It's one of those days. US equity markets are levitating oin extremely thin volume against the trend in every other risk-asset market. Treasury yields are pushing lower as safety is sought, VIX is bid as protection is sought ahead of the weekend, credit markets are leaking lower (at lows of day), and JPY strength is not helping the carry traders... but then again, none of that matters... we need moar...because all that matters is a green Dow close for the week.
Behold a lesson in magical "value creation":
- SPAIN'S BANK RESCUE FUND TO VALUE BANKIA SHARES AT EUR 0.01 - As a reminder, Bankia is the recently broke bank that was created when it subsumed a bunch of other formerly broke banks.
- SPAIN BANK FUND AIMS FOR NOMINAL BANKIA SHARE VALUE OF EUR 1.00
- SPAIN'S BANK RESCUE FUND TO DO REVERSE STOCK SPLIT OF BANKIA STOCK
- SPAIN BANK RESCUE FUND SAYS BANKIA SHARES WILL BE WORTH EUR 1.00 AFTER 100-TO-1 REVERSE STOCK SPLIT
To explain for those confused: you start with a broke, literally, bank. You value the "equity" at the lowest possible increment in existence. Then you apply a reverse stock split. And finally, you end up with a perfectly solvent bank whose stock trades at EUR 1.00/share.
Based on the the budget, Fitch has placed the United Kingdom's AAA taing on Watch Negative (for future downgrade): The RWN reflect the latest economic and fiscal forecasts published by the Office for Budget Responsibility (OBR) that indicate that UK government debt will peak later and at a higher level than previously expected by Fitch. GBPUSD snapped 50 pips lower but is reverting a little now - US equities shrug (just another piece of AAA collateral nearer biting the dust).
With the Fed now fully engaged, and few if any policy tools left, the effectiveness of continued artificial stimulation is clearly waning. Lower mortgages rates, interest rates and excess liquidity served well in priming the pumps of the real estate and financial markets when valuations were extremely depressed. However, four years and four programs later, stock valuations are no longer low, earnings are no longer depressed and the majority of real estate related activity has likely been completed. It is for this reason that the returns from each subsequent program have diminished. The reality is that Fed may have finally found the limits of their effectiveness as earnings growth slows, economic data weakens and real unemployment remains high. Reminiscent of the choices of Goldilocks - it is likely the Fed's estimates for economic growth in 2013 are too hot, employment is too cold and inflation estimates may be just about right. The real unspoken concern is the continued threat of deflation and the next recession.
Just when you thought you knew the rules, the Troika has changed them... (via MNI)
- TROIKA SAID CONDITIONS WORSENED, WANTS BILL TO REFLECT
- TROIKA HIKED CYPRUS CONTRIBUTION TO E6.7 BN VS E5.8 BN: SOURCE
- *SCHAEUBLE: MARKET SEES EURO-ZONE BETTER PREPARED FOR TURBULENCE
Europe's paymaster - that would be Germany for those who have not paid attention to events over the past four years - is not used to being snubbed. It certainly is not used to being snubbed by what every empty chatterbox and their kitchen sink will tell you is a "small and irrelevant" country (all the more so in the aftermath of last summer's embarrassing defeat in its head on confrontation with the ECB, in which the Bundesbank showed that sometimes the best offense is a gracious retreat). It most certainly is not used to not being invited to discussions involving the future of its precious mercantilist European union, especially when said union may no longer exist as we know it in 48 short hours. And Germany is angry.
Pardon this brief tangent from the hypnotic, sclerotic, quixotic, Cypriotic situation which will get no resolution today, or tomorrow, and may at best be resolved on Sunday night following yet another coordinated global bailout, (although our money is on a last, last minute resolution some time on Monday when Cyprus is closed but the European markets are widely open), but as it highlights a key follow up to our article from two days ago, "Dr. Copper's Deja Vu" it is worth being aware of a rather particular problem in Asia right now. A rather well-known problem for those who have tracked the warehousing woes of assorted industrial medals in China as an indication of the true state of the Chinese economy: as of right now, the stocks of copper in Asia (as determined by deliverable LME CLS and Shanghai copper) are at an all time high and up 90% from the previous three year average.
Moments after the last Hopium and Optimism driven surge in the EURUSD, we asked a simple question:
So what happens when Cyprus is not fixed "within hours"
— zerohedge (@zerohedge) March 22, 2013
...we just got our answer, courtesy of the perfectly expected ECB rejection, which this time waited a whopping 40 minutes before showing Cyprus who's boss
EURUSD (and implicitly the algo-connected S&P 500 futures market) is surging on the basis of optimism (for the new 'deposit tax plan') from the head of the party that abstained from the previous 'deposit haircut vote':
*CYPRUS'S NEOFYTOU SAYS SITUATION IS DIFFICULT; EXPRESSES CAUTIOUS OPTIMISM
It seems 'cautious optimism' is contagious but the irony of this politician's two-faced hypocrisy driving any market reaction is mind-numbing. EUR has broken above 1.30, Italian and Spanish bonds are rallying, and Italian stocks are now green for the week.
