Europe In Turmoil: Spreads Explode On Portulitical Crisis; Egypt Ultimatum Nears

Tyler Durden's picture

And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.

Bloomberg has more:

Secretary of State for Treasury Maria Luis Albuquerque replaced Vitor Gaspar at the Ministry of Finance. That prompted Paulo Portas, who leads the smaller CDS party in the coalition government, to quit, saying the new minister would offer “mere continuity” of the country’s deficit-cutting plans.


“It sounds the alarm bell of austerity fatigue,” said David Schnautz, a strategist at Commerzbank AG in New York. “This domestic noise is definitely negative.”


Portugal’s 10-year bond yield jumped to 8 percent earlier today, the highest level since Nov. 27, and was hovering at 7.65 percent as of 11:10 a.m. London time. The nation pays an average 3.2 percent for loans it received as part of the aid package.


Prime Minister Pedro Passos Coelho is battling rising unemployment and a deepening recession as he cuts spending and increases taxes to meet terms of a 78 billion-euro ($101 billion) rescue plan monitored by the European Union, the International Monetary Fund and the European Central Bank, known as the Troika. Coelho announced measures on May 3 intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers.

The contagion effect has quickly spread to other bond markets and both Italian and Spanish 10% spreads were seen wider by over 10bps. Financials underperformed on the sector breakdown, as fears of potential liquidity squeeze, together with the latest ratings action by S&P who cut Barclays, Deutsche Bank and Credit Suisse rating to A- from A, saw credit spreads widen. iTraxx crossover and sub fin indices widened by over 15bps, while the Eurodollar curve steepened on prospect of higher borrowing costs. In terms of macroeconomic releases this morning, the latest round of Eurozone Services PMIs had little impact on the price action, however the release of much better than expected UK Services PMIs saw GBP/USD break above 1.5200 level. Finally, a weaker than expected Eurozone Service PMI print (48.3, Exp. 48.6, last 48.6, once again driven by a weaker Germany) has certainly not helped matters.

If nothing else, at least Draghi's unused (and non-existent) OMT bazooka will soon have to be used. We will see just how effective it will be.

Looking elsewhere, the army in Egypt has given a deadline of around 1530 London time on Wednesday for the crisis to be dealt with; otherwise the so-called road map will be put forward by the army which included the outline for new presidential elections, the suspension of the new constitution and the dissolution of parliament. However, an Egypt military source denied local media reports on a political road map and instead suggested that next step will be to invite political, social and economic figures to talks on vision of the road map.

A quick summary of the European damage:

  • Portugal 10Y yield up 89bps to 7.61%, was up 130bps at 8.023% earlier
  • Spanish 10Y yield up 14bps to 4.76%
  • Italian 10Y yield up 7bps to 4.51%
  • U.K. 10Y yield down 4bps to 2.34%
  • German 10Y yield down 6bps to 1.64%
  • Bund future up 0.53% to 142.44
  • BTP future down 0.88% to 109.77
  • EUR/USD down 0.13% to $1.2962
  • Dollar Index down 0.15% to 83.42
  • Sterling spot up 0.62% to 1.525
  • 1Y euro cross currency basis swap down 1bp to -18bps
  • Stoxx 600 down 1.21% to 283.67

DB's Jim Reid has the full overnight rundown

The last 12-24 hours have turned into a bit of a round-the-globe Sovereign watch with Brazil, Egypt and Portugal all being highly newsworthy. Starting with Brazil, the BOVESPA (-4.2%) suffered its biggest one-day loss since September 2011, reaching its lowest level since April 2009, after the country reported weaker than expected industrial output data. Industrial production fell 2% mom (vs -1.1% expected) which is the worst result for the month of May since 1995 when industrial output contracted by 11%. As with other EM equities, the BOVESPA had a rough June. The index recorded 7 trading days with falls greater than 2% during the month, which is exactly half the number seen in the whole of 2012. Amongst the individual stock moves yesterday, there were material declines in market
heavyweights including Vale (-3.4%) and Petrobras (-4.8%) which both fell through their 52-week lows. On the credit side, Brazil’s 5yr CDS widened by about 9bp to 195bp. Conditions have also been challenging for Brazil's corporate funding markets with no Brazilian company able to price an international bond since May 15th according to Bloomberg data.

