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European Stocks Explode Higher As Spanish Bonds Implode

Tyler Durden's picture




 

Sigh. Spain's IBEX gained over 3%; Italy's MIB gained over 2%; and all but the UK's FTSE equity index ended very nicely green today (all jerked higher by Spain's comments on their bad-bank and then Bernanke's cover). However, European Government Bonds (EGBs) failed dismally. Spain's 10Y spread to bunds ended the week 46bps wider and Italy 15bps wider and while some point to the short-end as evidence that all is well, Spain saw modest weakness in the 2Y today post Bernanke (though Italy rallied). The curve steepening was dramatic to say the least as the market appearsd to be increasingly assuming the ECB will monetize short-dated govvies - our own view - consider what the implied forward financing costs are given these steep curves as clearly noone trusts this as a solution and will merely subordinate the entire market.  Spain 2s10s curve is now at its steepest on record at 328bps! and this is not helping:

*SPAIN’S CATALONIA REGION CUT TO JUNK BY S&P, OUTLOOK NEGATIVE

But buy stocks...

 

Spain 10Y spreads now wider than when Draghi 'promised'...

 

leaving the Spain 2s10s curve at all-time record steeps... sustainable? consider what forward funding costs are implied by this...

 

and credit did not follow stocks higher in the late-day...

 

and maybe this correlation will re-assert... (Spanish Bond risk - red - inverted against US equities (green)

 

Chart: Bloomberg

 

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Fri, 08/31/2012 - 12:06 | 2752961 A Man without Q...
A Man without Qualities's picture

big sell-off in the FTSE into the close, but cannot see any specific news...

Fri, 08/31/2012 - 12:07 | 2752969 fireangelmaverick
fireangelmaverick's picture

The damage caused by Bernanke is Irreversible.....kinda like the Euro.....Wall Street Journal Sep 2014.

Fri, 08/31/2012 - 12:21 | 2753013 camaro68ss
camaro68ss's picture

doomsday is coming bitchez!!!!!

Fri, 08/31/2012 - 12:38 | 2753077 THX 1178
THX 1178's picture

Cut to JUNK; outlook negative? Who cares? An F is an F. 

Fri, 08/31/2012 - 12:14 | 2752985 gkumar
gkumar's picture

Catalonia cut to Junk. Thats the reason european indices are down now. For a change bloomberg is faster than ZH

Fri, 08/31/2012 - 12:19 | 2753003 trebuchet
trebuchet's picture

Asset reallocation out of spain as spanish generic moves closer to junk. 

ECB Subordination issue on short end if that is the intervention.... more asset reallocation..

+ bond vigilantes short covering?? 

 

i wish i understood bond markets more, would be grategufl if someone suggested any tips/links  to a guide for muppets?

Fri, 08/31/2012 - 12:44 | 2753087 CrashisOptimistic
CrashisOptimistic's picture

Anything you might read would be obsolete in the New Normal.

All you need to know for now is bonds are where terrified money goes.  US T's will soak it all up from everywhere in the world.

No, it doesn't matter if US fundamentals are weak.  US T's are defended by the US military and that's all terrified money cares about.

They will drive rates negative soon.  Oil's scarcity is crushing all activity, including economic activity, and that is inevitably deflationary.  

If you're in now, you profit.

Fri, 08/31/2012 - 12:21 | 2753014 malikai
malikai's picture

Yup. Leave it to S&P to be ahead of the curve, as never.

I believe all of Spain's paper has been considered "junk" around here for quite some time.

Fri, 08/31/2012 - 12:29 | 2753041 Rainman
Rainman's picture

Catalonia sits on about one third of the country's debt. I just knew those marble floors in the Barcelona airport were over the top.

http://www.cbsnews.com/8301-505123_162-57501571/spains-catalonia-request...

Fri, 08/31/2012 - 13:05 | 2753171 dcb
dcb's picture

just do your chart weekly,

Fri, 08/31/2012 - 12:06 | 2752962 Capitalist
Capitalist's picture

Pfft crowded trades. Put a French OATS 2s10s steepener on.... PROFIT!

Fri, 08/31/2012 - 12:33 | 2753063 omi
omi's picture

How do you do spread trades on credit?

Fri, 08/31/2012 - 12:06 | 2752963 pods
pods's picture

Like a drowning man trying to avoid taking in the first breath of water.

After that things will settle down.

pods

Fri, 08/31/2012 - 12:07 | 2752965 Meesohaawnee
Meesohaawnee's picture

bullish

Fri, 08/31/2012 - 12:07 | 2752967 khakuda
khakuda's picture

Bad banks, money printing, ZIRP, blah, blah.

Not one of these things EVER addresses the underlying problem that all these countries continue to INCREASE debt and until then, the problem will never go away.

Fri, 08/31/2012 - 13:12 | 2753202 Nobody For President
Nobody For President's picture

Hey, it worked for a long time. It is just that guberments didn't get the memo those times have ended.

Yet.

Fri, 08/31/2012 - 12:08 | 2752970 nathan1234
nathan1234's picture

Ah it's pension money- someone else's money- Buy BUY BUYYYYYYYY

Fri, 08/31/2012 - 12:09 | 2752977 Jason T
Jason T's picture

seems yeild is backing off and dow is backing off too..