It seems that the Cypriot government is going full circle on its plans to save its nation and its people. As UK Think Tank Open Europe notes, "it now seems we have come all the way back round to the deposit levy as a solution in Cyprus. Overnight, the EU/IMF/ECB Troika rejected the plans for a Cypriot solidarity fund, particularly one based on pension assets and gas reserve revenues (which German Chancellor Angela Merkel specifically spoke out against)." The new - Plan 'D' - (Plan A - Haircuts; Plan B - Beg Russia for Bailout; Plan C - Solidarity Fund) appears to be moar haircuts and double-dip on the large depositors (seemingly what Brussels wants anyway). Plan 'D' - a restructuring and bigger deposit levy (a 12.2% tax on deposits above €500,000 or a 9.46% deposit on deposits above €100,000 would yield the necessary €3.5bn) - "may amount to trying to burn the larger depositors twice," as the plan to shift bad assets to a bad bank (along with the large uninsured depositors) and wound down (meaning 20-40% losses) and still face the initial large-deposit-tax - leaving the Russians large depositors with 50%-plus losses. As the FT notes, "that may make sense in the medium term, but in itself does not create new money"
Sometimes a picture paints a thousand words and with markets treading water ahead of any news out of Cyprus, Russia, or Brussels, we thought some brief levity (if not irony) was in order. Here are a number of excellent cartoons on the Cyprus situation from how we got here to where we are going...
Yesterday, when we described the latest Cyprus bailout proposal being (belatedly) debated by the Cyprus parliament and soon to be voted, we wondered how long before the Troika rejects it outright. After all the "Solidarity Bailout" Plan C (or whatever it is) did not do what Germany more than anything wanted to accomplish - punish Russian depositors as this entire farce has been nothing but a political gambit dictated by Germany from the onset. And so while GETCO's entire army of algos awaits the flashing red headline with a touch of optimism to unleash robotic buying of ES and EURUSD, we fast forward to the inevitable denouement, which is, not surprisingly, bad news for Cyprus, because as the FT reports, confirming our initial skepticism, "European officials rejected Cyprus’ plans for an alternative package to save its banking sector and remain in the euro, starting a fresh round of talks with the island nation’s government on Friday."
One of the most interesting issues of what has happened in Cyprus is where was the problem three weeks ago? There was not a mention, not a hint of anything that was wrong. All of the banks in Cyprus had passed each and every European bank stress test. The numbers reported out by the ECB and the Bank for International Settlements indicated nothing and everything reported by any official organization in the European Union pointed to a stable and sound fiscal and monetary policy and conditions. The IMF, who monitors these things as well, did not have Cyprus or her banks on any kind of watch list. In just two weeks' time we have gone from not a mention of Cyprus to a crisis in Cyprus because none of the official numbers were accurate. Without doubt, without question, if this can happen in Cyprus then it could happen in any other country in the Eurozone because the uncounted liabilities are systemic to the whole of Europe.
It was May in 2010 that Greece suffered its first bailout by its Eurozone peers. At that moment it effectively went bankrupt, however it took nearly three years for reality to set in. Yet it wasn't until months later that Greece's smaller (as we are constantly reminded) neighbor was first downgraded from its legacy "pristine" status, by the jokes that are the "Big 3" credit rating agencies. That downgrade unleashed an "waterfall of reality", shown exquisitely on the chart below culminating with yesterday's S&P cut of the island nation to CCC from CCC+, which is only comparable to the boom to bust ratings of CDS issued in early 2007 only to see full loss a few months later. How long until one or more agencies push the country to the dreaded "D" line?
- Cyprus targets big depositors in bank plan (FT)
- Merkel Vents Anger at Cyprus Over Bailout Plan as Deadline Looms (BBG)
- Russia rebuffs Cyprus, EU awaits bailout "Plan B" (Reuters)
- Russia Rejects Cyprus Bid for Financial Rescue as Deadline Looms (BBG)
- Cyprus unveils shake-up as the clock ticks (FT)
- Remember Italy? Italy’s stalemate unnerves investors (FT)
- Credit Suisse CEO pay jump to fuel banker bonus debate (Reuters)
- Kuroda Rebuts Reflation Naysayers as BOJ Action Looms (BBG)
- Fund Manager Says 'Whale' Trade Was a Bet (WSJ)
- House averts government shutdown, backs Ryan budget (Reuters)
- Hong Kong Homes Face 20% Price Drop as Banks Raise Rates (BBG)