Sovereigns

Market Snapshot: European Dispersion And The CDS Roll

Next week, credit derivatives will roll from December to March maturities. The last couple of days have seen increasing dispersion across sovereign, and corporate equity and credit markets in Europe. The modestly bullish bias to credit index moves, while not totally dismissible as optimism, is likely to have a number of technical drivers implying that investors should not read too much into the compression. Liquidity has dropped notably in both single-name and index products recently and credit derivative dealers have increased the spread between the bid and the offer accordingly - this means the roll adjustment may be even more expensive this time around and for traders with a book full of single-name CDS, positioned more short, the bias will be to sell index protection to 'hedge' some of that roll-adjustment. The other technical is the indices swung once again from rich to cheap into the middle of this week (meaning the indices trade on a cheap basis to the cost of the underlying components) and so heading into a roll, arbitrageurs will want to rapidly take advantage of this - especially in the high-beta XOver and Subordinated financials space. So, all-in-all there has been some optimism in credit markets the last two days but as-ever we pour some sold water on the excitement as all-too-likely this is driven by roll and arb technicals, as opposed to a wall of risk-hungry buyers.

Fitch Downgrades 8 Global Banks Including BNP, SocGen, BofA, Deutsche, And Morgan Stanley

Every day after close it is one endless downgrade parade in which any of the permutations of rating agencies and either European sovereigns or banks get up and start playing musical chairs with each other. Then proceed to sit down for the overnight session. One of these days all the chairs will have been pulled. The banks cut in some capacity, either via long-term IDR or viability rating, are Bank of America, Barclays, BNP, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Societe Generale. Now we know that even creditors do not want to trigger any ratings downgrade covenants because it would offset what is likely a terminal margin call, but at some point someone will need to do through the various bond docs and find out just who (ahem Bank of America) will need to post far far higher collateral as a result of all these relentless downgrades.

David Rosenberg Discusses The Market With Bob Farrell, Sees Europe's Liquidity Crisis Becoming Solvency In Q1 2012

For the first time in while, Gluskin Sheff's David Rosenberg recounts his always informative chat session with Bob Farrell and shares Farrell's perspectives on the market ("his range on the S&P 500 is 1,350 to the high side and 1,000 to the low side. He was emphatic that there is more downside risk than upside potential from here. His big change of view is that we have entered a cyclical bear phase within this secular downtrend (he sees the P/E multiple trough at 8x). Rosie also looks at Europe and defines the term that we have been warning against since May of 2010: "implementation risk" namely the virtual impossibility of getting 17 Eurozone countries (and 27 broader European countries as the UK just demonstrated) on the same page when everyone has a different culture, language, history and religion... oh, and not to mention animosity to everyone else. So yes: Europe in its current format is finished, but what will it look like in its next reincarnation? And why does he think the European liquidity crisis will become a full blown solvency crisis in Q1 2012? Read on to find out.

Art Cashin On The "Rumormonger Convention" And Why Traders Have Put Santa's Picture On A Milk Carton

With fundamentals, technicals, and now even headlines out of Europe largely irrelevant, it only leaves one market-moving thing: rumors. And yesterday was a terrific example of precisely this. Art Cashin does a "rumor by rumor" expose of the key "events", however unfactual, that moved stocks yesterday. If history is any indication, and it is, today will likely see the rumor brigade unleashed all over again shortly. 

Abysmal Liquidity And Other Things to Watch

It is only December 14th. We are all so exhausted it may feel later than that, but the reality is it is only December 14th. The market is providing liquidity like it is 3 pm on December 31st. So no, it is not normal. It also seems that the new spread is adopted by all the dealers. As far as I can tell, there is no entrepreneurial trader out there trying to make a name for him or herself by providing tighter execution levels. That would be typical. So no, this isn’t a normal behavior for this time of year. If CDX Indices were cleared, or better yet, exchange traded, they could continue to trade with tight bid/offer spreads. S&P futures continue to trade actively and e-minis had an exceptionally busy day yesterday. It is at times like this, that the failure to get CDX indices on exchanges (or even properly cleared) is most felt by the market.

