk is leaking off for now.

2012 - The Year Of Living Dangerously

...European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.

Euphoria Shifts From Stocks To Commodities

Silver and Gold remain the major outperformers year-to-date but the rest of commodities - most notably oil is catching up very fast having over taken stocks this week. It appears that the new-found flood of liquidity that we have been so passionately banging the table on for weeks, has found its way into the energy complex as European Sovereigns, European Financials, European Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. And as a hint to anyone who hasn't jumped on this tidal movement yet, one thing to note is that unlike stocks, commodities always have the risk of marginal or weak hands being shaken out via CME...margin hikes.

Eric Sprott On Unintended Consequences

2012 is proving to be the 'Year of the Central Bank'. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.... All of this pervasive intervention most likely explains more than 90 percent of the market's positive performance this past January. Had the G6 NOT convened on swaps, had the ECB NOT launched the LTRO programs, and had Bernanke NOT expressed a continuation of zero interest rates, one wonders where the equity indices would trade today. One also wonders if the European banking system would have made it through December. Thank goodness for "coordinated action". It does work in the short-term.... But what about the long-term? What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.