Morgan Stanley On Europe: "We're Getting Worried"

Tyler Durden's picture

We have noted the similarities between the current risk rally and previous years but Morgan Stanley's Laurence Mutkin is "getting worried" that investors expect the second half of this year to be different (and consistently bullish). Much of the current risk-on rally around the world was sparked by Draghi's "whatever it takes" moment theoretically reducing the downside tail-risk in Europe. Well, systemic risk in Europe is now at recent lows...

and just as in 1H12 and 1H 11, core yields are rising notably, peripheral spreads compressing, money-market curves are steepening, and 2s5s10s cheapening.


Of course, he notes, 2013 is different from previous years (OMT for example) but much rests on how ECB's Draghi responds to the recent (LTRO-repayment-driven) rise in EONIA forwards. Albert Einstein reportedly said that insanity is doing the same thing over and over again and expecting different results. Applying that to the European bond market - for the third time running, the year has opened well but it would be insane to expect a different outcome (than the typically bearish reversion) this time?


Via Morgan Stanley, low could Core 2-year yields go? Shockingly, we think they could retrace nearly all the recent sell-off, under the conditions that

  • (1) banks' weekly 3y LTRO repayments fall to near zero (even if the first repayment of the February tranche at end-Feb is as big as the first repayment of the December tranche last week); and
  • (2) systemic sovereign stresses re-assert themselves; and/or 
  • (3) president Draghi forcefully states that the ECB will prevent a sharp rise in EONIA.

In the near term, therefore, much depends on how ECB president Draghi responds to the recent rise in EONIA forwards at next week’s Press Conference. Our economists doubt he’ll lean heavily against the rise in rates, but we hope he'll avoid the mistake his predecessor made in blithely characterizing the rise in EONIAs after the 1y LTROs’ expiry in 2010 as being no more than evidence of the improving health of the banks.


An End to the Rally?

Peripheral spread has tightened considerably since the OMT announcement. We have argued that the “magic” of the OMT has reduced tail risk events and hence bought time for peripheral countries’ economies to stablise and recover. This has been the case: yields have fallen and market confidence risen, leading to encouraging signs:

  • Converging current account balances in core-peripheral
  • Improving funding conditions for the banking system, evident in LTRO repayments; peripheral deposit flows stablised; and Target 2 balances and foreign ownership of Spanish and Italian government bonds showed signs of improvement

However, do the signs of improvement warrant further tightening? The answer is less certain than it was three months ago in our view. Given the level of peripheral spreads, the risk of a reversal is rising, due to a few critical factors:

  • Rising funding cost because of LTRO repayments: The larger than expected initial LTRO repayment has taken the markets by surprise and led to a rise in the money market rates and short-end core rates. Despite its possibly being a sign of a stronger banking system, the rising funding costs directly reduce the carry and attractiveness of owning peripheral bonds, in particular relative to Germany given rising German yields. 
  • End of further easing in a fragile recovery: With a seemingly stronger banking system and funding markets, ECB’s rhetoric became less dovish than markets expected in the January meeting. However, the weaker parts of the banking system as well as peripheral sovereigns are still relying on low funding costs to aid any further recovery.

    If the end of further easing is signaled and priced in by the markets, the fragile recovery could be dampened fairly quickly, given the rise in funding costs. So far we have already seen a small tick up in the Monetary Transmission Index for Spain. 

  • Valuation: Both Spain and Italy spreads versus Germany have tightened close to or through the lows reached following the 3yr LTROs. Despite the market’s acknowledgement that the OMT is a more credible backstop, valuations are less appealing now: Italy is overvalued and Spain is close to fair value.

  • Debt sustainability prospects for peripheral sovereigns have already worsened slightly this year, due to the combination of a stronger euro and higher absolute yield levels. 0-5y Spain and Italy yields are +30bp vs January’s lows; and our FX strategists estimate that the euro’s recent rally has made it some 5% and 12% overvalued for Spain and Italy respectively  – an additional drag on nominal growth prospects. As yet, this deterioration in the outlook for debt dynamics has been pretty negligible. But if core rates push higher and take peripherals with them, the market could focus more on debt sustainability again.

