On Monday we reported the very disturbing news that despite the ongoing liquidity blockade, capital controls and (somewhat) closed Cyprus banks, one particular group of people - the very same group targeted to prompt this whole ludicrous collapse of the island nation - Russian Oligrachs had found ways to bypass the ringfence and pull their money out quickly and quietly. We said that, if confirmed, "If we were Cypriots at this point we would be angry. Very, very angry." Turns out the Cypriots did become angry, and the questions are finally starting. As Spiegel reports, the Cypriot Parliament, which may or may not last too long once the banks reopen tomorrow and the people realize that in a fractional reserve banking system, those deposits you thought were there... they are gone, poof, has begun investigating the capital flight that may means the destruction of Cyprus has been for nothing. Sadly, it is now too little, too late.
Central Banks remain aggressive accumulators of the precious metal as we noted last night, as their actions outweigh their words; but as CNBC's Rick Santelli notes today, there is a big difference between the physical bullion they are buying and the 'gold bug' trading currently going on in our markets:
I don't even look at gold as gold anymore since they securitized it. If things [went] badly in the world that I used to observe (as a gold bug); the gold would end up in the hands of the gold bugs. If things go badly now, they're going to end up with checks from ETFs! Sorry, it's not the same. The reign of [paper] gold as the Ayn Rand endgame, to me, that's over. Game, Set, Match.
Which likely explains the incessant demand for precious metals from the US Mint over the past few months - as the other great rotation (from paper to physical) proceeds.
It has been a recurrent joke that in addition to Germany (see chart), the only winners out of the slow-motion trainwreck that is the Eurozone, are the Belgian caterers who in 2010, 2011 and 2012 had an absolute record profit year following what was a weekly summit after summit in which we learned, without fail, that Europe is fine, couldn't be finer, and to "believe" Draghi that he would crush and mangle anyone who dared to short the EURUSD (ironic when every other central bank is literally paying FX traders to short their currency). But while caterers were literally swimming in money in the past three years, charging European taxpayers hundreds of thousands of euros per hour for either sturgeon eggs and pâté, or boxed lunches depending on the amount of austerity imposed, so far 2013 has been rather dry. All that of course is about to change, following the epic fiasco with the Cyprus "bail-in", which courtesy of Diesel-BOOM's subsequent clarification, is a unique template that will never be repeated... until the next PIIG finds itself in the same trough, which now that the dominoes are dropping once more, shouldn't be too long. Which is why the best levered derivative trade on the European "positive contagion" mutating back into its "negative" wilde-type is to go long European caterers. However, to offset as much non-catering risk as possible, it would be ideal to have a pair trade opportunity, whereby to go short an offsetting catering exposure. Luckily, we have found just that. Luckily we have just the trade.
Though it may seem a little like stating the obvious to many, Moody's comments:
While the risk of a euro exit by Cyprus is substantial... ...following the economic dislocation that will be caused by the restructuring of the island's two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further.
And so while the talking heads discuss Cyprus as a unique situation and too small to care about, it seems the reality of the last two weeks has actually raised their chance of Euro exit as opposed to bailed them into the Euro.
One would think that certain truths are obvious by now. It should be obvious, for example, that there are consequences to living beyond your means. It should be obvious that there are consequences to a long history of spending unsustainably and accumulating mountains of debt. And it should be obvious that there are consequences to dealing with such problems by spending more and accumulating even more debt. It should be obvious. But it’s not. Hyperinflation always starts with a surge in asset prices. And as I see stock markets at new highs, property prices posting big increases, and bond yields of the greatest debtor nations in the world hover at just over ZERO, a sane person ought to consider these important lessons from history.
Deja Deja... oh forget it. S&P failed to make its all-time highs. We dipped (on heavy volume) and wiggled all the way back on no volume in stocks. Healthcare and Utilities lead the week but high-beta momo-monkeys chased homebuilders on the day. Wherever you looked today - apart from stocks - risk assets were being sold. VIX is higher on the day (and 2.5 vols disconnected from stocks); high-yield and investment-grade credit markets are ending near their worst level of the week - suggesting the S&P is 20 points rich; Treasuries ended off their low yields but stil down 7bps on the week and notably more post-Cyprus (with stocks in the green post Cyprus). The USD strengthened further during the EU session and flatlined in the US afternoon (with EURJPY leading the way down and not supportive at all of the equity rally). Apple lost its 50DMA again, dropping 2.2%. Equity volume was extremely low (cash and futures) and average trade size the lowest of the year. The phrase of the day is - irrational divergence.
