Euro Plunges After Draghi Says Eurobanks Have Liquidity Crisis, Finland And Spain FinMins Say No Need For EFSF ExpansionSubmitted by Tyler Durden on 10/03/2011 11:11 -0400
The EURUSD as expected, is now in free fall mode, following a plethora of statement out of place, after coming ECB head Draghi says the bank in Europe have funding problems (aka a liquidity crisis), the Finland FinMin has said he does not want an expansion of the EFSF nor does he expect a solution on the collateral "row", saying a Deal on EFSF Collateral is uncertain, and lastly, Spain's Salgado has said there is no need of "quantitative amplification" of the EFSF. In other words, with the EFSF leverage meeting imminent, it appears that pretty much nobody aside from France, and some Econ PhDs, are banging the table on using a 10x expansion, knowing all too well that just as Nomura explained last night, such a move is equivalent to money printing and invites nothing short of hyperinflation if and when it all goes wrong.
Minutes ago Jim Cramer, reverting to his traditional inverse bank psychic, whose track record needs just one word of reminder, and that is Bear Stearns, told everyone that Morgan Stanley is fine. It may well be. However, we doubt it, as does the market, which just sent out the firm's CDS up another 32bps to 528bps, the widest since 10/13/08 having only traded wider than this level from 9/16/08 to 10/13/08. Critically for those looking at CDS not being as bad as during the peak of the crisis and gaining comfort from that - CDS did not trade gently to those extremes - it gapped unmercifully wider with incredible day to day volatility. Furthermore, for those talking about how illiquid CDS are and easily manipulated, we remind them that it is bonds that cracked first (a much more broadly owned and traded set of instruments) and only very recently has CDS started to catch up to the wide/risky levels at which bonds trade.
The bulls are all pointing out that we are near the bottom of the trading range, that 1,120 has held multiple times and the economic data isn't so horrible. The bears on the other hand can point to a myriad of problems that have the combination of not having been resolved, but too many investors hoping they will be. The market has priced in too rosy of a situation. The bears also point out that the data is marginally better, but still pretty awful. Finally, from a technical standpoint, if 1,120 does get broken, 1080 or so seems to be the next stop. We were sitting here last week, and got saved by a few positive tape-bombs. Will we see that again? I don't think so.
Just like Friday's Chicago PMI, the Manufacturing ISM has now completely decoupled from not only the developing world, but from the rest of America, as somehow US manufacturing in September came in better than expected, printing at 51.6, on expectations of a modest decline from 50.6 in August to 50.5. Commentary from the ISM's Bradley Holcomb: "The PMI registered 51.6 percent, an increase of 1 percentage point from August, indicating expansion in the manufacturing sector for the 26th consecutive month, at a slightly higher rate. The Production Index registered 51.2 percent, indicating a return to growth after contracting in August for the first time since May of 2009. The New Orders Index remained unchanged from August at 49.6 percent, indicating contraction for the third consecutive month. The Backlog of Orders Index decreased 4.5 percentage points to 41.5 percent, contracting for the fourth consecutive month and reaching its lowest level since April 2009, when it registered 40.5 percent. Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products." And reading within the index, the data was not all good, with the all important New Orders unchanged, while an increase in Price Paid showed a modest increase in inflation, and hence deterioration in margins. Compounding the picture, Backlog of orders slumped, while Customer inventories increased. Altogether a non-impressive number, although at least it did not post the first contraction in 26 months, as Goldman had expected.
In what is certainly a clear sign of the apocalypse, at least for Wall Streeters, there is now speculation that the holiest of holys, none other than Golman Sachs, may be planning to no bonuses this year following a third quarter which now everyone expects will be the worst for the company in recent history (which is to be expected with the firm's prop trading operation several crippled, although still marginally operational in various other guises). According to The Australian: "Goldman Sachs is planning to slash bonuses to almost zero amid growing expectations that the Wall Street bank is about to slide into the red for only the second time in its history. The market meltdown that began in August has hammered the revenues of all the big global investment banks. Analysts have been slashing their forecasts for Goldman's third-quarter results, due on October 18, with most now expecting it to report a loss." And don't tell Morgan Stanley this but... "Morgan Stanley, its closest rival, could also fall into the red." This means no mas dinero at Times Square-o either. Yet this is nothing compared to the media reaction when mainstream journalism figures out just how many partners and MDs at both Goldman and MS are underwater on loans they have taken out from the company itself in exchange for unvested stock struck at prices anywhere between 50 and 100% higher. Oops.
The Fermentation committee will be heard on where the market has been and where it is headed. The Chairman has the floor.
Bob Janjuah: "In One Year I Expect Global Equities To Be 25%/30% Lower; The S&P Will Reach Low 1000s In October"Submitted by Tyler Durden on 10/03/2011 07:56 -0400
Nomura Bob is back with another hotly anticipated if, unfortunately, grammatically flawless, market strategy piece. Short and sweet, Bob as usual cuts right to the point. "My secular view remains bearish. In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an 'undershoot' into the 700s is entirely possible. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not....On a secular basis, investors should remain cautious, and focus on strong balance sheets and strong/robust business models. I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived - it should be viewed opportunistically."