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fonzannoon's picture

Kyle Bass has said ad nauseum that Europe has not recapped their when do they pay the piper? If ever?

kliguy38's picture

They'll pay the piper....Nature's law......and Nature sets the time not the banks......the longer this is pushed out the bigger the bang. Unfortunately a lot of other sovereigns are in the blast one wants the radiation and its all going to come home.

kliguy38's picture

BTW we have not recapped our banks either.......we've only added to our reserves and reduced our leverage. It really will have no effect if the Eurozone goes......our banks cannot cover their derivative swaps, much less some of their outrageous commodity and PM shorts. Its all a house of cards and if the dollar slips its reserve status it will end very quickly

Harlequin001's picture

'Morgan Stanley On Europe: "We're Getting Worried"'

what's this 'getting'?

surely they've offloaded all their crap to the muppets by now...

TPTB_r_TBTF's picture

It's always the opposite of what they say.


They are not worried.  They just want to worry the muppets, so the muppets will sell low, so the bankers can buy low.

Their analysts actually see things as getting better soon, so they first scare the muppets out of the market.  Then they can sell their position back to the muppets at a higher price.

GetZeeGold's picture



It's always the opposite of what they say.


You might actually want to listen to them this time......unless you're Jon Corzine.

Popo's picture

60 years after WWII and here we are watching Europe and Japan implode.   


TPTB_r_TBTF's picture

> ...unless you're Jon Corzine.


Man! You blew my cover!  :-(


Well, since you already know who i am, here's another little secret-

Morgan Stanley are creating this little crisis to scare the House of Reps into "approriate" action.  CanT reveal that action just yet ...

grid-b-gone's picture

The failure of any fiat currency brings into question the viability of all paper. This was a prime reason Geithner lobbied so hard to reverse austerity moves in Europe.

To extend and pretend for as long as possible, the world's fiat currencies must remain somewhat equally worthless.

Damn Iceland is the wizzard behind the curtain who threatens to tell Average Jolene she could have clicked her heels together at any time, which is why the official line will be, "We can't turn back now." 


Daily Bail's picture

This is worth the click.

OFFICIAL: 'The Real Euro Crisis Is Just Getting Started - 'All hell will break loose when the central bank sugar ends'

bank guy in Brussels's picture

The European banks will blow up when the euro-zone starts to break apart

Right after the first country makes the move to start leaving ... Italy, Spain, Greece or Cyprus

The chain-reaction will blow up the banks and the ECB will print to save the core euro, the northern-Germanic countries ... even France might leave the euro

And ironically the euro will once again rise in value with the southern countries out ...

hairball48's picture

Will the northern countries keep a "new" euro when the breakup comes? Or will they go back to Dmark, gilders, etc.? Just asking. Seems that eventually the same problem of no fiscal union will crop up?

DoChenRollingBearing's picture

@ bank guy


I have been tossing out the notion that the key domino would be FRANCE.  That if France fails (and I mean very badly, worse so than Greece (etc.) have so far), then the financial tsunami would strike EVERYWHERE very quickly, 48 hours to get your last stuff at the stores...  My notion goes on to note that if ITALY falls (again, HARD), then France would be in grave danger.

I would be interested in your comments (and of course from everyone else).

Landrew's picture

@ DoChen I do doubt the weak would leave a system they find support. I would rather think the strongest leave first, that being Germany. The real clue they are leaving sooner than anyone thinks is the withdraw of gold holdings at the N.Y. Fed? I also would like to know what you think. 

goldenbuddha454's picture

The U.S. and Japan having been at currency war has only driven Europe to the breaking point of the unemployment abyss.  Some of the Euro countries are at 20% unemployment now, so if the EU doesn't start to get in on the currency war and start printing, how much higher will EU unemployment go?  The higher the Euro value the more unemployment because of the non-competitiveness of their exports.  There's either going to be a global currency war with all sides involved or some hippy nut from the 60's will put forth the notion that 'in order to stop the currency wars we need one common global currency'.  Can't wait til that happens!

