Sovereigns

S&P Puts EFSF's Critical AAA Rating On Downgrade Review, Can Cut By Up To Two Notches

From the full release: "We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the 'AAA' sovereign ratings, which are currently on CreditWatch, on one or more of EFSF's guarantor members. Conversely, we could affirm the 'AAA' ratings on EFSF and its issues if we affirm the rating on all six of EFSF's guarantor members currently rated 'AAA'. We could also affirm the ratings if we were to lower the current 'AAA' ratings on one or more guarantor members, but had evidence that the EFSF guarantor members were implementing further credit enhancements that were in our view sufficient to mitigate the relevant guarantor members' reduced creditworthiness."

Here Comes The S&P Downgrade Barrage - Full Statement, In Which S&P Says France May Get Two Notch Downgrade

From S&P: "Standard & Poor's Ratings Services today placed its long-term sovereign ratings on 15 members of the European  Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications. .. We expect to conclude our review of eurozone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one  notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments.  [THIS MEANS FRANCE]"

Commodities And Rates Lead Derisking Afternoon

High yield credit spreads were the first to show signs of disappointment this morning but this seemed more due to technical relationships in the CDS index market as HYG stormed ahead with stocks. Commodities had notably cracked early on this morning and were trending lower already as we broke the FT rumor of broad S&P downgrades in euro sovereigns. All markets reacted instantly, no questions asked, and while IG, HY, and the S&P dropped together, it was the drops in commodities as the USD strengthened that were optically of the highest magnitude. TSYs also instantly reacted and were another major outperformer - drastically beating Bunds on the day. ES (the e-mini S&P 500 futures contract) was much less volatile than broad risk assets overnight but as Europe opened markets started to move closely together in a positive risk mode. CONTEXT (the broad risk basket) was less positive that ES in the US morning session but as we sold off and closed they were closely in sync once again as every member of the basket was contributing to risk aversion. Financials outperformed but were well off their intraday highs as a sector with the majors closing mixed (e.g. BAC near lows and MS near highs) but we note that financials were the most net sold (especially the majors) in corporate bond land.

Some late day covering lifted 30Y TSY yields and EUR strengthened against the USD (European banks repatriating ahead of their open?) helping CONTEXT and elevating ES into the close. ES was on its own relative to credit though as it tore back up to try and regain VWAP.

Rumor Meet News: S&P To Put All 17 Euro Nations On Downgrade Watch

Just as we noted earlier from the leak to the FT, Bloomberg is now reporting further that

S&P Said to Place All 17 Euro Nations on Rating Downgrade Watch

The AAA aspect is probably the most critical still and the differentiation between Austria and France and the rest of the AAA European sovereigns has been plain to see for a while but the major direct impact of this move will be on EFSF bonds (and the entire support structure) which managed to rally back from just over 200bps to 148bps close today.

What Wednesday 8am Fed Headline Is Being Leaked Now?

Forgive our skepticism, but since our earlier market snapshot, most of the broad risk drivers have notably receded from their evening highs - while ES remains at highs. Together with the worst Composite China PMI print in 32 months, we are seeing CONTEXT diverge notably weaker than the 'resilient' ES futures. TSYs did open modestly offered but it is the retracement in FX carry, Silver, Gold, Copper, (and even Oil) that is dragging risk 'off' as the e-mini S&P futures contract holds magically at Friday's closing VWAP. We wonder what comfortable bid is being maintained by them-that-know-better-than-us-what-comes-next? We can only assume that the old adage that the 'worse it gets the better it will be' so BTFD is back in full force but we remind those knife-catchers (alone in the equity market for now this evening) that optical backstops are showing cracks and balance sheets are deleveraging no matter what is done to prop-up sovereigns until Santa arrives.

The Hill Just Killed The Market - Stocks, Euro Stumble As Conservatives Push To End IMF Bailout

As rumors and chatter circulate across trading desks, European equity and credit markets are starting to lose their giddiness. European sovereigns are leaking back wider and financials starting to underperform and it is being noted that, as reported by The Hill, that conservatives say they will try to block the IMF from bailing out Italy and Spain. Pointing to the huge bill this could leave at US taxpayer's feet, Republicans are concerned at the secrecy with which Geithner has acted. Sen. Tom Coburn appears to be at the helm of this legislation, noting:

"We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending."

As we have been saying all along, with every reincarnation of the idiotic "IMF to bailout [XXX]" rumor, there always is just one snag. A rather substantial one at that: US congressional approval for expanded IMF bailout capabilities.

Fiscal Federalism Or Bust! Morgan Stanley Sees Dec 9th As Real European D-Day

We have often discussed the temporary and tenuous nature of any and all government-suggested solutions so far to the European crisis on the basis that the 'model' is broken. Following the decision to go for PSI, and the possibility of a sovereign leaving the Euro-zone (Greek referendum ultimatum), money is no longer fungible in and across European banks (deposits) and sovereigns as it seeks the stability of a narrower and narrower core. Arnaud Mares, of Morgan Stanley, who wrote the initial and definitive Greek story long before most others, brings up this very point; questioning the fungibility of Greek Euro deposits with French Euro deposits, for example, and interpreting the situation as a 'run on banks and governments'. His view that without a clear path to a fiscal lender of last resort - or a true fiscal federalism across a united Europe - which ensures solvent governments will never go illiquid, then the December 9th decisions mark a bifurcation point of critical import.

