While European and US equity and credit market seem somewhat asleep this morning (despite quite significant moves in FX, Treasury, and Commodity markets), there is some stirrings in Italian and Spanish Senior and Subordinated debt markets. No matter how much de Guindos denies-denies-denies, the fact is the market has been increasingly pricing in subordinated bank debt impairment and now senior bank debt is inching wider also after the ECB's 'suggestions' came to light this weekend. Subordinated Italian and Spanish bank debt is at its worst since mid-December and the decompression trade we suggested is moving slowly on our direction.
From Albert Edwards: "I want to share with you news that the S&P is on the verge of an “ultimate” death cross (see chart below). This is where a 50-month moving average (currently at 1152) falls below the 200-month average (currently 1145). The Trend blogspot (link) tries to make some sense of this very rare event. They note that the averages came close to crossing in 1978 towards the end of the 1965-82 secular bear market, but just held. By contrast Japan suffered a monthly death cross in 1998 and 14 years later we are still in the firm embrace of the bear. Watch this space."
Once again the reflexive response that bad is good is occurring in risk markets. No ssoner had the dismal retail sales number printed than we are seeing Treasury yields tumble (within a basis point or two of record lows), the USD snap lower, and Gold snap higher. It seems the relatively sanguine nature of stocks this morning was the target for gold and USD's move but ince again we remind any and every dip-buyer that NEW QE can't come when everyone expects it and asset values are at least primed for a little jump (not within mult-year highs) as the deflationary threat Bernanke is primarily concerned with is clearly not evident.
Big Retail Sales Miss In Longest Collapse Streak Since 2008 Recession, Confirms US Consumer ZombificationSubmitted by Tyler Durden on 07/16/2012 08:40 -0400
Today's advance retail sales for June was simply abysmal, printing at -0.5% on the headline, and -0.4% ex autos. Expectations were for a print of +0.2% on the headline and unchanged less autos. Gas was not the culprit either as ex autos and gas the miss was -0.2%, on expectations of a +0.2% print. This was the third consecutive drop in a row: the longest since December 2008, when the US economy was flat out imploding. Expect furious Q2 GDP revisions imminently once the sellside community plugs this number into bean counter abaci. Goldman will likely cut its recently downgraded Q2 GDP from 1.3% to 1.1% or even sub 1.0%, which is essentially stall speed. Finally, today's number confirms our biggest worry: the spike in May consumer credit was not for discretionary purchases: it was for staples. Do the math. Finally, building material & garden eq. & supplies dealers down 1.6%, the biggest sequential drop aside from gas stations. At least housing has "bottomed." Of course, EURUSD spiking on expectations of more imminent NEW QE.
Here are the key highlights from the just released Citigroup Q2 earnings:
- Net Income of $0.95 or $1.00 excluding CVA and one time loss; Exp $0.86
- Citigroup Net Income of $2.9 Billion; $3.1 Billion Excluding CVA/DVA and the Loss on Akbank;
- Citigroup Revenues of $18.6 Billion; $18.8 Billion Excluding $219 Million of CVA/DVA and the $424 Million Loss on Akbank; Exp. $19.01 Billion
- Where the bottom line beat came from: Loan Loss Reserve Release of $984 Million in Second Quarter, or 35% of pretax net income.
- Complete freeze in capital markets:
- Fixed Income markets revenue plummets from $4.7B in Q1 to $2.8B in Q2 (and down 4% Y/Y from $2.9 billion)
- Equity Markets revenue slides 39% sequentially from $776MM to $550MM, down 29% Y/Y from $776MM. It's a zombie zone out there
- Total Securities and Banking revenues slide 22%, yet Expenses decline just 4%
- And just like JPM, Americans can't wait to hand over their deposits to Citi: Citigroup Quarter-End Deposits of $914 Billion, 6% Above Prior Year Period
- This compares to total Loans of $655 billion or a $259 billion mismatch; we know that this surplus is what JPM uses as funding for its Treasury/CIO group. Does Citi also use the excess deposits to fund its internal hedge fund?
In what has become a typical pattern; Europe has a summit, everyone says this, that, their own variation of that and the other to appease their citizens and it is not until days later that some sort of reality begins to be released to the Press. Not only has this become the pattern but it generally comes over the weekend when the markets are not open and when no one is paying much attention. It is a purposeful scheme and useful I suppose for dampening effects and it allows the bliss to continue. In the meantime there is no ESM in place, only $65 billion left in the EFSF after Spain and Cyprus are funded and the German Constitutional Court declared over the weekend that there would be no ruling on the ESM until September 12. The Golden Rule lives on; “He that has the Gold rules.”. For those that believe in the usefulness of firewalls, which would not include me, you are now staring at bricks to build dollhouses and it is not just the flank but the center that is fully exposed and vulnerable. This is Vichy reborn and Anschluss déjà vu and the takeover of Poland just accomplished on a different battlefield. The weapon is money and not armaments and while the stench is more polite the demand for victory has not lessened.