Moving to Portugal, there were signs of austerity fatigue amongst the ruling coalition government after Prime Minister Coelho lost two key ministers in as many days. The resignation of Finance Minister Vitor Gaspar was promptly followed by that of the foreign minister Paulo Portas who is also head of the smaller CDS party in the coalition. Portas reportedly disagreed with the PM’s decision to name Secretary of State for Treasury Maria Luis Albuquerque as a replacement for the FM, saying it would mean a continuation of the policies
deepening the country’s recession (Bloomberg). PM Coelho said he didn’t accept the resignation request and hasn’t asked the President to dismiss Portas due to the minister’s importance in the coalition. Portas did not say whether he would take his junior party out of the government — a step which would leave the government without a parliamentary majority. Portuguese bond yields added 33bp yesterday to 6.72% and are now up more than 140bp since the May lows. The PSI equity index finished 1.3% weaker. Elsewhere in the periphery, Greek 10yr yields jumped by 15bp after it was reported that the troika had given a 3-day ultimatum to the government to reassure international lenders that it can deliver on conditions attached to its bailout programme. The report was later denied by a spokesperson from the European Commission (Ekathimerini).

Speaking of ultimatums, President Mursi appeared on television yesterday to reject an ultimatum from the Egyptian military that he share power with his political opponents or face a military solution. In response, the Egyptian army said it was ready to sacrifice “blood…and its people” which has helped send WTI crude (+2.3% this morning) above the $100/bbl mark. At least one anti-Mursi TV station put up a clock counting down to the end of the military's ultimatum, putting it at 4 p.m. today (or 1400 GMT), though a countdown clock posted online by Mursi opponents put the deadline one hour later. The military did not give a precise hour (Associated Press). WTI has gained 17% since its low in mid-April, more than double an 8% gain in Brent crude over the same period. It will be interesting to see whether this shows up in US inflation numbers in the next few months and whether it impacts growth.

Overnight, Asian stocks are trading with a negative tone taking the lead from the S&P500 which faded into the close for the third consecutive day. Losses are being led by a -1.9% and 1.5% decline in the Hang Seng and Shanghai Composite respectively with the main laggards being Chinese banks and real estate developers. China’s official services PMI came in 0.4pts weaker than last month (53.9 vs 54.3) while the HSBC services PMI was a touch stronger (51.3 vs 51.2). On the fixed income side, Asian credit is trading about 9bp wider this morning but 10yr UST yield remain in a tight range (unchanged at 2.47% as we type). The AUDUSD is down 0.4% after disappointing Australian retail sales data (0.1% vs 0.3%) and comments from the RBA governor that the central bank will do what it reasonably can to assist the transition from a resource-led economy. S&P’s downgrade of several major European investment banking groups is also dampening overnight sentiment.

Looking at today’s calendar, Euroarea service PMIs, the US non-manufacturing ISM and ADP employment report are the three key highlights on the data docket. The last two will provide the final employment-related data points ahead of the looming payroll print on Friday. Specifically on the ADP, DB’s US economists view the ADP as the single best predictor of monthly changes in payrolls. Over the last 12 months, the average error between the difference in private payrolls and ADP has been -14k, which is quite small since the standard error on private payrolls is about 75k per month. US weekly jobless claims have been brought forward to today due to Independence Day holidays tomorrow. So these are going to be important numbers for markets. A reminder that US bond and equity markets will be shutting early today ahead of Independence Day tomorrow.

* * *

SocGen recaps the FX macro highlights

There were further gains in periphery debt prices yesterday resulting in lower yields in moves that were accompanied by broad based JPY selling and a the ascent over130.50 in EUR/JPY. It is tempting to interpolate a return of Japanese investor flows into eurozone debt two days before the ECB casts its verdict on monetary policy and before Spanish benchmark supply, but the co-movement of yields and the currency pair have been no coincidence and suggest Japanese flows may have flipped from the relentless repatriation from overseas in the spring. The 4.7% bounce in EUR/JPY from the June lows should not realistically be challenged by a dovish ECB (if that's how the press conference turns out tomorrow). The correlation of the currency pair with the US/EU 10y swap spread is only 0.41 and short JPY positions are considerably less heavy than they were six weeks ago. Option structures and flows aside, only a disappointing US payrolls report on Friday would give investors a reason to book profits. Meanwhile, Greece continues to bubble in the background as a EUR negative but the EC yesterday denied it has set the country a three-day deadline to reassure lenders if can deliver on the bailout terms. It was announced that the Eurogroup will make a decision next Monday whether or not to disburse the next EUR6.3bn bailout tranche to help cover the repayment of EUR2.17bn worth of government debt on 20 August.

