Eurocalypse Now: I Love The Smell Of Repatriation In The Afternoon
Sniffing around the moves in today's market suggest one very strong trend - that of European bank repatriation flows gathering pace. We pointed this out during the day as it occurred but looking back now, and remembering our critical analysis of these same flow patterns back in October of last year as the crisis was surging to crescendo, brings back some concerning memories. Today's cross asset-class price action had five very clear phases with the period around the European close and the afternoon in the US day session most directly evident of the generalized selling of USD-based assets and repatriating EURs in whatever format can be found. A picture paints a thousand words (perhaps more if it's scratch'n'sniff) and this one smells like forced selling - which combined with ECB margin calls and the rapidly worsening EUR-USD basis swap (funding issues) paints a rather concerning picture for (already collateral starved) European banks. As Europe faces bank downgrades (collateral calls) and auctions (real-money needed to bid in the reach-around), we suspect we will see more repatriation of EUR and understanding the flows these movements may cause will help make sense of the markets' movements during the day
Today's market action in USD (DXY Inverted - green), TSY yields (red), S&P 500 futures (blue), and Gold (gold) broke into 5 specific phases...
Phase 1 - markets were drifting until the release of the major US macro data (retail sales beat and empire manufacturing missed). The better-than-expected retail sales data spurred risk-on and Treasuries were sold and Stocks bought as the USD was reflexively sold (on correlations) and gold rallied (a little odd but looked like modest high USD beta move). Consistent
Phase 2 - US markets opened and started to slide, only helped by a notable miss on NAHB and commentary - risk-off. This Long USD, Short Stocks, Long Treasuries, Short Gold move all fit as bad news is bad news (no longer good enough to prompt a pre-emptive QE3 hope trade). The move was nicely in sync and these risk-off flows petered out after the first hour or so of the day-session. Consistent
Phase 3 - From mid-morning to the European close, markets generally drifted sideways but the sniff of USD selling was apparent and picking up. Consistent
Phase 4 - From the close of Europe's equity markets to shortly after their FX market closed (and notably market sweeps and funding needs are comprehended), the USD was sold hard and aggressively. The reflexive move of this forced USD selling / EUR repatriation flow was to push risk-assets up (as correlation algos reacted). The significant thing is that stocks moved on little volume (algos not flow) and the selling in FX was heavy and rapid (we need these EUR now). Inconsistent
Phase 5 - After the European markets had closed is when the effect of the real asset selling and repatriation flows hits the US markets. The need to bring EURs home in a hurry likely meant European banks traded away their US stocks and US Treasuries but this selling pressure was held back by the algos reacting to USD weakness. As soon as the FX trades were done and the USD stabilized the buying pressure disappeared at the margin and so Treasuries and equities sold off as the marginal algo buyer had gone and all was left was the flow of the EUR-based sellers left with dealers trying to unwind their positions. Also note that there was no flow back to Gold or the USD safety as USD-assets sold off (as they had already been shifted and were now being reracked by dealers offloading). Inconsistent
The selling of US equities and US Treasuries simultaneously and on a pick up in volume (and block size) even after the USD selling had abated strongly suggests US dealers had soaked up some of the selling pressure (knowing full well stocks would get a lift in the USD-correlation-sense) and then sold into that strength.
We will be watching for similar flows this week and keeping a close eye on the EUR-USD basis swap - especially ahead of auctions and possible downgrades (both of which need real money to make a difference - bids at auction for Spanish banks and higher collateral calls on downgrades). Is that the smell of napalm in the morning repatriation in the afternoon?