Even with Citi reporting a miss on the top line of $18.6 billion (Exp. $19 billion), but a bottom line beat courtesy of more loan loss reserve releases amounting to $984 million, or 35% of the entire pretax net income number, sentiment has been very quiet this morning, with hardly any sharp moves, aside from the now usual leak in Spanish sovereign bonds, following Bloomberg's confirmation of the WSJ story that the ECB is willing to impair Senior bondholders, while Swiss nominal bonds continue to trade below 0.4% and the EURUSD drifts lower. Today's lethargy may be interrupted at 8:30 am when the Empire Manufacturing and Advance Retail Sales data are released, but unless we get another massive, and very convenient, EUR repatriation out of Europe at just the moment when the US market opens, we doubt much will happen today ahead of Bernanke's semi-annual congressional testimony tomorrow.
Contrary to popular delusions, money flows in Spain are once again deteriorating rapidly, with the country's bank borrowings from the ECB soaring by €50 billion in June according to the Bank of Spain, the second highest ever, to a record €337 billion. While this is bad for Spain, it is good for Italy, which saw its June ECB borrowings rise by only €9 billion, to a record €281 billion, although well below Spain's total - something Italy, which led Spain in ECB borrowings since mid-2011 will be delighted to hear. What however, is rather curious, is that the Spanish TARGET2 net liability soared to €371 billion (-€40 billion in autonomous factors accounting for the lower total number), forcing the ongoing implicit German bailout of the periphery to accelerate to a record €729 billion as noted previously. As a result, for the first time ever, Spanish TARGET2 liabilities represented over half of total Germany TARGET2 claims. Just as we predicted several months ago, German funding of peripheral current account balances is the only "source of capital" for these countries in what is rapidly becoming the latest 'flow of funds' mercantilist scheme, one which can only sustain for so long by definition. In the meantime, now that we are in the exponential phase of the TARGET2 blow out, expect the next German update to indicate well over €2 billion per day in implicit European bailout spending.
The debate on how to deal with false or misguiding campaign speech is neither new nor likely to be resolved soon, but as Europe’s economic crisis continues to deepen, and as social and political tensions rise, elemental questions of democracy once limited to seemingly distant European Union institutions are now spilling over to national governments. In the case of Spain, broken campaign promises coupled with the notion that Brussels and Berlin may have de facto hijacked the national political process are seeding the ground for an imminent political crisis. Indeed, Spanish Prime Minister Mariano Rajoy’s systematic adoption of policies that are in complete breach of the promises which took him to power only a few months ago are casting doubts on the legitimacy of his political leadership.
- Looks like the troops won't be steamrolled: JPMorgan Blaming Marks On Traders Baffles Ex-Employees (Bloomberg)
- The Goldman "Huddle" goes to Blackrock - Surveys Give Big Investors an Early View From Analysts (NYT)
- At least housing has bottomed: London House Prices Plunge As Supply Rise Adds To Lull (Bloomberg)
- Christine Lagarde and Nicolas Sarkozy embroiled in new corruption inquiry (Telegraph)- at least that fraud they created: Others helped them create it.
- Heat Leaves Ranchers a Stark Option: Sell (NYT)
- Merkel Gives No Ground on Demands for Oversight in Debt Crisis (Bloomberg)
- The euro skeptics have the best lines again (FT)
- Wen Says China’s Economic Recovery yet to Show Momentum (Bloomberg)
- Europe’s Banks Face Tougher Demands (FT)
- Madrid Region To Sell 100 Office Buildings Amid Austerity (Bloomberg)
- China eases taxes for foreign companies (FT)
Via Goldman, here are the key economic events to look forward to in the coming relatively quiet week. And out of DB, we get a list of the key PIIGS bond auctions and bailout events in the immediate and near-term future.
The market's hopes and dreams for the next LSAP remain high. As gold inches higher, tail-risks priced out (expectations for extreme FX moves are considerably lower than sentiment would suggest), and US equity vol expectations (and put skews) are crushed; the equity market clearly remains 'at a premium' in its notional indices given what is sheer lunacy in earnings expectations going forward. The question every investor should be asking is not when QE or even if QE, but so-what-QE? As Credit Suisse notes, given the deterioration in US economic activity (and the extension of Operation Twist) the FOMC will probably wait until its September meeting (and remember the trigger for further pure QE is a long way off for now). The most critical question remains, will additional QE work? After all, few would argue that US interest rates are too high or that banks in the US need still more excess reserves. Two things stand out in their analysis of how QE is supposed to work (transmission mechanisms) and its results to date: QE1 was more effective than QE2, and it's easier to find QE's effect on Treasury yields than on real economic performance. Perhaps more concerning is that the potential negative effects of such unconventional monetary policy has received little attention (aside from at fringe blogs here and here).