A trio of key US labour market data will take precedence today over pretty much everything else. Initial claims, ADP and the ISM non-manufacturing services survey are due before US markets shut for Independence Day tomorrow. We got an inkling yesterday of the direction the market is willing to push the USD, irrespective of the fact that US yields continue to trade remarkably well in the face of Friday's upbeat employment expectations. Today's ADP and ISM releases may prove whether the calm is deceptive and the pivoting around 2.50% in cash yields and 2.70% in swaps is merely a testimony of investors playing for time before Friday and a function of reduced trading volume.

The Riksbank is expected to keep its benchmark rate on hold at 1.00% today. The bank issued a lower repo rate forecast last April and is likely to reiterate this view today without making meaningful changes to the underlying forecasts. Increases in the repo rate are not expected until the second half of 2014. For EUR/SEK, quite a bit rides on the ECB tomorrow and the UST reaction to payrolls tomorrow, but with the mean reversion move from 8.90 nearly over, SEK bears may be tempted to reload long EUR/SEK (and USD/SEK).

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Incubus's picture

Where's my goddamned blackass swan already

GetZeeGold's picture



Word is we're sending some F-16s to Egypt....can't wait to see who gets them.

j0nx's picture

Yeah yet your government says you can't be trusted with a 25 round squirrel gun. THIS is what the NRA should be pumping across all tv's across the land: Your government sells weapons to terrorists yet tells you that you can't and shouldn't have access to a 25 round squirrel gun. Pathetic that people allow this shit.

GetZeeGold's picture



Only terrorists can be trusted with sidewinder missiles and supersonic aircraft.....they have the proper training.


We don't teach our school children the proper use of squirrel guns.....therefore they shouldn't have them.

tango's picture

LOL  When I grew up a zillion years ago that was the ONLY reason to join the NRA.  My dad entered me in the gun safety course in the faint hopes I'd become an avid hunter.   I learned about guns and still hate hunting.  The point is that back then this was not an issue, not even on the radar, not even an inkling of a conflict.   Simply common sense - if you have a gun you should know how to use it.

It was not until the radical politicalization of everyday life that hunting became a subject for debate, laws, speeches, fund-raising, etc. 

Treason Season's picture


"...radical politicalization of everyday life."

el Gallinazo's picture

Gungrabbing is always a historical and necessary prequel to genocide.

el Gallinazo's picture

Squirrels of the World Unite!

Totentänzerlied's picture

Yeah, like how we let all active duty noncoms open carry their weapon of choice while off-duty, and give all military combat personnel an automatic assault rifle and 500 rounds as a free gift at time of discharge, because they have "proper training"... LOL!

SmallerGovNow2's picture

Take your pick, they are hatching at break neck speed around the globe as we blog here...

Headbanger's picture

OT:    Looks like Snowden just left Moscow on Bolivia Air Force One

EclecticParrot's picture


Investor-1's picture

copy some good traders who know how to make a good profit out of all this financial turmoil.

slotmouth's picture

I hear Corzine is recommending a leveraged long position in Portugese debt.

nmewn's picture

Clearly this calls for Draghi, Bernanke, O'Barry and Merkel to do a conga line dance across the world stage. 

Ghordius's picture

lol - I spend so much time getting incensed on how Tyler writes about Europe that I sometimes forget to praise him

though I probably will never understand the need for the puns, like "portu-litical", or the gist around "as austerity's "poster child" has rapidly become Europe's forgotten "dunce.""

when it comes to the eurozone, criticism is still mainly of the Keynesian persuation. that's imho a good sign in this whole damned mess

regarding "If nothing else, at least Draghi's unused (and non-existent) OMT bazooka will soon have to be used" - also a good thing to read of yet-unspent and possibly never-to-be-used monetary bazookas. but OMT is imo strongly misunderstood: it's not meant to "raise all boats", only to "break the legs of speculators" in the "good old continental CB tradition"

overmedicatedundersexed's picture

Ghordius, seems like the UN would be stepping into the mess in Egypt and the EU, you know giving them both advice. LOL, useless blue helmets on sale - is the UN even still there? how do the UN goons justify the salary they pocket each week?

