Equity and credit markets are in close sync as broad derisking is evident everywhere. Energy, Materials, and Financials are the underperformers. HYG, the high-yield bond ETF, is notably underperforming both equity and high-yield credit spreads as its momentum-chasers exit fast and professionals find it the easiest / most-liquid instrument for hedging.
The troubles in Europe remain front and center in the minds of most rational investors causing risk aversion to rise and safe-havens to become bid. However, much has been made (mainly by those hoping to increase AUM) of the admittedly better-than-expected US macro data of the last month or so inferring US equities are the safe-haven. While we do not want to pour too much cold water on the exuberant animal spirits that a mediocre payroll print or fractionally higher PMI or an LEI that is entirely useless thanks to the underlying factors regime change, we do note that once again it is much more about beating weak expectations than it is about underlying strength. Just as with earnings beats and the hoop-la that surrounds 70% of names beating every quarter, Citi's Economic Surprise Index shows that we have swung from wildly pessimistic to perhaps too optimistic very rapidly. The Citi Econ Surprise Index is about as high as it gets here and implies we should expect disappointing macro data relative to our lofty expectations from here (today's CFNAI?).
As ECB's Stark Warns Contagion Has Spread To Euro Core, Bank Cash Parked With ECB Soars At Fastest Rate In YearsSubmitted by Tyler Durden on 11/21/2011 10:03 -0400
The Germans at the ECB, which just refuse to die, have been let out of the cage, and are making loud statements. ECB policymaker Juergen Stark warned on Monday the sovereign debt crisis had spread from the euro zone's periphery to its core economies and was affecting economies outside of Europe, according to Reuters. "These are very challenging times... The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon," Stark said in a speech to Ireland's Institute of International and European Affairs in Dublin. "The sovereign debt crisis is not only concentrated in Europe, most advanced economies are facing serious problems with their public debt." Naturally this is not news to anyone, and certainly not to European banks, which have seen their deposits with the ECB (or a safe haven for any cash within the European interbank system) rise at the fastest rate in years, if not ever, since the last MRO. It has taken just 11 days to go from €73 billion on November 8, post the most recent LT liquidity operation, to €237 billion. We expect the total to surpass the two years high of €300 billion in under 5 days.
The Liberty Movement, and all it’s more specific and specialized branches, represents a resurgence of the immovable ideal. We refuse to set aside the truth. We refuse to relinquish our freedoms. We refuse to be silent. We refuse to negotiate. Regardless of the consequences, and despite contrary impositions of so called “national security”, we simply will not go away. This kind of philosophy is a serious obstacle for any establishment system which seeks to maintain or even expand its base of power. If you cannot buy off a person, if you cannot co-opt a person, and if you cannot frighten him into compliance, then all that is left to do is to demonize his public character, lock him up, or kill him. Men of conscience force the agents of centralization to expose their inherent tyranny before they are ready for the citizenry to know who they really are. Frankly, the Liberty Movement is a considerable pain in the neck for those who would see the American dynamic distorted to the benefit of a select few. We wear this distinction like a badge of honor. If we were not a threat to the globalist corporatist strategy, then they would not consistently go out of their way to attack us. They attack us, because we are doing something right. Only days ago the Southern Poverty Law Center (SPLC), the most prevalent propaganda think tank tied to the wretched tentacles of the Department Of Homeland Security (DHS), released yet another hit piece article slandering not just the Liberty Movement in general, or specific spokesmen like Stewart Rhodes of Oath Keepers, Chuck Baldwin of Liberty Fellowship, or James Rawles of Survivorblog fame, but also a specific action the movement has taken, namely, the relocation projects now gaining steam in the northwest Rocky Mountain regions of the U.S.
Belgium is the latest entrant to the fully inverted 5s10s club. Yet what is scary is that even Austria and France have just 14 bps to go before they also invert. And most worryingly, Germany is just 4 bps behind. Keep a close eye on the 5s10s. If it inverts for everyone in Europe, including the UK and German, it is game over.
Suddenly, everyone is discussing how the IIF “deal” made sovereign CDS worthless and that is why we are seeing a renewed sell-off in sovereign debt. That is just plain wrong. What the Greek “deal” did was make it perfectly clear, that banks that survive on the benevolence of the ECB directly and the IMF/EFSF bailing out their positions indirectly, will do what the governments tell them to do. The separation of banking and state has been violated. That is the problem, and that means banks need to reduce positions because they are scared of what their masters will demand of them, and they cannot survive a haircut on Italian or Spanish bond holdings.