 

 

 

Fri, 08/31/2012 - 12:46 | 2753098 CrashisOptimistic
CrashisOptimistic's picture

And that is that, to say nothing of the fact that his replacement would be even more of a defend-German-money hawk.

Fri, 08/31/2012 - 12:13 | 2752983 LawsofPhysics
LawsofPhysics's picture

How does this make any fucking sense?  Bond vigilantes finally had enough of spain?

Fri, 08/31/2012 - 12:15 | 2752988 tocointhephrase
tocointhephrase's picture

Silver, i'm pleased to see you too

Fri, 08/31/2012 - 12:18 | 2753000 youngman
youngman's picture

The whole investing world has gone from Business´s and what they make and sell.....profit and loss...to what Central Bank is going to print first and how much....sad really..the stocks or more like the ETF´s are just a surfboard to ride the wave..

Fri, 08/31/2012 - 12:19 | 2753009 Burr's 2nd Shot
Burr's 2nd Shot's picture

Obviously, one cannot eat Spanish debt. Equity Paella, however, is delicious, especially when served with a nice Rioja.

Fri, 08/31/2012 - 12:26 | 2753031 BeetleBailey
BeetleBailey's picture

BULLSHIT-ISH!

Fri, 08/31/2012 - 12:30 | 2753042 omi
omi's picture

Well that actually makes sense.

I don't think so much money has been lost as lending to government. When you're sure that the bonds won't be worth much, you'd rather buy stocks that are on deep discount. At least there is some chance of making your money back.

edit: Do you seriously think that just because governments fail and corresponding bonds go to zero, people would not need services that are available? Most companies will be around regardless of currency or who's in power, some will shut down, sure, but there's a base level of demand for all services no matter how bad the economic situation is.

Fri, 08/31/2012 - 12:44 | 2753092 silver4me
silver4me's picture

"Most companies will be around regardless of currency or who's in power, some will shut down, sure, but there's a base level of demand for all services no matter how bad the economic situation is."

 

The average person will get screwed no matter what. Gold in your hand is safest bet.

Fri, 08/31/2012 - 13:04 | 2753167 omi
omi's picture

Screw gold, practice shows that having access to distribution (not even production) of goods is far more important. Seen that in Russia, Belarus and Ukraine.

 

But I guess this is a gold bugs hangout, so it's like pissing at the wind.

Fri, 08/31/2012 - 12:42 | 2753088 mammoth mo
mammoth mo's picture

 

What we have here is nervous twitching.  The signals being given off do not add up.  Stocks are good and Bonds are bad.  But it's not really that simple:

Bonds which should be safe and less risky than stocks (and for that matter pay a lower return) are now unsafe in Spain, more or as risky as stocks in Spain (and for that matter if they are actually going to pay - paying as high or a higher return than stocks).

Such is the real problem.  The Central Banks, in an effort to get everyone to buy the Market across the world, have now created high yielding bonds in unstable economies.

These high yielding bonds represent alternative equity gambling venues.  No longer are bonds in these countries safe and secure.  They are now unsafe with a potential for a nice payoff.  All you need is for the Central Bank to bail you out and like magic you have made a profit.

So when the Spanish Bond dips below 6% someone buys in.  As the Bond price rises due to the fact that the country is bankrupt.  Profit.  Sell those bonds back to the Central Bank (no one else is buying).

So you have the correlation of high rising stock markets and high rising bonds.  The stock market is rising because central banks are pumping in liquidity on any old POS.   The bond market is rising because everyone knows its a POS in the market and they know its going to fall.

Regardless the Central Bank now has to bail out both sides - the equity market and the bond market.  It's a gamblers paradise in Spain and Italy right now.  Buy either stocks or bonds and know you will get bailed out.

 

Fri, 08/31/2012 - 12:48 | 2753104 CrashisOptimistic
CrashisOptimistic's picture

You can't guess the whims of government intervention.

All you can do is know that terrified money is fleeing to US Ts.  This will get worse and worse and worse because the only US fundamental that counts is the US military will defend those documents.

Negative rates are eventually likely.

Fri, 08/31/2012 - 12:57 | 2753138 mammoth mo
mammoth mo's picture

Agreed -

All those not gambling will place their money in what they percieve as safe and secure treasuries.

 

Fri, 08/31/2012 - 12:52 | 2753126 lasvegaspersona
lasvegaspersona's picture

seems one small failure to get bailed out (enough) and those 'profits' vanish.....picking up pennies in front of the steamroller?

the little guy is probably best served by quietly waiting in gold and adequate cash

Fri, 08/31/2012 - 13:04 | 2753150 dcb
dcb's picture

well we hit my udn target line today, I has posted about this getting close top target but not reaching. we shall see, But I sold a good portion of the position.

I see today as silly aglo hunting for buy orders, we got to a point where you'd switch, and then dropped. But of course there is nothing wrong with the capitial markets according to the powers that be

Fri, 08/31/2012 - 13:44 | 2753307 dcb
dcb's picture

anyone understand why crude is acting like it is today? Short squeeze?

I am really confused heere, except algo's just pushing things?

Fri, 08/31/2012 - 13:57 | 2753345 CrashisOptimistic
CrashisOptimistic's picture

Quiet report out of Russian oil output having problems.

Fri, 08/31/2012 - 21:37 | 2754387 IMA5U
IMA5U's picture

it must suck to be a perma bear

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