Thought you could shut up Egan-Jones? Sure, you could... as a NRSRO: the same worthless designation that is carried by Moodys and S&P. However, that does not prevent them to act, and provide their ratings opinion, as a non-NRSRO. Which is exactly in what capacity the infamous firm, which was targeted by the SEC for daring to downgrade the US (the same reason S&P was sued by the DOJ later), just downgraded the UK from AA- to A+.
As we noted earlier, a Cypriot Euro is implictly worth less than a non-Cypriot Euro thanks to the capital controls being put in place. It appears the exact relative worth, based on prices of restaurants, drinks, food, transportation, utilities, and rent that a Cypriot Euro is worth 91% of a German Euro. But under the surface, the cost of living is notably higher (in common currency units).
It will come as no surprise that the US equity market this week has been bought on every dip but a glance at the following chart must leave one asking the question - who (or what) is buying? The huge volumes that the market has seen when selling occurs dwarves the miniscule (mostly after-hours) volume that occurs during the ramps. Of course, the slow drift higher is evident also - as $85bn a month spills out day after day. Meanwhile Treasury bonds have handily outperformed since the 3/15 Cyprus headlines hit - 10Y up 1.25% against unchanged for the S&P 500.
Tomorrow Cyprus banks will reopen sometime around noon (they are supposed to close at 6 pm but likely will close far earlier). What does that mean? Apparently nothing much. Because according ot various newswires the withdrawal limit at all banks will be €300 per day. In other words, all said "reopening" will do, is to allow physical branches to be used as glorified ATMs but with a very terrified and confused carbon-based teller on the other side (the same ATMs which a few days ago saw their limit reduced from €300 to €120). All other cash transactions will be strictly curbed, virtually no cash will be allowed to exit the island, and the what's more the government will ban the termination of the oh so ironically-named time deposits. This means that time deposits will now become "permanent deposits", even if within the €100,000 insured limit. The good news: credit card treansactions will be permitted when paying for goods and services anywhere on the island. Of course, electronic cash just happens to not be physical cash, which is why the bank is so cavalier with allowing people to access their own money. Well, electronic 1s and 0s-based money. In other words, tomorrow's bank reopening means absolutely nothing (as ATMs had worked for the duration of the Cyprus bail-in crisis), and anyone who had hoped they could just walk in and withdraw their entire insured deposit up to €100,000 will be severely disappointed. Of course, those who had more than €100,000: Poof, it's gone, step aside please.
Something rather notable appears to have changed in Europe in the last week. Since the global financial crisis exploded five years ago, each significant risk-flare has seen money flow rapidly into Swiss short-dated bonds (the so-called safe-haven trade) and has often driven these rates significantly negative. However, the current debacle is exhibiting a very different picture. Whether it is concern (as we noted here) that Switzerland will be next for a 'wealth tax' or simply a market's recognition of where the 'only' safe-haven truly exists in Europe, investors have surged into short-dated German Bunds (and not Swiss) - driving the yield on these bonds below Swiss 2Y.
The security firm that became infamous for its Olympics snafu is responsible for the 'safety' of Cypriot banks and their money as they prepare to open tomorrow. G4S is the world's largest security-provider, and has been helping banks in the last week by sending out teams (with police protection) to restock ATMs. However, an additional 180 staff have been hired to, "be based outside branches... to control queues," adding (rather optimistically), "if there are any queues." It seems the extra security is, "basically it is to make the banking people feel safe and the customers as well." As ekathimerini reports, while the banks have been closed, businesses have been calling on the security company to find places to keep their cash and asking for guards and alarms to protect their assets. They are also using G4S as an intermediary to bring money from overseas to pay wages and suppliers, and drawing on its systems for shipping cash to provide guarantees for payments abroad, effectively using it as a kind of bank. G4S local boss added, "people have had time to digest the agreement so maybe there won’t be that scenario whereby people run to the banks to withdraw." Oh we are sure...
When the ECB first announced the LTRO in late 2011 (and executed in early 2012) we explained how the ECB's encumbrance via this 'aid' is in fact a major negative for the rest of the capital structure. We were proved correct and even as Draghi lied and stated there was no stigma, the market priced the LTRO-encumbered banks notably weaker. Of course, the banks with the greatest need for support were the ones who grabbed the ECB's punchbowl that time and it seems as fears re-awaken in Europe, risk-appetite towards these ECB-dependent banks (relative to non-LTRO banks) is waning rapidly. The so-called LTRO Stigma (the spread between LTRO and non-LTRO bank credit) is back at 5-month wides as investors rotate away from any and every bank outside of the core. This weakness rubbed off everywhere in Europe as Italian and Spanish bonds saw their worst day since the Italian elections as European stocks slumped and Europe's VIX is now 4.5vols higher than Monday's open.