Remember when we said two months ago that one way or another the market will need to tumble to enforce the chain of events that lead to Spain demanding the bailout which has long been priced in, and (especially after yesterday's violent protest) Rajoy handing in his resignation? Well, it's "another." After nearly 3 months of suspending reality, in hopes to not "rock the boat" until the US presidential election, reality has made a quick and dramatic appearance in Europe, where after a day in which the EURUSD tumbled, events overnight have finally caught up. What happened? First, ECB's Asmussen said that the central bank would not participate in any debt restructuring, confirming any and all hopes that the ECB would ever be pari passu with regular bondholders were a pipe dream. Second, Plosser in the US said additional QE probably won't boost growth which has reverberated across a globe in which the only recourse left is, well, additional QE. Finally, pictures of tens of thousands rioting unemployed young men and women in Madrid did not help. The result: Spain's 10 Year is over 20 bps wider, and back over 6%, Germany just had a €5 billion 10 Year auction for which it only got €3.95 billion in bids, which means it was technically a failure, and the second uncovered auction in one month, and finally CDS across the continent, not to mention the option value that is the Spanish IBEX which may fall 3% today, have finally realized they are priced far too much to perfection and have, as a result, blown out.
- Portugal 521 bps, +46
- Spain 390 bps, +22
- Italy 360 bps, +25
- Germany 56 bps, +4
- France 120 bps, +9
- Ireland 307 bps, +20
Of all procyclical news, perhaps the second German bond auction failure in under a month was the most disturbing, reflecting the biggest problem with "capital markets" - a schism between what the secondary centrally-manipulated market indicates is fair value, and what end demand truly is. Confirming this was the German Finance Agency spokesman Joerg Mueller who said that the auction showed "weakening investor interest -- in a volatile market -- in bonds with a maturity longer than five years." Indeed it does.
For the full update of overnight events we go, as usual, to DB's Jim Reid:
Rajoy does have a fair bit on his plate at the moment though and yesterday was a pretty bad day for Spain newsflow wise. Protestors clashed with riot police outside the national parliament as Spaniards rallied against earlier budget cuts. Estimates on the number of protesters varied from several thousand to tens of thousands. Earlier Spain’s government announced that the cumulative YTD central government budget deficit had widened to EUR50bn (or 4.8% of GDP) in August, wider than the deficit seen in the same month last year (3.8%). Meanwhile in the Spanish regions, the head of the Catalan regional government announced that early regional elections will take place on 25th November this year (rather than in 2014 as scheduled). In its latest communication, CiU, the centre-right nationalist ruling party in Catalonia, mentioned the possibility to "consult the population on sovereignty", without making it clear whether this consultation would take the form of a referendum or merely early elections. According to DB's European economists, it seems that the second solution has been chosen which is likely the least disruptive as it would offer more room for ambiguity on the issue of future relations with the rest of Spain. Also Spain's Andalucia region said it will study seeking a EUR5bn liquidity line from the central government’s regional liquidity fund. Spain's deputy PM confirmed that the fund is expected to launch this week. It seems that trying to be a national level European political expert is necessary these days, but maybe Spain is showing that you also need to immerse yourself in regional politics too.
The negative tone to the European news was added to by the German, Dutch and Finnish finance ministers issuing a joint statement yesterday saying that while the ESM can take direct responsibility of banking sector problems that occur under a common banking supervision framework, “legacy assets should be under the responsibility of national authorities”. While the meaning of the statement was not entirely clear, the FT and WSJ took it to mean that the current plan to directly recapitalise Spain’s banks may be jeopardised. The WSJ added however, that a potential compromise could be reached where national government remain responsible for bank bailouts in the interim, but the ESM would take over capital injections after a Euro-wide banking supervisor was in place, citing an unnamed EU official.
The joint statement weighed on sentiment late in the US session and the weaker tone has continued into overnight markets with the KOSPI (-0.7%) and Hang Seng (-1.0%) both trading in the red this morning. The Nikkei is underperforming (-2.0%) as a large number of stocks trade ex-dividend today. Yesterday’s downbeat statement from Maersk, the world’s largest shipping company, who announced capacity cuts on Europe-Asia routes is weighing on a number of exporters. In its third quarter policy meeting statement, the PBOC said it will maintain “prudent monetary policy” in line with signs that the growth is “stabilising at a slower pace”. On that same note, the PBOC pumped a record RMB290bn into the money markets yesterday via reverse repos in an effort to ease liquidity ahead of next week’s weeklong national holiday.
On a more downbeat note, the Philly Fed’s Charles Plosser, a non-voter, said that QE3 will not boost economic growth or lower unemployment and raises the risk of long-run inflation, in line with his hawkish stance. Plosser said that currently elevated unemployment rates are structural in nature and therefore not amenable to monetary policy solutions (Reuters). Monti’s statement that he would not be running in Italian elections next year also weighed on sentiment late in the US session.
Returning to European headlines, speaking at a German industry conference in Berlin, Draghi said the ECB’s OMT program is a bridge to EU members rather than a solution to funding problems and that it was up to governments to follow through with "decisive actions". Draghi added that he expects the Eurozone to return to growth next year. Merkel's office issued a statement after the Chancellor’s meeting with Draghi in which the pair agreed considerable reform efforts by Eurozone governments were still needed to boost competitiveness and restore credibility. In Greece, the finance ministry said that the country will have a EUR13-15bn funding gap if Greece is given an additional two years to meet fiscal targets. The finance ministry added that Greece may seek a roll-over of bonds held by the ECB as one option to bridge the financing gap. (Reuters). Finally, German newspaper Bild said that lawyers at the Bundesbank were checking into the legality of the ECB's OMT program. The Bundesbank refused to confirm the report.
Turning to the day ahead, it should be a relatively quiet day in terms of data. In the European time zone, the key data releases to look out for will be German CPI, French consumer confidence and jobs data and Italian/UK retail sales. In the US, the August new home sales print is due. A number of leaders are scheduled to speak at the UN General Assembly including Italy’s PM and the EU’s Van Rompuy. Also worth noting is a joint conference with the Bundesbank’s Weidmann and Italian FM Grilli scheduled for the London afternoon.
Meanwhile, Greece’s two largest unions have called a 24-hour strike today.