VATICANT's picture

48 hours if we're lucky; likely 12-24 hours. And that's assuming you've got plenty benjamins on deck since the electronic charging and atm withdrawals will fail immediately. It's a dismaly sad state we're in where soo many are awake and alert to what is soon to be our reality, yet soo many have not stashed, piled, and fortified nearly enough to actually endure the coming world collapse and some way some how actually resist Satan's nwo. Yet we all can afford laptops and smart phones

Lore's picture

The Germans essentially made their first move when they asked for the return of their gold. The market should already be pricing in Europe breakup. In fact, the outcome should have been clear for at least the last few months.

Regardless, this is all about making banksters happy. How does any of it help working-class families in crisis?  How does it pre-empt the rise of political extremism?  How do interest rates mean more than banging pots and pans to the person on the street?

So sorry if these questions seem banal, but public opinion should figure into the equation at some point.

TPTB_r_TBTF's picture

Public opinion figures into the equation right before they declare martial law.

Landrew's picture

I don't think I understand your logic. Why would the weak leave a system that supports it? Most likely the strong will leave first. As of now even Germany isn't as strong as it was and would leave first true? I do value your opinion and would like your thoughts on Germany leaving first. One clue I think is the transfer of gold from the N.Y. Fed.

HoaX's picture

Only thing Germany is leaving is the U.S.

Since everyone knows with the Bernank printing money like there´s no tomorrow and the Chinese getting more than a little nervous about it, it´s not going to be Europe that breaks down first (although you Yanks sure tried to achieve that the past 5 years), but the USA to lose its reserve currency status sooner than later, and when that happens, good luck getting your gold back since the shit will hit the proverbial fan over there.

Cheers and have a good weekend.

Yen Cross's picture

 FX Flows from Asia  and the U.K into (mainland EU) are substantial.  Cable and the aud/usd trade are "heavy". When you look at DXY breaking a double bottom last night ( 78.91) from October, and another short term pattern from mid December, makes me nervous.

  It's all about flows into Europe. Remember Draghis tape bomb last fall? It's time to pay the proverbial PIPER...

   The ECB want's favorable F/X exchange rates before it QE's. (cut's rates)...

   Japan is buying Piigs with borrowed yen.(JGB monetization) <

  The BoJ is directly interviening in the F/X markets. I will send some clearing trade amounts(transaction) and origination "cert #'s", that have BoJ written all over them...  BoJ is actively interveining in F/X spot!

goldenbuddha454's picture

So if China quits buying Japanese bonds, what happens to the Euro?

kwality's picture

So when it collapses, do we all declare Japan bankrupt, put an eviction notice on the door, and change the locks?  All impaired counterparties then receive a free Japanese citizen as repayment?  I hear they make good night lights.

bobthehorse's picture

Europe's toast.

We all know that.

Yet nothing seems to happen.

I don't get it.

Tango in the Blight's picture

Wasn't Morgan Stanley poised to go bust last year? What happened?

Dr. Engali's picture

I was wondering the same thing when I read this report. Their equity and CDS were under stress , then once Dragqueen made his announcement they were all fixed...... It seems.

Yen Cross's picture

 If I only knew, what I know now? Nice work Doc. & Tango.

Manipuflation's picture

I have a question for you all to consider.  What is going on with the dating here?

Manipuflation's picture

Yen, it is a reasonable question if you look at the data.  It's not hard to see.

Yen Cross's picture

   Are you fucking kidding me?  I'm the guy that buys your student loans!    

Manipuflation's picture

LOL  I do not have any student loans.  So now what?