The "Neutron Bomb Of Capital Calculations" And A Kyle Bass Refresher

In a double-whammy of downbeat dystopian discussions, GMO and Kyle Bass are active on the inevitability of Europe's demise. Perhaps that is too strong but the two are focused directly, in separate pieces, on the huge need for capital and the dire dearth of it available. GMO's central focus on the direct capital needs of the European banking system in the case of a recovery (but under Basel III) and under stress scenarios. Dismissing the EBA's efforts, and recognizing that the problem is capital/solvency (if there were more, the market would not be worrying about liquidity and deposit flight), their 'neutron bomb' scenario where sovereign debt is recognized as a 'risky asset' (which seems more than plausible to us), the capital needs are almost EUR300bn with Spanish and French banks dominant but Italian and German banks are close behind. As Kyle Bass notes "There is no savior large enough with a magic potion of capital to stave off this unfortunate conclusion to the global debt super cycle.". This leads to only a bad and worse outcome for Europe, as the cataclysm plays out because the banks do have an alternative to raising capital – shrink the balance sheet. Deleveraging is already going on in a number of countries, with loan-to-deposit ratios dropping in recent months in Portugal, Spain, and Italy. This reduces the capital needs of banks, but fairly quickly starts to cut into the muscle of the financial system. The banks have little alternative but to keep holding sovereign debt in the short term, since it is the collateral for their borrowing needs. And as we have been so vociferously explaining recently, should they be forced to delver even more, and sell reduce these sovereign assets, then the daisy-chain effect of de-hypothecation on shadow banking will not end well for anyone.

S&P Warns Of Increased Corporate Bond Downgrade Risk Following Sovereign Action

As we said last week, when the S&P, in desperate hope that the Euro summit would achieve something, anything, to avoid an eventual downgrade of Europe, called Europe's bluff... and Europe was found to hold 2-7 offsuit. Now, when it has no choice but to downgrade the EuropeAAAn-club, S&P is practically apologizing for its action, and is today saying that since nothing happened to change its opinion, it will have no choice but to proceed with pervasive downgrades, only this time not only sovereigns (which it is expected to conclude on shortly) but also corporates of all shapes and sizes. Unless of course it doesn't, at which point the rating agency can just tell the last guy to turn the lights out on their way out.

Art Cashin On The Clash Of Market Reality With Post-Summit H[o/y]pe

It is always amsuing to listen to market narratives, however goal seeked they may be, when presented by market veterans such as Art Cashin, who in this case deconstructs the violent clash between reality and post-summit hype as represented by yesterday's amusing market action.

Daily US Opening News And Market Re-Cap: December 13

  • Moody's placed the ratings of eight Spanish banks on review for a possible downgrade
  • A solid 3-month T-Bill auction by the EFSF supported appetite for risk
  • OPEC and IEA trimmed their oil demand growth forecasts
  • Talks between Greece and private bondholders have ended without a deal, although consultations will continue, according to a banker involved
  • According to BoE’s Dale, there is certainly scope for the central bank to increase QE if needed

Six Tail Scenarios That Deutsche Bank Are Watching For Next Year

Jim Reid and his team from Deutsche have produced another magnificent compendium of information and prognostication in their 2012 Credit Outlook and while their up-in-quality preference (non-financial) may not be earth-shattering strategically, their timing view is of note. Instead of viewing the looming refi-ganza among European sovereigns and financials in H1 2012 as a reason for doom and gloom, they see it as the necessary evil to drive the ECB into the markets in size only for the latter half of the year to disappoint significantly as the reality of the underlying problems rear their ugly head once more. The down-then-up-then-worse-down perspective on markets for next year hardly sounds optimistic but it is the following six scenarios away from European woes that keep them up at night. From the positivity of a US housing rebound or Election year cycle to much more extreme downside risks such as geo-political concerns and non-European sovereign risks, their views on China, QE-evolution and Inflation concerns are noteworthy.

