While we await the Moody's downgrade of the Spanish banking system, which we can only attribute to a lack of outsourced Indian talent, since three banks are now rated higher than the sovereign, Moody's decided to give a little present to our Dutch readers by downgrading 5 of their biggest banks: Rabobank Nederland, (2 notches to A2) for ING Bank N.V., (2 notches to A2) for ABN AMRO Bank N.V. (2 notches to A2), and for LeasePlan Corporation N.V. (2 notches to Baa2). The long-term debt and deposit ratings for SNS Bank N.V. were downgraded by one notch to Baa2. And yes, this means that the US banks (looking at your Margin Stanley) are likely next.
Lower growth expectations and higher risk premia on peripheral European assets have weighed heavily on the EUR since the sovereign crisis began in late 2009. But, as Goldman's FX anti-guru Thomas Stolper notes, we have not seen evidence of a net capital flight crisis out of the Euro area that would have led to disruptive EUR depreciation (yet). Much of the reasoning for the relative stability is the Target 2 system and the high degree of capital mobility in European capital markets which have enabled the rise in risk aversion to be expressed by internal flows (as well as repatriation). With this weekend's election (and retail FX brokers starting to panic), it is clear that the interruption of these internal channels may well lead to a disorderly capital flight and a full-fledged crisis in flows. Stolper outlines four potential catalysts to trigger this chaos (which is not his base-case 'muddle-through' scenario) as we already noted the huge divergence between implied vols and realized vols indicate the market is starting to price in more extreme scenarios and safe-havens (swissy) are bid.
Greece, Spain, Portugal, Italy and others besides have fallen into the trap of bribing their electorates with promises that become ever more unsustainable. In each of these states, expectations have been created that cannot be met and that cannot now be undone. This is surely a recipe for social unrest. These will not be the only countries to succumb to failure. The national debt, the unaffordable long-term cost of social security, health care and a myriad other entitlements and the mounting evidence of the insolvent state point to the same outcome for the UK and the US. Failure is ensured; the more pressing question is, what happens next?
In browsing the last seven months of video commentary that Charles Biderman, of TrimTabs, has produced, he is clear on one thing, "nothing has changed". With an 'admittedly rigged' stock market now at the behest of global central banks and the slow-motion train-wreck in Europe seemingly approaching the end of its can-kicking-road, Biderman is frustrated by the inane financial media's perpetual belief that we are 'a grand plan' away from a return to the way the world was before the crisis began - "We are not!" Wages and salaries in the US continue to stagnate with a $100bn per month deficit as he is incredulous at the belief that we can go on printing $1.3 trillion to produce $250 billion in spending each year. The US economy will double-dip when the Fed's attempt at rigging the stock market and economy is no longer perceived as viable and as the paisley-wearing pontificater expects both inflation (inevitable with CB printing) and deflation (big banks, European and EM equities thanks to the interventionist policies of the global central banks), he suggests gold as a core holding.
Epic. Stocks clambered back up to the 1315 (S&P 500 e-mini Sept 2012 contract) level which has been a critical VWAP level for a few days now amid what was a mildly slow day (though IG credit outperformed from its recent deterioration). Then the rumors started. Risk assets jolted in a very systemic manner (all highly correlated) as ES popped above last Friday's highs (unable to get close to Monday's open we do note), then as the realization that a pre-emptive warning of 'some' action in the case of 'some' event was simply the status quo anyway and we gave the entire 14 pt ramp back. Then we bounced once again as BoE made some noise on further stimulus if things go pear-shaped and we bounced again (though this time only about 8pts and on very small average trade size we note) as we headed into the close right around last Friday's highs. With OPEX tomorrow, this vol could not be more stop-inducing and painful for many as the Dow has now been -150, +150, -80, and +160 pts this week and decent volume today although average trade size remains limited (on the lack of conviction we pre-suppose). Gold and less so Silver bounced off their earlier spike-down moves and WTI rallied like a champ today (resyncing with Silver just in the green for the week). Gold is up 2% on the week (but was far less impressed with the chatter today than stocks were) as in the meantime the USD dropped and ended -0.75% on the week (and AUD is now 1% stronger). Treasuries whipsawed around but only retraced around a third of their rally from yesterday's morning session as 7Y and 10Y underperformed (+5bps or so). Pre-OPEX VIX is always a mess but we dropped over 2.5 vols into the close to end under 22% (but above Friday's close). Risk assets in general moved together and stayed in sync today during the final hour's carnival with stocks perhaps a little rich by the close.