Just Ice's picture

I only glanced at the data you linked but am assuming "closing date" means initial close date scheduled for an acquisition whereas updated date means date the acquisition actually did close or has been rescheduled for as anticipated to close.  (Similar to an escrow for sale of any other business or real property...there's a prospective date the sale is set to close when papers first signed but then the date can be pushed to later as contingencies of the sale are met/eliminated/delayed.) 

gwar5's picture




Yesterday, upon the stair,
I had a worry that wasn’t there
It wasn’t there again today
I wish, I wish It’d go away...




falak pema's picture

maybe you don't stare hard enuff! 

Stare it down !

scrappy's picture

Yes, we need to work "with" nature going forward.


It's doable,we have the tools, material, and labor, and the need bigtime.


Reminds me of the Guernsey experiment, at least in the short term.



blindman's picture

Singing In The Rain - Singing In The Rain (Gene Kelly) [HD Widescreen]
Jimmy Durante - ( If You're ) Young at Heart
" is the best part, you have a head start
if you are among the very young at heart." ...
be happy morgan stanley, don't worry. it will rain
"money" and you will get wet while watching the world
burn without a care. moar moar moar ... and
singing in the rain .....

helping_friendly_book's picture


I am a serial poster. Sorry but, I must:


Please look at this to explain why the people in North America are being abused by the "chosen ones"

This news clip is from FOX news so I can say it is right wing.

if you watch the whole video you will be appalled by the truth.

I never thought I would ever claim a Fox news segment as the most honest reporting I have ever seen.

Bloomberg will not allow me to post this video.

the truth watch if you dare

It seems Bloomberg news hires disqus to censor their comment section.

Please feel free to go to any Bloomberg article and post this news report produced by FOX news.

I think disqus is paid by the piece, meaning they are paid a set amount for every censor of a comment.

I propose we break Bloomberg by posting this video, which is red pill stuff, on every article produced on


DoChenRollingBearing's picture

Uhm, interesting video, but it is almost five years old, just sayin'...

helping_friendly_book's picture

Uhm, does the truth have an expiration date?

You, obviously, can not reason? You don't get it?

I don't understand why you are not in abhorrence?

What is wrong with you?

South Korean? Say hello to your Northern cousins breaking down the fence on the 38th.

They will send their women to detonate the mines to make a path for the millions!


HoaX's picture

Disqus has no fuckin moderator, but they auto-block links being posted and give you that message. You´re a bit paranoid dude.

If you wanna post a link on disqus use [ ] at certain points and tell people to remove them.

Like [www].Yousuck[.gov]

Monedas's picture

We give fuel rods to North Korea .... we give secrets to China about getting a satellite into orbit .... we are clueless about 9/11 .... I think we should pay Israel to spy on us .... and tell us where we're fucking up !   We could close down the CIA .... contract with Mosad .... for ten cents on the dollar .... and no more Hillary Clinton "Benghazis" !         If the Israelis admitted they were on to the 9/11 terrorists .... we probably would have tried them for espionage .... if they were seen celebrating in a New Jersey parking lot .... it was because they got their Jews to be late for work that day .... never did hear the breakdown on how many Jews were killed on 9/11 .... do you have any data on that .... how many Jews would normally be working in the twin towers .... how many were working that day .... and how many died ?

helping_friendly_book's picture

You are just an inbred incestuous Israeli tool.

Brinnng baaaack thhhe guillotine...... execute all the Israeli trash.....

just imagine the lyrics to the music of Steely Dan, Boston Rag.

No offence to Steely Dan. I've seen them many times and I enjoy their jam.

One of few Jews I respect.

Monedas is just a Stern gang Pollock. Go back to Poland from whence you came.

We need to take care of you: boy.

Yen Cross's picture

Be well all. I'm going to link the latest BoJ PDF. Egress. In the morning. 

kito's picture

morgan stanley is worried.....yeah...righhhhhttt.................

Yen Cross's picture

 I have " middle of the night" trading stories.   Last night, GBP/USD i escaped by 2 pips before New York opened.

     The retrace looked good.  It was< I broke even on the trade. I was Trading Yen retraces, and hedging. ( I got lucky)