From Peter Tchir of TF Market Advisors
EU Deal and Hell Freezing Over
So the EU finally reached a debt deal and hell (or at least New York City) froze over.
Thursday's meteoric rise was followed by a relatively calm Friday but is losing steam as more and more nagging doubts set in.
Italian and Spanish bond yields have failed to participate in the rally and in fact Italian yields are reaching yields not seen in decades.
The EFSF has morphed into an incredibly complex entity and there is no indication that Regling is up to the task of running their various programs optimally. The Asian trip seems ill advised at best and a debacle at worst. What is he asking China to invest in? China has money, and I don't doubt that under the right terms will invest in Europe. But they need terms. What terms is the EFSF getting on the bank recap portion? Do they even know or have they even thought about it? Are they even willing to let China invest in banks on a big scale? What about buying bonds? Since there are no details on the new first loss protected bonds, what can Regling be asking them to invest in? At some point China has accumulated these reserves because they understood it matters what you invest in. I wonder if not only did this trip annoy China but has actually increased their concern that European leaders are way in over their heads on this financial crisis. Even Japan was only willing to say they would take some more of the German/French backed good EFSF bonds, albeit at a slower rate of purchase. Does anyone really doubt the AAA bonds backed by the 6 AAA countries still have a bid?
Some interesting noise on EFSF short dated bonds. Those will provide cheap funding - which is good - but have a lot of roll risk - which is the problem the EFSF is trying to fix for Italy and Spain.
The IIF proposal doesn't look like it will be a real 50% write-down of Greek principal. One of the senior IIF officials was on Bloomberg TV this weekend and seemed stuck on the NPV reduction and EFSF enhancements. No actual terms yet prepared. That and the insistence that it will have a positive impact by 2020 for Greece. Why the focus on NPV and enhancements if it was a real honest to goodness write off of debt? If it was a real write down of debt couldn't we talk about the debt to GDP impact in 2012 rather than 2020? Investors who thought the banks were really biting the bullet here are likely to be disappointed. They may even understand why voluntary restructuring isn't a Credit Event. It will be interesting to see if Merkozy were in on this little joke or also are getting hoodwinked? I'm not sure what it means, but the DB CEO seems less involved in the spin since the great haircut was announced, but I bet it means something - that he doesn't want to be too closely associated with this latest PSI - which does feel like it will be heavily paid for by taxpayers rather than banks.
US GDP was positive. Some focus will finally shift to US economic data. We seem to have made the economic data binary. Either recession or not. If no recession all great, if recession then doom. It's a continuum and it isn't as bad as feared but not great or out of danger of being bad yet either. It is good to see earnings and data hit the forefront but we have to watch that same data out of China and Europe too.
The HVB thing is just bizarre. It is positive in the Germany found 55 billion euros. It is scary that a mistake of that magnitude can exist. And since positive mistakes rarely occur - we usually find problems that are reducing the bottom line right away - there is a fear what negative problems may not have been found - especially in Spain and Italy.
QE3 is allegedly back on the table. I guess it is never far removed. I've lost sight of what this is even supposed to do other than makes stocks go up for a bit. Since Europe is finally saying growth and exports rather than austerity are the way out of the debt problem, and dollar weakness because of more QE won't be tolerated. I guess there will be a focus on mortgages if we get one, as it can be sold to the public better that way and can help the European banks liquidate some of their portfolio to reduce dollar funding needs and potentially reduce capital required.
MF global is interesting to say the least. Weirdest part is right bet, wrong market. To the extent Corzine used his connections to determine that Europe would through more and more German taxpayer money to bail out the PIIGS and banks, he was right. That the bonds would go up in value based on that - he was wrong. It is another reminder that the "solutions" coming out of Europe have had the least impact on the assets they are specifically supposed to help. It is scary how fast a financial firm can unravel. They did a bond issue in early August. Due diligence would have ensured things were known at the time. The market ignored or didn't see or they weren't in the trades back then but once the market got concerned about the positions and the risk management that led to such seemingly large positions - it reacted quickly and decisively. Dexia - which had the advantage of being too big to fail (was a massive derivative counterparty) also toppled very quickly. It went from being a fringe problem to a ward of the state in less than a week. As the rally goes on (if it does) it is worth remembering how quickly leveraged financial institutions can unwind.
I'm sure we will see a lot of exciting headlines this week and can't wait to get some actual details on the proposals agreed to last week. Europe can still get it right but they need to deliver on promises - and for once really really think about the best way to use EFSF and to consider how markets (sovereign debt markets in particular) will actually respond and not base plans on how the EFSF wishes markets would respond.