For all the news out of Spain: tumbling sovereign bonds, bailed out banking sector, there really is just one driver of everything: the same one many have been warning about for years: the artificially inflated valuation of the Spanish housing sector. Because the only reason why banks are suddenly finding that their assets are worth much less than previously expected, is because it is now impossible for local banks to keep the real-estate "assets" on their books at marks-to-model (read par) as the bulk of them have long since become impaired, delinquent or outright defaulted.... Which is the worst news for holders of Spanish bonds, now that the entire banking sector is effectively pari passu with the sovereign debt courtesy of priming ESM debt: recall that every incremental dollar, or in this case, euro, of bank capital deficiency will be one more priming bailout euro behind. Effectively there is now an inverse relationship between the Spanish housing sector and the country's sovereign bonds. And for those who are still naively are clutching to Spanish bonds, even as they tumble to all time lows (that's the local law, as opposed to the legal arbitrage trade we have been promoting and which today is making even more money), we have some bad news: that perpetual of optimists, S&P, just said that the Spanish housing sector has, wait for it, another 25% to drop!
This means a comparable drop in store for Spanish bonds and all the related securities in Europe, which courtesy of the bailout are all now daisy-chained.
Here Comes The Mother Of All Rumors: G-20 Sources Say Central Banks Preparing For Coordinated ActionSubmitted by Tyler Durden on 06/14/2012 15:08 -0400
Update 1: and here comes the revision:
- G20 SOURCES SAY CENTRAL BANKS PREPARING FOR COORDINATED ACTION AFTER THE GREEK ELECTIONS IF NEEDED
So... if Syriza wins, and Greece leave the Eurozone, there will be a response? Unpossible.
* * *
And the mother of all rumors strikes:
- G20 SOURCES SAY CENTRAL BANKS PREPARING FOR COORDINATED ACTION AFTER THE GREEK ELECTIONS
One small problem. Central banks NEVER indicate in advance what they will do. This is merely a desperation attempt to ramp markets into the close, and sucker even more retail into stocks ahead of Sunday. Now we wait for the denial because otherwise some pathetic G-20 leak just made central banks everywhere irrelevant and obsolete: remember what happened to Jamie Dimon when in March he front-ran the Fed...
Last night we presented a very disturbing warning from one FX broker, Oanda, on what Sunday's election could mean for FX trading on Sunday (nothing good). And, as often happens in such instances, the idea has now been "incepted" - look for every FX brokerage to follow suit, likely followed by the plain vanilla exchanges to issue comparable warnings ahead of Monday.
While men are from Mars, and women from Venus, it would appear Europe's major political leaders are on totally different orbits when it comes to the future of the European experiment. Though there are come commonalities there is one glaring divide - the speed of deficit reduction - as Mont-and-oy differ from Merkel quite vehemently.
