The squeeze is on. EURUSD is probably the most extreme example of the squeeze-factor potential of what is at its heart a lot more talk and lot less action. Up almost 250 pips from its pre-summit-statement levels, EURUSD is just under 1.2700 - which in context is only back to 6/21 levels. As we noted on June 3, the epic level of CFTC non-commercial EUR spec shorts were ripe for a squeeze-fest, while on the other hand we specifically said "the pain trade will be any appeasing announcement from Europe." Sure enough we got just that (supposedly) and EURUSD is now up well over 300 pips from those levels as the clear pain trade plays out. The USD weakness has driven commodities higher with Gold reaching $1600 once again (6/21 levels). European sovereigns are (somewhat expectedly given the euphoria - though just how much has actually changed is unclear) also rallying hard on the day but while they have compressed spreads markedly, they have stalled at unchanged on the week (though Portugal remains notably wide on the week). Credit and equity markets in Europe are in sync and have snapped higher to 6/21 levels also (with financials outperforming modestly). Europe's equity markets are all soaring - up 3 to 4.5% - as DAX is now outperforming the S&P 500 on the year once again. Big moves (multiple sigma in bond and FX markets) and yet we can't help but think they were hoping for more than just a retracement of one week's price action.
As always, the most pragmatic read thru of what are now day to day rescue efforts out of Europe, which in its own words has effectively given up on seeking a long-term remedy, comes from UBS' Art Cashin who as usual cuts right to the bone of the deluge of essentially hollow endless chatter out of Europe whose sole purpose is to once again baffle all the algos with binary bullshit.
High frequency economics is truly living up to its name, as now GDP forecasts are adjusted not weekly but daily. After Goldman yesterday hiked its Q2 GDP forecast to 1.7% on better than expected Q1 GDP composition, today's weak consumer spending data pushed it right back down. "Due to the downward revisions to March and April PCE, we revised down our estimate for Q2 PCE to +1.8% (annualized) from +2.0% previously. This lowered our tracking estimate of Q2 GDP growth to +1.6% from +1.7%."
The latest confirmation that the US consumer is rapidly retrenching ahead of the great unknown which is the US fiscal cliff was the just released data on Personal Spending and Income, both of which came in as expected, at 0.0% and 0.2% over the prior month. This was the lowest rate of increase in the Personal Spending rate since June 2011, when spending posted a -0.2% decline. This was to be expected considering the ongoing contraction on the income side: "Private wage and salary disbursements increased $1.1 billion in May, compared with an increase of $5.3 billion in April. Goods-producing industries' payrolls decreased $7.0 billion, in contrast to an increase of $5.6 billion; manufacturing payrolls decreased $4.5 billion, in contrast to an increase of $3.2 billion." The collapse in manufacturing wages was somewhat offset by gains in services: "Services-producing industries' payrolls increased $8.3 billion, in contrast to a decrease of $0.4 billion. Government wage and salary disbursements increased $0.3 billion, compared with an increase of $0.4 billion." And for the best indication of just how consumers feel about the economy, one just needs to look at the savings rate: at 3.9%, this was the highest savings rate since January as any free money enters not the economy, but bank checking accounts and counterparty risk-free mattresses.
Bloomberg News may be the most read news source in the world, but as of today, it is no longer available in China. Why? According to Bloomberg TV News Editor Denise Pellegrini, all it takes is for some investigative reporting exposing the dirty laundry, or in this case the even dirtier assets of one Xi Jinping - "the man in line to be China’s next president." In "Xi Jinping Millionaire Relations Reveal Fortunes of Elite" Bloomberg writes: "Xi warned officials on a 2004 anti-graft conference call: “Rein in your spouses, children, relatives, friends and staff, and vow not to use power for personal gain.” As Xi climbed the Communist Party ranks, his extended family expanded their business interests to include minerals, real estate and mobile-phone equipment, according to public documents compiled by Bloomberg. Those interests include investments in companies with total assets of $376 million; an 18 percent indirect stake in a rare- earths company with $1.73 billion in assets; and a $20.2 million holding in a publicly traded technology company." That a country's will seek to block the internet when the wealth of its humble leaders is exposed is expected. However, what is unexpected is that the hidden assets of China's president in waiting are rather easily discovered is troubling: it means Goldman has still much work to do in China, and much more advisory work to the country's elite over how to best hide its assets in various non-extradition locations around the world under assorted HoldCos. Just like in the US. The good news, for GS shareholders, however, is that this indeed provides a huge new potential revenue stream.
In the final analysis Europe is quite exposed at this moment and may be for quite some time. The ESM, after the change in seniority status, must be re-affirmed in at least two countries that are the Netherlands and Finland and Germany has not yet approved it yet either. The EFSF has already spent $450 of its capacity on Greece, Ireland, Portugal and now $125 billion for Spain. The balance left in the fund is tissue paper thin and that is all that is in existence presently for any more problems in Europe. Plans and schemes aside, the amount of money that could actually be used today is a drop in the proverbial bucket.
