Equities are holding off their lows for now as Treasuries are pushing on to the lowest yields of the day (swinging from +4.5bps to -5bps now). Gold has pushed to the highs of the day (with Silver +1% from Friday's close). S&P 500 futures sit at the lower-edge of their 3-month up-trend channel and today's volume on the downswing was notable. Risk-assets in general are tending to be more risk-averse than stocks though we would not be surprised to see a pull up to around 1515 for a VWAP test before resuming any down-trend. JPY is up 0.5% against the USD but overall the dollar is higher on the day also weighing on risk-appetite.
Today's stunning comeback by Berlusconi, which is really a slide in support for Bersani and Monti whose joint coalition government is unlikely to have the 158 seats needed in the Senate to avoid elections in a few months, means the "Plan B" aka "worst" outcome is in play. How "worst"? In a note released over the weekend, JPM strategist Gianluca Salford attributed a tiny 15-20% probability to an outcome that now appears to be the base case. A far more likely result (defined by JPM as 75%) would have been a continuation of the status quo, which saw an easily-formed Center Left government. As of this moment, that no longer appears feasible. So as the next steps play out, the fulcrum security will be Italian BTPs, which according to JPM will be whacked to the tune of 40 to 100 bps (at least to start), and with deleveraging feedback loops picking up after, who knows where this will end, especially in a worst-er case scenario where there will be months of political and social uncertainty in Italy.
For the third time since the crisis of confidence in the world's economic and financial markets really shifted from the 'old normal' to a supposed 'new normal' of credit-bloated slow growth and deleveraging, risk markets in general have fallen back to a belief that systemic risk is off the table. Not just European tail-risk. As Bloomberg notes, across six major assets classes, cross-asset-class correlation has fallen to levels associated with pre-crisis risk. Simply put, the systemic 'tail-risk' driver of our markets has been priced out, leaving just idiosyncratic risk (for now). What is often misunderstood, however, is this drastic reduction in correlation also means the market believes that the systemic 'flow' of central bank liquidity is also less important as investors become more confident that some fundamental hope belies the performance. As we have seen a few times post-crisis, since the impossible was proved very possible, risk-flares can happen when one least expects them, and with market perceptions of that possibility now so low, the impact could be considerably more exaggerated.
When Moody's downgraded the UK's sovereign credit rating last week it was something of an anti-climax. The ratings agencies long ago lost what little credibility they ever had. Being downgraded by Moody's is like being called a moron by a moron; ask anyone who has ever set foot in a bond dealing room - the ratings agencies are always behind the curve. The UK has been on the skids, credit-wise, for years. Britain's debt to GDP has gone through the roof. We, and generations to come, will be left with the reckoning. Nobody believes that bonds are an objective reflection of economic reality. The game is rigged, and everybody knows it. But the Moody's downgrade should serve as a piercing smoke alarm to anybody still naive enough to be holding these instruments of value destruction. Get out now while the going is good.
For a moment there it was all solved. Everything was in full bull mode (apart from the EURUSD). Then, the 'buy first, ask questions later' crowd saw the headlines and the covering began. Of course, bulls will point to the fact that stocks closed unchanged and not down and sovereign spreads ended unchanged and not wider but the truth is that the Italian stock market dropped 4% from pre-poll headlines, Italian and Spanish bonds cracked over 30bps wider and the EUR dropped 160 pips. Finding support at 5%, Spanish yields pushed higher and ended back above 360bps spread to Bunds. Europe's VIX pushed back above 21.5% but it is EURJPY's retracement of all the overnight gains that is probably hurting global risk the most for now...
With the entire world, and certainly GETCO's ES and EURUSD algos, focused on every single update out of the Italian Senate race, which now appears certain to not bring the necessary 158 seats to the Bersani-Monti coalition leading to a chaotic revote in the coming months, here is some tangential news of the "who could have ever seen this coming variety." Following last week's Heinz insider trading probe, which implicated a Goldman Sachs account in Zurich belonging to some private wealth client, who was so anonymous not even Goldman knows who it belonged to, we now learn that yet another Goldman employee has just left the company in a totally separate insider trading probe.
The State has monopolized all authority, giving it essentially unlimited power to make things worse. Since concentrations of centralized capital, authority and power does not relinquish control easily, if ever, the Status Quo will have to decay and implode before authority can be pushed down to more responsive, appropriate levels.
