And like that, Europe is broken again. Following a spate of negative European data (what else is there), including a miss in German industrial production as well as a miss in UK manufacturing output, all eyes are again on Spain, especially those of the bond vigilantes, who have sold off the sovereign European bond market, sending the Spanish-Bund spread to over 400 bps for the first time since December 2011. The main reason today: a Goldman report saying Spain will unlikely meet its 2012 and 2013 budget targets, as well as JPM Chief Economist David Mackie saying Spanish government "missteps" have raised questions about its credibility, making investors reluctant to purchase Spanish debt. Stress has returned to periphery, if it broadened into bank funding markets more LTROs would be forthcoming; if that “failed to hold yields at an appropriate level” Spain may need assistance from the EFSF/ESM and the IMF. Euro area unlikely to return to stability in sovereigns without some burden sharing; nominal growth likely to stay below borrowing costs, making fiscal targets “all but impossible to achieve”. UBS piles in saying Spanish banking stresses still haven't been addressed. Finally, a big red flag is that market liquidity is once again starting to disappear, and as Peter Tchir points out, Main is now being quoted with 3/4 bps bid/ask spread, all the way up to 1 bps spread. In other words, as we have been warning for weeks, the period of fake LTRO-induced calm is over, and the market is demanding more central planner liquid heroin. The question becomes whether Europe has even more worthless collateral in exchange for which the ECB will continue handing out discount window money in sterilized sheep's clothing. Yet nowhere is the resumption in risk flaring more evident than in the Swiss Franc, where the EURCHF all of a sudden broke through the critical 1.20 SNB floor, which was set back in September 2011, the day gold was trading at its all time high. Said otherwise, everyone is once again scrambling for safety. And since they can't get it in the CHF, it is only a matter of time, before gold resumes its ascent as the paper currency alternative that sent it to its all time highs late last summer.
Relatively quiet overnight session in the markets, where Europe has seen several bond auctions, most notably in France and Spain, whose good results has in turn sent the German 30 Year Bund yield to the highest since December 12, all courtesy of the recently printed (and collateralized with second and third-hand Trojans) $1.3 trillion. Per BBG, Spain sold 976 million euros of 3.25 percent notes due April 2016 at an average yield of 3.37 percent. The bid-to-cover ratio was 4.13, compared with 2.21 when the notes were sold in January, the Bank of Spain said in Madrid today. It also auctioned 2015 and 2018 securities. France sold 3.26 billion euros of benchmark five-year debt at an average yield of 1.78 percent. The borrowing cost for the 1.75 percent note due in February 2017 was less than the yield of 1.93 percent at the previous sale of the securities on Feb. 16. Elsewhere, we got confirmation of the collapse in Greece, where Q4 unemployment rose to 20.7%, up from 17.7% in the prior quarter. China weighed on Asian market action again following ongoing concerns about domestic property curbs, and a slide in the Chinese Foreign Direct Investment of -0.9% on Exp of +14.6%. ECB deposit facility usage, primarily by German banks, was flattish at €686.4 billion, while in Keynesian news, Italian debt rose to a new record in January of €1.936 trillion. Watch this space, once inflection point occurs and vigilantes realize that not only has nothing been fixed in Italy, but the current account situation in Italy, and Spain, is getting progressively worse as shown yesterday, all at the expense of Germany.
Topped off with Wall-Street-esque hype ... how refreshing, and so unlike the congressionally mucked-up USPS.
Confirming that the angst 3 days ahead of the Greek PSI deadline is very warranted, we learn that Bingham, which as we noted previously has so far identified and organized a significant group of local law bondholders potentially sufficient to derail the transaction, has now also organized a blocking group of Greek bondholders, this time those holding the country's outstanding Swiss Franc bonds. From Bloomberg: "Investors in Greece’s Swiss franc bonds have formed a group to fight for their rights as the country seeks to pare about 106 billion euros ($139 billion) of debt as part of an international bailout. The group is concerned by the terms of the restructuring and is “exploring means to address its concerns and to protect the rights of holders of the bonds,” according to a statement from their legal adviser Bingham McCutchen LLP in New York. The group holds the 650 million Swiss francs ($708 million) of 2.125 percent notes due 2013." Ironic that there are those who have taken a look at Venizelos' "best and only offer" and just said no. All that is left now is for Bingham to find and organize the blocking stake in the UK-law bonds and the PSI outcome will be, as we forecast way back when, that of the lower right quadrant. In the meantime, any and all Greek bondholders who dislike excess use of vaseline to be used on their bent over bodies, to contact Bingham promptly.
Could Sweden or Finland be the scene of the next European financial crisis? It is actually far likelier than most people realize. While the world has been laser-focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place. Nordic and Western European countries such as Norway and Switzerland have attracted strong investment inflows due to their perceived economic safe-haven statuses, serving to further inflate these countries’ preexisting property bubbles that had expanded from the mid-1990s until 2008. With their overheated economies and ballooning property bubbles, today’s safe-haven European countries may very well be tomorrow’s Greeces and Italys.