- Moody's said that rising French bond yields increase the fiscal challenges facing France
- Members of the congressional deficit reduction committee voiced little hope of a breakthrough ahead of Wednesday’s deadline to agree a deal to reduce the US deficit
- EU's Rehn said that the sovereign crisis is hitting core Eurozone countries, and there should be no illusion
- ECB's Nowotny said an interest rate cut is possible, adding that the ECB will consider worsening economy at the next meeting
- Bundesbank slashed its 2012 German growth forecast to 0.5%-1% from its previous forecast of 1.8%, sees German economy entering 'difficult waters' in the coming months
- According to sources, EU governments rejected mutual guarantees for bank term funding, adding that the German opposition was key to the decision against mutual guarantees
- China Fears Lasting Worldwide Recession (FT)
- Grand deficit-cutting effort ends with whimper (Reuters)
- Global Economic Outlook Grim, China Tells U.S. Trade (Reuters)
- U.S. Billionaires Avoid Reporting Gains to IRS (Bloomberg)
- Deutsche Bank Could Transfer Contagion (Simon Johnson)
- Some BOJ Members Warned of Lehman Crisis-Type Shock (Reuters)
- Spain's Rajoy Triumphs With Big Election Majority (Reuters)
- Commission Proposes ‘Eurobonds’ (FT)
- Greek PM Heads for Brussels to Try to Secure Cash (Reuters)
Financial contagion in Europe is pushing already fragile global economies towards recessions, and the risk of slipping into global recession are rising significantly. Indeed, as we have warned for many months, there is a real risk of a global Depression given the scale of the debt levels in most western countries and the massive imbalances globally. A senior Chinese official, Chinese Vice Premier Wang, said yesterday that a ‘chronic’ long term global recession is certain to happen and China must focus on domestic problems. While all the focus has been on Europe in recent weeks, markets may again focus on the not inconsequential matter of the appalling US fiscal position which could see further market volatility and the dollar come under pressure again. Washington's latest fractious effort to come to grips with its mounting debt looks set to end in failure today as negotiators look set to announce they have failed to reach a deal. The Congressional ‘supercommittee ‘charged with cutting the US government's crushing $15 trillion debt looks set to admit failure which should support gold. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, reported a rise of 3.631 tons from a day earlier to 1,293.088 tons in its holdings, the highest in more than three months. The ETF witnessed an inflow of 24.422 tons last week, the biggest one-week rise in holdings since mid-August. Commerzbank say they expect to see gold trading at $1,800/oz by the end of the year. Barclays says it is sticking with a fairly bullish call for gold and says it sees the price at $1,875/oz in Q4, according to Reuters. Deutsche Bank say they expect periods of risk aversion to remain through 2012 and their strongest conviction trade remains long precious metals and specifically gold, according to Reuters.
These days the biggest single catalyst to a big gap down is the arrival of 3 am Eastern at which point Europe opens and specifically that one all important instrument, Italian BTPs, start trading. Sure enough, European risk aversion is back, hot on the heels of not only the completely expected Stuporcommittee agreement to disagree and put the US rating at risk, but following a Figaro report that it is now Moody's (as a reminder it was S&P which almost blew up the OAT market one week ago with that "technical glitch") that is contemplating a French downgrade. From Reuters: "Ratings agency Moody's believes the recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating, newspaper Le Figaro on Monday reported the agency as saying. "Presistently high financing costs combined with a deteriorating economic outlook could increase the difficulties that the government faces, with negative implications for credit," the newspaper quoted Moody's as saying. Reuters sought but was unable to obtain confirmation of the reported remarks from the the ratings agency. On Oct. 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget." The result: a resumption of the bloodbath. France CDS rise to 11 bps to match record 233. Italy CDS rise 15 bps to 543. Belgium CDS rise 12 bps to 337. The three-month cross-currency basis swap was 131 basis point below the euro interbank offered rate at 8:45 a.m. in London, the most expensive since December 2008, according to data compiled by Bloomberg. The rate was 130 on Nov. 18. As for cash spreads: they are not at all time records... But they will be shortly, especially since the ECB is largely missing from the market today: telegraphing that it won't monetize? Or is there a hit job on yet another European leader? Which Goldman leader will replace Sarko?
The week ahead is light on data. The highlight of the week will be the publication of the PMIs in the Eurozone and the IFO in Germany. We expect business sentiment to deteriorate but only modestly. There is also the release of the first of several monthly China PMIs. Durable Goods and the FOMC minutes in the US will also be interesting to watch. Data in the US has been reasonably stable and have continued to surprise mostly on the positive side, albeit less so recently as expectations have adapted. Sub-trend growth will lead the Fed to consider its easing options again, but possibly not until sometime next year. An important US event this week will be the deadline for the fiscal Super Committee, which will likely fail to deliver a plan to cut the budget deficit by $1.2tn over the next 10 years. Though markets do not expect a plan before the deadline, it is likely that the focus on structural US imbalances intensifies during the week. This could well become an even more risk-averse environment, leaving few options to go short the USD. As our weekly FX idea, we therefore like short $/JPY, aiming for a move back to the pre-intervention lows.