Very bad news for the globalist statist banker oligarchy as it now appears that an Italian revote is virtually unavoidable:
- ITALY'S BERLUSCONI WOULD GET 138 SENATE SEATS, CISE SAYS
- ITALY'S GRILLO PARTY WOULD GET 54 SENATORS, CISE SAYS
- BERSANI AND MONTI BLOCS WOULD GET 121 SENATORS TOGETHER: CISE
It also means that should Grillo form a coalition with Berlusconi, even if very unlikely, they would have the required 158 seat majority in the Senate. In short: this is a horrible result for Goldman and its technocratic tentacle which got an epic boot from the Italian people.
It seems that as long as lumber futures are rising they are an excellent indicator of the strength of the housing recovery, but once they show any weakness, it is technical or negligible. A few things we know: inventory is epically low; homebuilder stocks are priced for perfection (and missing); NAHB confidence is rolling over; and now Lumber futures have tumbled by the most over the last five days in 15 months. So much for a sustained 'recovery'.
With the epic, and very embarrassing, retracement of Italy's (and the US stock market's) entire intraday gains as the revelation that Europe may be very much unfixed all over again, here is yet another vote tracking map, which however is slightly delayed from the real time data, which as of moments ago had Berlusconi at 37.4% in the all too critical Lombardy, while Bersani at just 29.7%, while the latest braoder Senate count per Sky is Berlusconi 31.9%, Bersani 28.7% and Grillo at 24.9%, which means Bunga + Bepe have over 56% of the Senate: an epic failure for Goldman's tentacle. This is very bad news for statists, as the lack of 158 seats even for a Bersani-Monti coalition, means a Hung Parliament, possible loss of OMT eligibility and new elections coming soon, all of which was explained previously.
Well that didn't last long did it?
LATEST SENATE FROM RAI: BERLUSCONI 31.6, MONTI: 29.4, GRILLO 24.9, MONTI 9.2
As noted initially, Italian exit polls are notoriously inaccurate. Sure enough, here is some data which directly contradicts initial pro-statist results:
BERLUSCONI LEADS IN KEY SENATE RACES, IPR PROJECTION SAYS
BERLUSCONI LEADS IN SENATE RACE 31% TO 29.5%: RAI PROJECTION
BERLUSCONI COALITION LEADING SENATE IN SICILY: LA7 PROJECTS
The market may have to ask some questions, after having shot repeatedly already. And it gets better:
Grillo Five-Star movement would be largest single party in Senate based on Rai projection
A renegade, counter-establishment comic to head it all. What can one say but... Italy.
While the Italian exit polls provided a breath of fresh air for statists everywhere, and hope that despite his recent resurgence, Berlusconi ascent won't result in a Hung Parliament outcome, threatening Italy's access to the ECB's OMT program, the final outcome for the 158-seat Senate majority will hinge on the final Lombardia vote, which as explained previously is critial for the final senate breakdown. Readers can track the real-time data as Lombardia votes come in via Italy's TG24/Sky at the following link, while the general Senate breakdown in real time can be found here.
As I and many others have pointed out for years, unless you are a crony Wall Street welfare queen you can pretty much forget about any high level position in the Obama Administration. Barack made that clear from day one when he decided to surround himself with two of the people at the core of the 2008 financial crisis, Larry Summers and Tim Geithner. The trend is simply continuing with the current nominee for Treasury Secretary: Jack “Bailout Bonus” Lew. The revolving door is institutionalized and at this point as reliable as a Swiss watch.
If one looked at the EURUSD exchange rate or US equity futures one could be forgiven for thinking things did not go so well in Italy's election. The former is fading quite rapidly from its overnight exuberance and the latter is stable at pre-FOMC levels. However, a glance at the initial exuberant, nothing can stop us now, Italian (and Spanish) bond and stock markets and it appears the problems of the world have been solved. Spain's 10Y yield is back below 5%, Italian 10Y spreads have collapse 30bps to near multi-year lows, and Italy's equity market is up 3.5%. However, if you pause, take a breath, and look around, the liquidity is plain to see and the initial knee-jerk is beginning to retrace as investors realize that everything they knew was there before - is still there...