Overnight Summary: Perfect Storm Rising
The only good news spin this morning was that the Greek, pardon Spanish contagion, has not reached Italy, after the boot-shaped country sold €5.25 in bonds this morning at rates that did not indicate a meltdown just yet. It sold its three-year benchmark at an average 3.91 percent yield, the highest since January but below market levels of around 4 percent at the time of the auction. It also sold three lines due in 2020, 2022 and 2025 which it has stopped issuing on a regular basis. And this was the good news. The bad news was the not only has the Spanish contagion reached, well, Spain, but that everything else is now coming unglued, as confirmed first and foremost by the US 10 Year which just hit a new 2012 low of 1.777%. Spain also is getting hammered with CDS hitting a record wide of 526 bps overnight, and its 10 Year hitting 6.26% after the country sold 364 and 518-Day Bills at rates much higher rates than on April 17 (2.985% vs 2.623%, and 3.302% vs 3.11%). But the highlight of the day was the Banco de Espana release of the Spanish bank borrowings from the ECB, which to nobody's surprise soared by €36 billion in one month to €263.5 billion, more than doubling in 2012 from the €119 billion at December 31.
That this happened even as the Spanish government is now serially nationalizing banks is probably the nail in the coffin of Spain, and means the market can now sit back and watch as the Greek events unfold one at a time a few thousand kilometers west. Finally, and going back to Greece, nothing has been resolved on the election front where Syriza has pointedly refused to meet with the president at 7:30 pm local time in a last ditch attempt to avoid a second parliamentary election. But probably the one headline that bears the most watching is that Greek government spokesman Kaspsi has said that the Greek government has not taken a decision on its May 15 bonds yet. Well, with just a few hours left in the day, they better decide soon. As a reminder, this is the fulcrum issue identified first by Zero Hedge, that is a non-member of the PSI consortium and has non-Greek law covenants, and whose non-payment will push Greece into full out bankruptcy.
Altogether a perfect storm day in the making, which has sent the EURUSD tumbling, gold red on the year, various "safehaven" bonds to new record low yields, and futures imploding in what is now certainly a preparation day for THE NEW QETM, especially since German GDP data released tomorrow now appears set to confirm that even Europe's largest economy has double dipped. With China already commencing a new easing episode, it only means it is just a matter of time before the Fed now joins the rest of the world in a desperate attempt to once again prove Einstein was 100% correct.
And a full recap from Bank of Countrywide Lynch:
Market action: Political uncertainty undercuts confidence
Political uncertainty in Europe is undercutting global investor confidence. In Greece, deadlock is set to continue as legislators are unable to find agreement on a unity government. Meanwhile, the Greek media has started discussing Euro exit scenarios and the threats to the nation's banking sector. Meanwhile, in Germany, Chancellor Angela Merkel suffered a significant political setback; her party was defeated in the nation's most populous state in regional elections.
In other news, weaker than expected Chinese economic data has spurned action. Clearly, the pace of the slowdown in China is more than policymakers can stomach. The People's Bank of China (PBoC) said that it is cutting the reserve ratio by 50bps, freeing up more cash for the banking system. This is the third such cut in the last six months. Announced over the weekend, the cut will be effective May 18. Because the announcement came immediately after soft economic data, we expect the PBoC to further ease liquidity conditions.
Stocks down, US and German bonds better bid
Stocks are selling off sharply as investors take risk off the table. The MSCI Asia Pacific Index slid 0.7%. In Europe, major indices are down in excess of 2%. Spain's IBEX is off 2.8%; the CAC 40 is cracking 2.3%; and, the German DAX is sliding 2.1%. At home, equity futures are pointing to a lower open across the major indices. The Dow is set for a triple-digit loss at the open.
In bondland, there is a major flight to safety trade. US 10-year Treasury note yields are down 6bps to 1.78%. If you think that is low, the benchmark German bund is off 7bps to 1.44%. In the UK, gilts are down 10bps to 1.87%. By contrast, yields across the periphery have blown out, up 23bps in Italy to 5.7% and 28bps in Spain to 6.24% - levels not seen since last November.
Commodities melt as US dollar rallies
Not surprisingly, as the market prices in a softer growth backdrop commodities are coming under pressure. WTI crude oil is down $2.0 to $94 per barrel. Turn to page C1 of today's Wall Street Journal, "Commodities Rally Hits a Speed Bump." The yellow metal is having a bad day - of $17 to $1563 per ounce. Part of the weakness in gold has to do with the falling value of India's rupee. Recall that India is the world's largest gold consumer. See page C10 of today's WSJ, "Weak Rupee Stings Gold." Industrial metals are down too. Copper is taking a 2.5% hit to its lowest level since January. Finally, the US Dollar is enjoying the risk-off trade, rallying against most major currencies. The DXY Index is up 0.3% and with concerns rising in Europe, the euro-dollar cross is breaking down to 1.29.
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