Bill Gross Starts Q4 With A Cold Shower: "Forget Double Digit Returns - Bonds, Stocks And Real Estate Are Overvalued"Submitted by Tyler Durden on 10/03/2011 09:02 -0400
Everyone hoping that the last quarter of the year would start on an optimistic note was disappointed following not just the continuation of last week's manipulations now that hedge funds have their marching orders from their LPs, who are certainly seeking to redeem tens if not hundreds of billions in capital, but also from Bill Gross' monthly letter who in "Six Pac(k)in'" writes that "there are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years." And pontificating on a theme started many months ago by Zero Hedge with observations on the relative contribution to income from labor and capital (a modern day warning to Marxists), Gross warns that "both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize" His conclusion: "A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs." More or less reminds us of the warning above the gates of hell in Dante's Inferno...
Two months ago we said core European default risk is about to surge on risk transfer fears. This morning German CDS just hit a record. Yesterday, and on Friday, we said Belgium CDS is about to be monkeyhammered. Sure enough, Belgium is the worst performed of all European sovereigns, +18 on the day and soaring and threatens to go offerless as we type on imminent Dexia nationalization fears. And there's your alpha for the day.
Tired of all the trite meaningless propaganda from Economic PhDs who crawl out of the woodwork every time there is a downtick in gold, proclaiming in big bold letters that the Gold "bubble" has burst, only to crawl right back in when gold soars $100/oz in the days following their latest terminally wrong proclamation? Or, alterantively, wondering what will happen to gold from this point on? Then the following report from Nomura is for you. As Saeed Amen analyzes: "In this article we explain why the price of gold has fallen in recent weeks. Notably, price action during Asian hours has become very bearish, which had not been the case in previous unwinds earlier in the year. In addition, it is likely that losses in risky assets such as equities helped precipitate unwinding of very heavily extended long gold positions. However, the key reasons for being bullish gold remain; namely, a very low interest rate environment and the potential for long-term demand from Asia. Also, the potential for gold’s status as a safe-haven hedge to tail risks arising from various uncertainties due to the European debt crisis is likely to be enhanced, especially now that short-term speculative positioning is relatively light. Also on a short-term basis, we have begun to see some reversal in gold back upwards during Asian hours, after the unwind." Overall, informative but nothing new to regular readers: gold liquidations on market plunge (confirming ironically that gold is now among the most liquid types of investments in the market) as had been predicted months ago, and the same long-term fundamentals for the metal once the current stock downturn shakes out all the weak hands.
Risk averse trade was observed in early European trade following the news over the weekend that Greece were to miss budget deficit targets set by the Troika with the Asian markets closing sharply lower into the beginning of the European session and consequently fixed income markets being heavily supported. Focus remained on the banking sector following reports that consultations are underway regarding the nationalisation of Belgian bank Dexia with further comments from ECB’s Noyer on the dependence of French banks on USD funding. At the Equity open Dexia opened down 12% with the French banks underperforming heavily, however as the session progressed risk sentiment did begin to creep back into the markets with the Euro-area manufacturing PMI’s generally being higher than expected. This was allied with the ECB’s Securities Market Programmed rumoured to be buying in the Spanish and Italian curves with significant tightening observed in both countries 10-year government bond yield spread over Bunds. Looking forward in the North American session focus will be on the Eurogroup meeting due to start at 1600BST where discussions on EFSF leveraging will be on the agenda. In terms of data there will be the ISM manufacturing report for September and the start of Operation Twist, alongside the latest Outright Treasury Coupon Purchases.
ISM manufacturing index, construction outlays and vehicle sales/GM channel stuffing.
- German conservative MP says "Greece is bankrupt" (Reuters)
- Eurogroup to discuss EFSF leveraging, Greek reforms (Reuters)
- Europe Aims to Dodge ‘Scapegoat’ Label (BBG)
- UK Treasury Fears Effects of a Euro Break-up (FT)
- Dollar Beating All Assets in September Undermines S&P Downgrade (BBG)
- Japan Tankan Sentiment Below Pre-Quake Level on Global Slump (BBG)
- Osborne Reaches for Middle Ground (FT)
- Hong Kong Banks Face Higher Credit Risks in Midterm, KPMG Says (BBG)
- Greece to Miss Deficit Targets Despite Austerity (Reuters)
- US Congress Presses China on Currency (FT)
Just when you thought the latest round of liquidity improvement rumors out of the ECB (such as the resumption of a 12 month refinancing operation from last week) would buy the European financial system some time (not like many did, but for the sake of sentence construction bear with us), here comes reality confirming that it took about 4 days before liquidity got hopelessly snarled up again. As of Friday, the ECB Deposit Facility usage soared to a fresh 2011 high of €200 billion, beating the previous high of €198 billion set on September 12. Once again banks are scared of keeping excess cash with each other (as confirmed by the nearly 50th consecutive increased in LIBOR) and instead have dumped a 2011 high amount with the ECB. And the flip side, or looking at the ECB's Marginal Lending Facility, which does just as it says, shows that €1.4 billion in cash was loaned out from the ECB to "needy" banks - the highest since the €3.4 billion lent out September 14.