If governments choose to engage on the route to fiscal federalism, we believe that this does not mark the end of the crisis. It could, however, mark the beginning of the end of the crisis, as it would be a decisive first step towards stabilisation and a European federation. The alternative could well be the beginning of the end for the European confederation.

Europe has to choose between debt assumption (enhanced federal control of national budgets accompanied by centralised funding of governments) and a debt jubilee (wide-scale debt repudiation), with all the social, economic and political consequences this entails. Mares' four-question-framework for considering the words and deeds of December 9th is critical, though complex, reading to comprehend the tipping point we are at.

Dismal End To Day After In Europe

Just when you thought it was safe to go all-in buying financials, stocks, commodities, Chinese IPOs and even Tilson's fund, the last few hours of Europe's day was very disappointing. Commodities took a fairly serious plunge as the dollar strengthened (macro data? or just a reality slap). Credit and equity markets oscillated but legged down into the close and ES also slipped to day's lows as we closed. Sovereigns were on a tear, thanks obviously to a helping hand early on from ECB's SMP program, but even they started to leak back wider in spread and higher in yield into the close. It was not cataclysmic, obviously, but was hardly the follow-through risk-on day that so many had hoped and dreamed of last night and most notably, broad risk assets in general have been leaking lower since US close last night, leaving ES rich relative to CONTEXT.

Is The Risk-On Rally Real?

Whether its non-confirming volumeless rallies in stocks, hard-to-find collateral, sovereign risk, counterparty risk, USD funding stress, GDP growth dislocations, EM credit dispersion, or equity market outperformance, Nomura's EEMEA FX and Fixed Income team has a little for everyone in today's '10 Things We Did Not Know'. Today's obvious risk-on knee-jerk-response rally is perhaps not so broadly supported even as Ben's promise trumps a totally failed Grand Plan.

Market Snapshot: European Close

Equity and Credit markets rallied significantly on the day with credit catching up to equity's recent strength in an unusually biased move. The higher beta XOver (high yield European credit) and Subordinated financial credit outperformed close to close but lags overall relative to equity and investment grade credit, suggesting less than stellar demand to lay out new risk and more likely shorts covering in a hurry. Seniors underperformed Subs in financials - again suggesting some covering on the SEN-SUB decompression trade on the back of the ratings actions this week. Sovereign spread moves were actually largely unimpressive with spread curves flattening, some decompressing, and the fulcrum security BTPs, not exactly ripping across the curve.

Market Reaction To Global Bailout, Sovereigns Disappoint

Risk markets are tearing higher globally with equities, commodities, and credit all considerably higher. Equities and CONTEXT are back in line as this is a very systemic shift up as the dollar tanks and TSY yield surge. US equities are back to 11/18 levels but are stalling out a little here as the initial spike wears off - whether this liquidity surge fixes the insolvency crisis is the question it seems markets are considering now that they have had some time to think (and squeeze). Silver and Copper seem the largest movers for now along with AUD relatively speaking as most equity and credit assets are back to 11/18 levels. We do note that while sovereign spreads in Europe are narrower, the moves are not dramatic and in some cases are actually deteriorating still.

Goldman's Sigma X Spot On Once Again: Predicts Imminent UK Contagion

Last Wednesday we put up the following blurb: "Five months ago, when Italian yields were still tame in the 3% ballpark, and not 7% where they are today, we suggested that based on trading patterns and overall volume in Goldman's dark pool, Italy may be about to experience a "Greek episode." Days later we were proven right as Italian yields and spreads started their relentless move wider, with only those who had access to Sigma X being able to get an advance whiff of what was about to happen. Well today we are happy to report that the German diversion may have worked: the truth is that nobody appears to care about Germany. Instead what everyone does seem to care about, is the nation with the greatest combined debt (government, corporate and household) to GDP in the world. Yup. The UK." Following that, a quick Twitter update from this morning indicated something was again going on with the UK from the perspective of the world's most connected insiders: "UK's LLOYDS and RBS top of most active on Sigma X this morning." Sure enough, here's Fitch with what may well be a precursor to the bond vigilantes finally focusing their attention on the last, latest and greatest AAA credit.

  • FITCH: UK GOVT MAY BE MOST INDEBTED OF AAA SOVEREIGNS EX U.S. -BBG
  • FITCH: NEW UK FISCAL VIEWS 'SIGNIFICANT DETERIORATION' VS MARCH - BBG
  • And the punchline: "the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted"

And cue the imminent downgrade rumors - and ensuing safe-haven outflows to TSYs.

Credit Sanity Check

Once again this morning, credit markets are deteriorating with financials the notable laggards and yet equities in US and Europe are beating to their own 'Birinyi'drum. European sub financials are the worst performers, which makes sense post the Moody's downgrade concerns, but the scale of recovery this week is incredible in terms of equities post Friday rally relative to credit market's perception of reality. At the same time, Italian all-in cost of funding - yields - are near record highs post auction, even if spreads are flat and off the highs.