While everyone's attention was focused intently on peripheral European bond spreads last week and the incessant call for ECB intervention, a dramatic (and contagiously panic-worthy) move occurred in the European Investment Bank (EIB) bonds. For those unfamiliar, the EIB is the EU's IMF-equivalent and is the largest international non-sovereign lender and borrower. Technically, it is defined as "the European Union's long-term lending institution established in 1958 under the Treaty of Rome. It supports the EU’s priority objectives, especially European integration and the development of economically weak regions." 5Y Euro-denominated AAA-rated EIB bond spreads crashed higher, blowing past the 2009 record wides and clearly indicating that European capital flight is in full swing. The IMF-like entity, supported by a small capital base of deposits backed by promises of huge capital injections by sovereign nations (sound familiar?), has massive exposure across Europe (and elsewhere). The massive implicit leverage in the capital structure suggests the need for capital calls (and is Greece, Italy, and Spain likely to do that?) to maintain its AAA-status could be needed - given the MtM losses on its loans at a minimum. Clearly investors think the same this week and are starting to worry about the same self-referencing, self-supporting house-of-cards that caused the EFSF to be written off as potentially unworkable. With EUR20bn to be rolled (and EUR6bn in interest payments) in the next few months, we will get plenty of insight into investor demand for EIB AAA-rated paper and the impact on secondary trading from that supply.
Japan's Kokusai Liquidates Remainder Of Euro Sovereign Exposure, Just As European Primary Issuance Supply SurgesSubmitted by Tyler Durden on 11/20/2011 23:19 -0400
When we discussed the specifics of the ongoing European bank run, we cited from the NYT which noted the actions of a core Japanese mutual fund with European sovereign exposure, namely that "earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt." The Nikkei has just reported that this was merely the beginning: "Kokusai Asset Management Co. has sold all Spanish and Belgian government bonds that were part of its flagship fund, Global Sovereign Open, The Nikkei learned Monday. As of Nov. 10, Spanish and Belgian bonds accounted for 1.8% and 3.1% of the fund, respectively. The share of the bonds in the fund's portfolio fell to zero as of Thursday." Just what prompted this drastic move and very loud slap in the face of the European confidence building exercise? "A Kokusai Asset Management official said the company sold off the bonds, amid widespread concerns about the outlook for Europe's sovereign debt crisis to avoid hurting the value of the fund, given volatile prices of the bonds. The mutual fund operator had already divested the fund of all its French government bonds in October and all Italian bonds in early November." It is safe to say that where one core asset managers has been (and no longer is), everyone else will shortly follow. For the simple reason that it is now if not cool to not have European exposure, it is certainly required by one's LPs to cut down on all European bonds. Kokusai is merely the canary: expect everyone else to go ahead and dump the €741 billion in non-domestically held Italian (and then all other European sovereigns) bonds. Good luck ECB buying these in the secondary market. And one market where the ECB can do nothing by charter, is the primary issuance one, where as the following update from Morgan Stanley shows, things are getting from from bad to worse.
Jim O'Neill Describes Europe's Surreal Times, Asks If Germany And The Euro Area Even Want The Monetary Union Any LongerSubmitted by Tyler Durden on 11/20/2011 22:45 -0400
Among the traditionally meandering permabullish ramblings of a man who continues to ignore the disconnect between reality and his view of the world, tonight's note by GSAM loss leader Jim O'Neill "Surreal Times" has a very ominous rhetorical question inbetween all the bullish propaganda: "The ECB doesn’t seem to regard 10-year Italian bonds as a bargain and, of course, it is rather tricky as they need to be sure that Monti will deliver. In turn, this means that what is really important is that Mario gets support from those in the background and, ultimately, the Italian voters. And then there is Spain. And still, of course, the troubling Greek situation. And ultimately, the complex world of Berlin and Frankfurt. As many European newspapers are asking in recent days, does Germany actually really still want the EMU? And, as I shall now provocatively ask, does the Euro Area? All very surreal." No Jim, all very logical, because for the first time in decades, Europe is finally starting to do the math and realizes it is failing miserably. It is those stuck in a world in which combined total exports are greater than total imports by over $300 blilion: a mathematical lunacy, who think that what is happening is "very surreal." To everyone else, the right phrase is "very much expected."