Ghordius's picture

can't write what I think about that while still on board of a UN black chopper paid by US taxes, manned by EU Stormtroops eating German sausages and French baguettes still flying over Texas. the NSA could record that, one of the millions of geeks it employs might defect, publish the transcript and poor ol' Ghordius would have to stand up in front of three Popes and grovel in search for excuses. it's bad for my back, groveling

Ghordius's picture

not for me, thanks. joking is one thing, betraying what you believe in is imho a very different one

Eally Ucked's picture

If you were not so one sided observer you would notice that Tylers use the same style talking about US or Japan or whoever. It's their goal to stir debate and controversy, it's good for the site.

But you seem to go a bit overboard in defense of everything European, I read your posts about Evo Morales plane saga and I could not believe that you can use such arguments in that case.

Ghordius's picture

yes, he uses the same style - I'm just stating that I often don't understand it. and this is controversy, isn't it? I still don't, what is funny about "portulitical"? (except that it is on the expense of the name of a nation, a language and a culture - this I do get)

including my defense of some things european where I often find that if you pontificate, you should have a more grounded, deeper knowledge, first

but please do add your opinion to my initial "plane saga" comment

Skin666's picture

Are you german Ghordius?

I believe they call it wit, or satire, or lampooning...

It is very funny...

Ghordius's picture

ok, if you found it funny then it's ok - I presume it's in the league with the old "Miserable Fat Belgian Bastards" - which is funny, even though part of the lampooning is directed against this very jingoistic vein - which makes it truly funny

Eally Ucked's picture

I'm European, and I was granted political asylum in Austria many years ago, I can understand many things, and I follow closely events in Europe, I believe I have "grounded and deep knowledge" what is going on there, but maybe we differ at the interpretation of certain facts.

Ghordius's picture

I mainly defended whoever decided to bar that flight (probably Italy) from charges of hypocrisy, particularly in the light of what nearly happened last time the US redirected a plane, in 1985

About Austria and political asylum, a friend of mine went through quite an ordeal to get it, in Austria, and I stood him by. he had no passport, no nationality, and we had to bring him physically to that Republic, for which I had to request the help of people who did similar favours to me at a different border

but this is a long time ago, laws and procedures change, so perhaps my view is outdated. in which case I do beg you to give me a fresher view with other interpretations

overmedicatedundersexed's picture

Ghordius does not defend the UN inaction the last 15 yrs, yet gov across the globe fund it, pay it lip service, was the UN just needed when the world had a cold war? now - like an old race horse out in the field wating for it's end.

If the UN is as ineffective and even not worthy of MSM attention, as we are seeing today, what does the speak to a world government? the NWO , the un's brother, should be worried, at the UN's fall, a joke, an expensive joke-

we are witness to the failure of the left's ideal the United Nations, the failure of the rule of law, the failure across the globe of large centralized government (EU)..yet Ghordius as well written and informed does not see what the Failure of the UN portends for his EU frankenstein.

Ghordius's picture

what is your point? you are talking about three different clubs of nations as if they were one and the same. why do you want me to defend (or not) the UN? every single action of that club is subject to the veto of the Big Nuclear Five, remember? and why do you think that I would support a NWO? or why do you connect - as many do, in your country - the eurozone and/or the EU with NWO? or why do you think I'm not critical of the EU (I am, though for a completely different set of reasons than ZH)?

if you look at me for confirmation or rejection of some deeply held beliefs you hold, you might have to remember that some of them are alien and quite unknown, to me - and this includes the "UN black choppers" that populate some people's imagination

overmedicatedundersexed's picture

my my ghordius, as a kindness , I have pointed out an example for all to see of what you will not see. the dream of unification is at best what the UN has become. I know you do not see it. that is why I want your subconcious to work on it seem a good person - unity for the purpose of control and crime on the people is what we see with each of the organizations listed. perhaps you are still trapped in " the right of kings".

Ghordius's picture

you leave me confused: are you asking for one world authority, for many, or for none? meanwhile I confess I somewhat like our setup(s), in the eurozone, which is many for some things and one regional for certain others

Escapedgoat's picture

Certain people like myself started out and thought that a United Europe is a good thing.