While Italy is already celebrating the double whammy of its victory over Germany in football and in the corridors of bureaucracy (read the following from Spiegel for the German perspective: "How Italy and Spain defeated Merkel at EU Summit"), Germany may have some other plans. While the ESM ratification vote has planned to take place later today, many are now saying this vote should be delayed as its represents a "180 degree" shift in previous commitments. Die Welt reports: "Given the confusion over the results at the EU summit in Brussel, speculation has been raised in Berlin to postpone the vote on the euro rescue ESM. Several Members of the CDU-FDP coalition also called for a dismissal of the agenda item on the evening, it was said from the CDU and FDP immediately before the start of a special meeting of the Budget Committee. Point of contention is that Chancellor Angela Merkel in Brussels more concessions for easier credit to ailing banks in Europe has been as expected." And more: "The Budget Committee of the Bundestag will hold a special session on the summit resolutions. The government must explain its turn through 180 degrees, called the SPD budget expert Carsten Schneider. With the decisions on permanent euro rescue ESM "means any obligation of a country are only a paper tiger," Schneider criticized with regard to that ailing banks are to receive direct assistance ESM. The meeting will take place on Friday afternoon." In other words while the CDU conservative budget expert is calling for an all normal vote, the SPD is getting worried. The question now is what happens to the ESM ratification vote today: that is the key catalyst for the time being.
Much has been speculated about who promised what at last night's summit, and who guaranteed that the ESM would do this, that and the other, as once again, just like last summer, the ESM is becoming the most universal Swiss army knife ever conceived (just pray it never has to be actually used). Here, courtesy of Reuters, are excerpts of what they all really said.
Below is Goldman's quick take on the E-Tarp MOU (completely detail-free, but who needs details when one has money-growing trees) announced late last night. In summary: "We recommend being long an equally-weighted basket of benchmark 5-year Spanish, Irish and Italian government bonds, currently yielding 5.9% on average, for a target of 4.5% and tight stop loss on a close at 6.5%." By now we hope it is clear that when Goldman's clients are buying a security, it means its prop desk is selling the same security to clients.
There was just one relevant phrase uttered in all of last night's bluster, and ironically it came from Italy's own Mario Monti who said that there are "no plans for boosting bailout funds." This really is all that matters. Why? The Bridgewater chart that we presented before once again explains it all.
In the aftermath of last night's bombastic European announcement coming in the late night hours, in which Europe has virtually promised the kitchen sink, one would imagine that the response for the biggest beneficiary, Spanish bonds, would be far more dramatic. Instead after ripping 60 bps tighter in a kneejerk move, the yoyo reaction has seen bonds slide wider ever since, and the result being a SPGB level last seen... on Monday. Why is the market not more enthusiastic? Because what happened last night is nothing short of the second Greek bailout announcement from October, which followed a similar pattern: a late night announcement by Europe that Greece is saved, followed by a brief rip of a rally, only to give it all back, and to require global central bank intervention one month later. Because what really happened last night? Merely promises. We will not dwell much on the fact that the ESM has yet to be ratified by the paying countries, that the ESM will now have to be scrapped in its current format, and resigned by all 17 member countries since the seniority provision is somehow scrapped: an event that amounts to a cramdown exchange offer, that while everyone is talking about the uses of funds, nobody has uttered a peep about the sources, that Germany has yet to say what the German conditions will be or whether the revised deal will even pass the Bundestag, that the deal is contingent on the formation of a "effective single supervisory mechanism is established, involving the ECB" which in Europe is next to impossible, and that finally the whole "arrangement" is nothing but an Memorandum of Understanding - the weakest form of non-binding agreement possible. Which is why we are just a little skeptical and that today's E-Tarp is merely the latest catalyst to be faded.
The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leader still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures.
Juncker 'Hoped For More' As Italy And Spain (Oh, And Ireland Now) Get (To Share Same-Size) 'Band-Aid'Submitted by Tyler Durden on 06/28/2012 23:03 -0400
So To Clarify: Dropped seniority and overseeing of ESM (unratified) and EFSF rescue funds (which will not be boosted in size) to fund not just Italy and Spain but Ireland too...conditioned on agreeing to EU banking oversight
- *MONTI SAYS EURO LEADERS HAVE NO PLAN FOR BOOSTING BAILOUT FUNDS
- *ITALY HAS NO INTENTION TO `APPLY FOR THIS,' MONTI SAYS
- *IRELAND'S KENNY SAYS WHAT WAS IMPOSSIBLE IS NOW POSSIBLE
Early morning (drunk-dialing/texting) headlines from the EU Summit that there has been some short-term measures approved in terms of the removal of the seniority preference for ESM/EFSF rescue fund recaps of Italian and Spanish banks (though no details of the levels of dilution, cram-downs, or amounts have been discussed). The market, being as thin as it can be, is ripping higher on this realistically 'not much' news - though clearly someone 'blinked' a little. Headlines via Bloomberg:
- *EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS
- *EURO LEADERS AGREE TO OPEN FUNDS WITHOUT AUSTERITY PROGRAMS
- *BANKS CAN RECAPPED DIRECTLY WITH AID FUNDS, VAN ROMPUY SAYS
But it's not all free-money and unicorn tears:
- *MERKEL SAYS EU LEADERS TO CONTINUE WORK ON LONG-TERM MEASURES
- *JUNCKER SAYS WOULD HAVE `HOPED FOR MORE' FROM EU SUMMIT
- *EU BANK SUPERVISION IS CONDITION FOR ESM LOANS TO BANKS: RUTTE