Just What Is Mario Draghi Hiding? ECB Declines To Respond To Bloomberg FOIA Request On Greek-Goldman SwapsSubmitted by Tyler Durden on 06/14/2012 13:38 -0400
Back in February 2010, in the aftermath of the discovery that none other than Goldman Sachs had facilitated for nearly a decade the masking of the true magnitude of non-Maastricht conforming Greek debt, Zero Hedge first identified the prospectus for a Goldman underwritten swap agreement securitization titled Titlos PLC. We titled the analysis "Is Titlos PLC The Downgrade Catalyst Trigger Which Will Destroy Greece?" because for all intents and purposes it was: at that time a rating agency downgrade of the country would lead to a chain of events which would make billions in assets ineligible for ECB collateral, forcing a massive margin call on the National Bank of Greece, which likely would have precipitated a Greek default there and then. But that is irrelevant for the time being: what is relevant is Titlos itself, and what Bloomberg did after we posted the analysis. It appears that in following in the footsteps of Mark Pittman, Bloomberg sued the ECB under Freedom of Information rules requesting "access to two internal papers drafted for the central bank’s six-member Executive Board. They show how Greece used swaps to hide its borrowings, according to a March 3, 2010, note attached to the papers and obtained by Bloomberg News. The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a securitization that allowed National Bank of Greece SA, the country’s biggest lender, to exchange swaps on Greek government debt for funding from the ECB, the Executive Board said in the cover note. The ECB's response: "The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency." Maybe. But what is far more likely is that the reason why the ECB, headed by none other than former Goldmanite Mario Draghi, is desperate to keep these documents secret is for another reason. A very simple reason:
Mario Draghi - 2002-2005: Vice Chairman and Managing Director at Goldman Sachs International
So the military-industrial complex — the lobbyists, the weapons makers, the media — may accept it if Obama kills 14 women and 21 children to get one suspected terrorist. More terrorism means more weapons spending. For the lucky few it’s a self-perpetuating stairway to riches. Yet for wider society it means spending time, money and effort on war, instead of on domestic prosperity. It means the constant threat of terrorism. And it means the loss of our liberty, as the security state adopts increasingly paranoid anti-terrorism measures. We should do to others as we would have done to ourselves. That means — unless we are comfortable with the idea of ourselves living under military occupation and drone strikes — getting out of the middle east, and letting that region solve its own problems — forget another costly and destructive occupation in Syria. Slash the war and occupation spending, and redirect the money to making America independent of middle eastern energy and resources.
Same time, same place, One day later. After yesterday the Treasury engaged in nearly contemporaneous monetization in the 10 Year bond courtesy of the Fed, first buying then selling the paper, at a record low yield of course, so minutes ago the Treasury just sold $13 billion in 30 year paper at another fresh record low yield of 2.72%, down from 3.06% in April. Ignore that the Bid To Cover plunged from 2.73 to 2.40, the lowest since November 2011, and that Indirects were barely interested, taking down just 32.5%, it was all about the Directs, whose 24% take down soared, and as in yesterday's case, was one of the Top 5 highest ever. China? or Pimco? We will find out soon. Dealers were left with the balance, or 43.5% the lowest since October 2011. Something tells us that once the Fed extends Twist, or engages in more outright LSAPs, we will be seeing much more of this same day turnaround service as little by little all interest-rate sensitive instruments slowly grind down to zero.
It's not all Aston Martins and Brioni suits for hedge fund managers this year. As Bloomberg reports, "It’s a confluence of tricky markets, super-cautious investors and a tough fundraising environment that’s making it a difficult time for hedge-fund managers." The latest addition to the 775 funds that were shuttered last year (the most since 2009) sees California-dreamer Paul Sinclair liquidating his $458mm health-care equity fund as "political decisions made on the other side of the globe have undermined his stock picks and spurred losses for a second year." Physically and mentally exhausted from his travails (planning to spend the summer sleeping and relaxing), Sinclair joins the wannabe likes of Zoe Cruz and three ex-Moore Capital managers, as he honestly notes "I don’t have an edge on Greek elections, the Spanish banking system, what the European Central Bank, the International Monetary Fund, the Chinese government, Angela Merkel, or the U.S. Federal Reserve will do." It seems an increasing number of masters-of-the-universe are awakening to what retail seemed to figure out over the past few years - that everyone's a hero in a central-bank-liquidity-driven rally - and as one other hedge fund manager noted in his investor letter "Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects, we have not weathered the ensuing volatility well." Once again correlations are rising - 30-day correlation coefficient between the MSCI World Index and its members is 0.92, compared with the average since 1995 of 0.73 - as all that over-priced alpha is shown up as 'central-bank' beta.