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European Credit Signals LTRO Ineffectiveness
Blinded by the light of the European equity market, one could be forgiven for thinking that LTRO 2 has indeed had some stabilizing impact on the European (and even the world) economy market. However, just as we have been aggressively pointing out, this is not the case (or at least not a sustainable case) as we see the 'LTRO-stigma' rising - now 10-15bps wide of its post-LTRO best levels - as LTRO-behooven banks trade notably wider (worse) than non-LTRO-subservient banks. What is very clear is that European credit markets, which are now trading at their worst levels post LTRO are much more concerned at the unintended consequences of the massive subordination and dependency than the equity market appears to be. Senior financial credit spreads are underperforming as they re-price for the broad subordination that has occurred but investment grade and high-yield credit in Europe is dramatically wider today even as stocks levitate. With ECB deposits breaking records and bank funding costs rising (as opposed to the hoped for drop), it seems unlikely that all this freshly minted collateralized cash will find its way out to the real economy and do anything but further zombify European banks and implicitly drag economic growth down (as credit markets appear to be better at discounting once again).
The red line is Senior financials - notably lower (wider) and underperforming the Subordinated financials (light blue) as the entire capital structure of European banks is pushed down by the ECB. The broad credit market is very notably weaker post LTRO as opposed to the magically levitating equity market.
The last time we saw this pattern was 3 weeks ago and credit and equity converged with equity underperforming less than credit outperformed. Perhaps the fact that there is less expectation for an ECB rate cut and further LTROs around the corner means that the liquidity-driven exuberance of stocks will revert harder to the risk-aware credit markets this time.
Charts: Bloomberg
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nice trade, thanks again.
debt is discounted to worthless while some equity claims on production still have value.
When you plant shit seeds what do you get? Shit weeds.
Still can't short this market because of LTRO2. But I'm pleased to see that the half-life will be shorter than QE2. I wonder when the Europeans will come up with their version of Operation Twist.
IMHO,
IMF does gold swap with Fed. IMF "loans" the necessary $50B to ECB / Greece. (cause for recent bolt down in PMs?)
All clean...no Fed QE3, no ECB LTRO2 to discuss politically....Legacy Media announces recovery....buy. buy, buy equities....sell, sell, sell PMs......until US has $6 / gal for gas....then...
PMs, buy, buy, buy. Timing is difficult....stay alert and liquid.
More and more European banks agree with writing off their Greek debt. Greek default will be a non-event. #WhatCrisis?
Thats the game plan. Only hedgies left with a bloody nose. Time = liquidity.
ltro effect is diminishing.
http://www.jinrongbaike.com/
http://www.cnhedge.com/