- Hedge Funds Try to Profit From Greece as Banks Face Losses (Bloomberg)
- Spain Doubles Target in Debt Auction, Yields Down (Reuters)
- Italy 1-Year Debt Costs More Than Halve at Auction (Reuters)
- Obama to Propose Tax Breaks to Get Jobs (WSJ)
- GOP Seeks to Pass Keystone Pipeline Without Obama (Reuters)
- Debt Downgrades to Rise ‘Substantially’ in 2012, Moody’s Says (Bloomberg)
- Petroplus wins last-minute reprieve (FT)
- Geithner gets China snub on Iranian oil as Japan plans cut (Bloomberg)
- Fed officials split over easing as they prepare interest rate forecasts (Bloomberg)
- Draft eurozone treaty pleases UK (FT)
- Premier Wen looks at the big picture (China Daily)
- US Foreclosure Filings Hit 4-Year Low in 2011 (Reuters)
The Swiss had a rough couple of years; first the national airline crashes, then the banking secret, and, now, their central bank. It seems someone from inside the SNB finally woke up and skilfully played the Swiss media to work on Hildebrand’s expulsion. There is only one problem for the SNB: how to get out of the hole before the Euro blows up? The sharks are already circling their prey; the Swiss Franc decoupled from the Euro the moment SNB chairman Hildebrand resigned: The exchange rate got dangerously close to the “Rubicon” of 1.20 (the level the SNB vows to defend with utmost determination). The SNB is basically 100 pips away from extinction.
Just one headline from Bloomberg, which says it all:
- HILDEBRAND RESIGNS
It is unclear which FX trading company he will join next. As expected, the entire politically charged campaign against Philipp was set to culminate with his departure. And now that the scapegoat is official, it may be time to revisit the EURCHF floor which will likely be the next to go.
Can Austerity Work?
This is the question of the hour. Which way was it?
Unlike other, more humorous instances, such as Byron Wein and his 10 endlessly entertaining year end forecasts, some banks take the smarter approach not of predicting what will happen, because only idiots think they have any clue what tomorrow may bring with any sense of certainty, especially under global central planning - a regime that is by definition irrational, but instead of stating what would be a surprise to a base case forecast. And with "surprise" now the new normal, it would be prudent to anticipate what to the status quo may represent as fat tails in the coming year. Especially since even UBS now mocks the Wall Street consensus, and the traditional upside biad: "Let’s face it: Bottom-up consensus earnings forecasts have a miserable track record. The traditional bias is well known. And even when analysts, as a group, rein in their enthusiasm, they are typically the last ones to anticipate swings in margins." Which is why, with that advance mea culpa in hand, we bring to readers the Ten Surprises for 2012 from UBS' Larry Hatheway: "At the end of each year, in our final strategy note, the global asset allocation and global equity strategy teams join up to consider possible surprises for investors in the year ahead. Inside, we briefly describe ten such outcomes, and also provide a review of how last year’s surprise candidates fared." For those pressed for time, here is the full list: i) The consensus of bottom-up earnings estimates is right; ii) Financials outperform; iii) The euro rallies; iv) Oil prices fall below $70/barrel; v) Sovereign default outside the Eurozone; vi) Rising Treasury yields; vii) An Italian sovereign upgrade; viii) EU or EMU disintegration; ix) Fewer than five governments switch hands and, last but not least, x) Britain does Great at next summer’s Olympics. Let's dig in.
Even as Eurozone leaders attempted to instill some meager sense of accomplishment following the latest (but certainly not last) Euro summit culminating with yet another 7-page term sheet which achieved absolutely nothing, and in fact succeeded in alienating the UK even more, the real game continues behind the scenes. And it is a game which the euro looks set to lose. As Bloomberg reports, in the aftermath of the Telegraph's latest report confirming what has been said here all about the collateral crunch in Europe, Europe's CEO are now actively preparing for the worst case outcome: the end of the Euro (despite UBS' and other banks' repeated calls that such an event would result in an end of the world). To wit: "Grupo Gowex (GOW), a Spanish provider of Wi-Fi wireless services, is moving funds to Germany because it expects Spain to exit the euro. German machinery maker GEA Group AG is setting maximum amounts held at any one bank. “I don’t trust Spain will remain in the euro zone,” said Jenaro Garcia, founder and chief executive officer of Madrid- based Grupo Gowex, which provides Wi-Fi access in 15 countries. “We moved our cash and deposits to Germany because Spain will come back to the peseta"... Contingency planning for an unraveling of the currency involves cutting investment, moving money to Germany, transferring headquarters to northern Europe from southern, and even going out of business." And to all the chatterboxes on CNBC repeating ad inf that a Eurozone collapse would be "manageable" here is a person who actually knows what he is talking about: "“How do you control an explosion in a controlled way?” Fiat SpA (F) Chief Executive Officer Sergio Marchionne told reporters in Brussels on Dec. 2. “That’s a contradiction in terms. This will be an implosion of some size with potentially disastrous consequences." He is right, and while the outcome is certain, it will not stop Europe's financial leader Germany from intervening in an attempt to prevent a surge in Deutsche Marks once the currency returns, and will likely set up capital control measures - that last bastion to every failing monetary system - to halt what is sure to be a record inflow of post-collapse DEM appreciating capital.