The European Death Spiral

Recently, we presented and discussed one of the biggest issues for European banks: the urgent need to delever substantially (to the tune of over €2.5 trillion) by selling assets, in order to placate various regulatory entities that banks are solvent, and, far more importantly, the market, which has so far proceeded not to short banks into oblivion only due to the ongoing short selling ban, and to the explicit backstop from the ECB (and, indirectly, the Fed). However, since deleveraging into an deflationary environment will certainly require bank bailouts due to collapsing asset prices, the question is what the impact of bailouts on banks will be. And here Bloomberg's Yalman Onaran explains all too vividly how not even in ponzinomic finance is there ever a free lunch... even if bought with free money. "If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “Then the banks’ losses will rise because they hold the government debt. That’s a vicious cycle. It’s hard to know which one to stabilize first, the sovereign bonds or the banks.”  And therein lies the rub, and the problem at the core of it all: when one is dealing with a continent and its insolvent financial system whose banks have underwater assets that amount to the size of the host nation's GDP, "It’s hard to know which one to stabilize first, the sovereign bonds or the banks." Recall that killing both birds with one silver bullet is what the failure that is the EFSF was supposed to do, by allowing sovereign debt rolls and fund bank nationalizations at the same time. Now that that hope is gone, all we have is the inevitable "death spiral."

Daily US Opening News And Market Re-Cap: December 12

  • Moody's said that the European crisis is still in a critical and volatile stage, adding that it will revisit ratings of all EU sovereigns in the first quarter of next year
  • According to S&P, it wanted to send a strong signal that the Eurozone is facing risk of a major recession, and significant credit crunch
  • The Italian/German 10-year government bond yield spread widened despite a successful T-Bill auction from Italy as well as market talk of the ECB buying Italian government paper
  • Deutsche Bank cut its UK growth forecast for 2012 to zero, and said it now expects the BoE to buy a further GBP 75bln of Gilts in February, then a final GBP 50bln in May

Moody's Unhappy With Friday Euro Summit, To Review Ratings, Warns Of "Multiple Defaults And Exits By Euro Area Countries"

The main weight on the EURUSD this morning is not only the virtual certainty of S&P cutting Europe's AAA club, after it called Europe's bluff and Europe revealed a 2-7 offsuit, but a report just released from Moody's which said that the rating agency looked at the European abyss, and did not like what it saw at all. As a result, Moody's has warned that it was review the ratings of all EU countries in Q1 as the summit has failed to produce "decisive policy measures" (we emphasize this for our friends at Bloomberg TV). It says: "As a result, the communiqué does not change our view that the crisis is in a critical, and volatile, stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain. While our central scenario remains that the euro area will be preserved without further widespread defaults, shocks likely to materialise even under this 'positive' scenario carry negative credit and rating implications in the coming months. And the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area." The result, as one can imagine, a surge in Italian and Spanish yields, and redness across the screen.

Inevitable Spiral Equity Collapse, Biderman's 'Better Early Than Late' Call To Sell Into Strength

It's the end of deficit spending in Europe as we know it. That's how Charles Biderman, of TrimTabs, rightly describes the unwilling-to-compromise German's (perhaps heroic) attitude to their fellow European sovereigns. From his perspective, this forced austerity will mean slower growth and with that all chance that the European nations can 'grow/tax' their way out of this charade. He notes there is simply no way they can grow fast enough to be able to kick the can far enough down the road for it to matter. Pointing to his 'better early than late' calls on markets over the last 40 years, the man from Sausalito sees it as inevitable that the practical insistence on the elimination of deficit spending will force banks into bankruptcy, leading, as asset values are marked down, to a spiral collapse in equities. He then dismisses the simple-minded decoupling perspective as if no new Keynesian-inspired 'technology shift' occurs, US growth will be in the doldrums as European deleveraging drags global growth down with it. It's not all doom-and-gloom though as he ends on the upbeat notion that this collapse won't happen tomorrow, given balance sheet strength, although selling into rallies is the clear picture he is painting.