But after all these fiaskos, I DO NOT LIKE THAT AT ALL.

There is Not a single thing that I can hold to account, any of these Eurocrats in any meaningful manner. Even the so called elections, are a FARCE.

We saw that when things, like Referenda, go against the Eurocrats, the people have  to vote, time and again.

Until they get the desired result (Ask the Irish)

As for the poor sods, the Greeks, they were never  allowed to vote, in case they got it WRONG.

Now anybody that gets Out of that hell, has my support.

i do not like any  AUTHORITY  whatsoever. That is NOT A DEMOCRACY.

Pay attention to the word "Democracy". And authority without Accountability by the people  is Not A Democracy.


Eally Ucked's picture

You indicated that revoking right of passage for Bolivian presidential plane by European countries was some kind of self defense act by them, because Americans  would force land that plane on their soil anyway and cause major diplomatic problems, isn't it? So what is worth their sovereingty, which you defend so staunchly? 

Ghordius's picture

in extreme shortness: is sovereignty about doing what someone else wants you to do? In this case the US, the UK, Bolivia, Snowden and his supporters? Or is it about what the sovereign (represented by it's government) wants to do? Or not to do? I know that this is not a nice answer, but please think about it

In this discussion we could nearly forget that the US and the UK want him as a criminal, eh? Or that extradition treaties apply

Eally Ucked's picture

That was nice try man, lining up US and UK on one side and Bolivia and Snowden (and supporters) on other. Pretty even contest which answers your second question what sovereign goverment wants to do or not to do. And that is an essence of our discussion.

What if sovereign country or court wanted Obama or Hollande (just an example) as war criminals or something, is there any entity to enforce such thing? If not why?

Ghordius's picture

I disagree. I lined up the US, the UK, Bolivia, Snowden and his supporters on one side - and the govs that refused passage to a plane on the other side

your second question is something completely different, depending if you are asking for a war (as it was done for the fascists) or for one world authority

Eally Ucked's picture

That's really innovative, all of them on one side? I like it!

Ghordius's picture

yes. on one side, lots of people that want something. on the other side, people that don't want to be dragged in it (and again, remember the extradition treaties). you asked asylum in Austria. did you ever notice the word & concept of neutrality, there?

mvsjcl's picture

At least, they don't practice porture with the same reckless abandon that the Americans do.

Ghordius's picture

now this I find funny

Skin666's picture

+ 1

Tyler(s) kicks everyone in the nuts, regardless of which protection racket they are running...

This is Fight Club after all...

Ahhhh, another day, another clusterfuck on good old planet earth...

FJ's picture

German government spokesman says: "Will continue to support Portugal's reform efforts....


although, statement only good until Mrs. Merkel has been re-appointed...then we'll see.

fukidontknow's picture

Angela Merkel arrives at Passport Control at Paris airport.
“Nationality?” asks the immigration officer.
“German,” she replies.
“No, just here for a few days.”

NoDebt's picture

Impossible for me to read this article with references to Portugal's "CDS Party" and not read it as the "Credit Default Swap Party" in my mind. 

Another "unused (and non-existent) bazooka that will soon have to be used"?  Nah, they'll never let them trigger!

aleph0's picture


Seems to be pretty much up-to-date.


THE DORK OF CORK's picture

Its in Iberias interest to default and /or devalue.

Countries cannot sustain such a dramatic drop in energy consumption and survive for very long.


The Euro  Deflation of Europe starting in 1980~ is the mirror image of BRIC inflation.


How long will Europe remain the slavemasters house ?

That is the central question of our time.


A euro breakup will tranform the global market for coal.

With Auzie ships making the long journey to Europe rather then the short run towards Asia,


Incubus's picture

We could've approached the 21st century as rational human beings and found great solutions to the problems that face us today. 


But instead, we went about it the same way we've always done.  Now it comes down to this: there are too many people on the planet competing for diminishing resources.  A trillion dollar war-machine beat out a rotting education system and information infrastructure; individual rights, freedom.


7,000,000,000 people can't  be maintained.

Now comes the culling.




tip e. canoe's picture

We could've approached the 21st century as rational human beings and found great solutions to the problems that face us today.

this is the Great Tragedy of our times...lost opportunity.