European Risk Is Back: CDS Surge, Spain 10 Year Back Over 6%, Germany Has Second Uncovered Auction In Three WeeksSubmitted by Tyler Durden on 09/26/2012 06:14 -0400
Remember when we said two months ago that one way or another the market will need to tumble to enforce the chain of events that lead to Spain demanding the bailout which has long been priced in, and (especially after yesterday's violent protest) Rajoy handing in his resignation? Well, it's "another." After nearly 3 months of suspending reality, in hopes to not "rock the boat" until the US presidential election, reality has made a quick and dramatic appearance in Europe, where after a day in which the EURUSD tumbled, events overnight have finally caught up. What happened? First, ECB's Asmussen said that the central bank would not participate in any debt restructuring, confirming any and all hopes that the ECB would ever be pari passu with regular bondholders were a pipe dream. Second, Plosser in the US said additional QE probably won't boost growth which has reverberated across a globe in which the only recourse left is, well, additional QE. Finally, pictures of tens of thousands rioting unemployed young men and women in Madrid did not help. The result: Spain's 10 Year is over 20 bps wider, and back over 6%, Germany just had a €5 billion 10 Year auction for which it only got €3.95 billion in bids, which means it was technically a failure, and the second uncovered auction in one month, and finally CDS across the continent, not to mention the option value that is the Spanish IBEX which may fall 3% today, have finally realized they are priced far too much to perfection and have, as a result, blown out.
There has been a lot of ink spilled about how the stock market performs during Presidential election years generally leaning to why investors should be fully invested to the hilt. The current election year, with just three months remaining, has certainly played out to historical norms with the markets advancing on expectations of continued government interventions even as economic and fundamentals deteriorate. To wit Bespoke Investment Group wrote back in July: "We have highlighted the similarities between this year and prior Presidential Election years numerous times. Most recently, in early July we noted the fact that based on the historical pattern, the S&P 500 could see a modest pullback in mid-July coinciding with the kick-off of earnings season. Sure enough, the market saw some choppiness about a week and a half ago and subsequently rebounded in the middle of last week. Holding to the historical pattern, that rebound came right at the same time that the market historically sees its summer low. If the pattern continues, the S&P 500 could be set up for a nice rally to end the Summer. Will it hold? Only time will tell, but if the historical pattern has worked so far, what's to stop it from continuing?"
In what is likely the biggest sabre being rattled this week in the war-of-words that is occurring in the Pacific, China announced today the launch of its first aircraft carrier. China bought the 300-meter Soviet-built vessel in 1998 from Ukraine and had it refitted to become an important step in "raising the overall fighting capacity" of its naval forces. Rear Admiral Yang Yi noted that "it is natural that China should have its own aircraft carrier," arguing that all major world powers already own similar vessels. Of course, the coincidental timing is no surprise as Reuters notes "China will never tolerate any bilateral actions by Japan that harm Chinese territorial sovereignty," Vice Foreign Minister Zhang Zhijun told his Japanese counterpart on Tuesday as the two met in a bid to ease tensions. "Japan must banish illusions, undertake searching reflection and use concrete actions to amend its errors, returning to the consensus and understandings reached between our two countries' leaders."
But what if one wants Ron Paul to be elected? Can one vote for Ron Paul then?
While much attention has been paid to what Draghi has 'talked' about doing, what Bernanke 'is' doing, what EU Leaders 'are not' doing, and what US politicians 'will not' do - the world's risk markets remain on edge. Admittedly, for now, that edge seems biased to the 'we-believe' side of the fence. However, as Deutsche Bank notes, in their wonderfully succinct chart comparing the impact and probability of potential upside and downside risks to global markets, it is economic (or real!) data that should worry investors the most - though we still fear the Kubler-Ross 'denial' stage that in which Spain/Italy/Portugal/Greece remain mired.
The first concern of the Emir of Qatar is the prosperity and security of the tiny kingdom. To achieve that, he knows no limits. Stuck between Iran and Saudi Arabia is Qatar with the third largest natural gas deposit in the world. The gas gives the nearly quarter of a million Qatari citizens the highest per capita income on the planet and provides 70 percent of government revenue. How does an extremely wealthy midget with two potentially dangerous neighbors keep them from making an unwelcomed visit? Naturally, you have someone bigger and tougher to protect you. Of course, nothing is free. The price has been to allow the United States to have two military bases in a strategic location. According to Wikileak diplomatic cables, the Qataris are even paying sixty percent of the costs. Having tanks and bunker busting bombs nearby will discourage military aggression, but it does nothing to curb the social tumult that has been bubbling for decades in the Middle Eastern societies. Eighty-four years ago, the Moslem Brotherhood arose in Egypt because of the presence of foreign domination by Great Britain and the discontent of millions of the teaming masses yearning to be free. Eighty-four years later, the teaming masses are still yearning.
Two years ago nobody would dare touch Steve "Blue Eyes" Cohen's firm. Then we dared to ask some questions. Then the entire expert "information arbitrage" network pyramid got exposed (with a one year delay after ZH) and hedge funds returns aka "alpha" plunged. And now this. From Bloomberg:
- FIVE SAC CAPITAL EMPLOYEES HAVE BEEN IMPLICATED IN INSIDER CASE
- SAC MANAGER SAID TO BE UNCHARGED FIGURE IN HEDGE FUND SCHEME
- SAC FUND MANAGER MICHAEL STEINBERG SAID TO BE TIED TO PROBE
- SAC CAPITAL'S STEINBERG SAID TO BE UNINDICTED CO-CONSPIRATOR
How long until we go from unindicted, i.e. extensively questioned, to indicted? Just which bigger fish are these "unindicted co-conspirators" expected to throw under the bus? And what happens to the NYSE if/and or when the firm that trades 10% of its daily volume is busted?
It seems European credit markets were on to something this morning. As European tensions spilled over so the US equity markets just could not hold on to the post QEternity gains and turned down rapidly shortly after Europe closed. The S&P 500 has retraced over 75% of its post-FOMC spike gains, Treasuries are well below the pre-FOMC yield levels and the USD has retraced all of its losses. The 1% drop in the S&P 500 is the largest in over two months. equities closed at their lows - something we have not seen in a while - with all the usual high-beta suspects (e.g. AAPL -2.5%) all getting crushed. VIX surged to 15.5% (up 1.25 vols) as volume surged across most equity indices. Only Healthcare and Staples remain green post-FOMC.
As we observed earlier, Spain, whose YTD expenditures are now nearly 10% greater than last year, has yet to implement any austerity (dear Spanish readers, if your standard of living has gone down it has nothing to do with less government spending, and everything to do with corruption and incompetent politicians). Yet even so, the locals (who at 24% unemployment have quite a bit of free time on their hands) are quite unhappy, and as Art Cashin observed earlier, are "occupying congress" or otherwise indicating their displeasure with the world. Those who wish to follow the major Spanish protest in Madrid, can do so here.
Sadly the social unrest that we had predicted, when over 50% of the youth are unemployed and the politicians are navel-watching, has erupted, as angry protesters charge the local police, who in turn are arresting rioters and using volleys of rubbers bullets to keep the crowd at bay.
Leonardo Fibonacci (1170-1250) may have just stuck his 'golden-ratio-based' fork in the equity market's rally. As the following chart shows, the diminishing marginal utility of Quantitative Easing's wealth effect has followed a rather remarkable pattern... and today marks the next turning point.
The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a remarkable plunge in economic freedom during the past decade. From 1980 to 2000, the US was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. The ranking of the US has fallen precipitously; from second in 2000 to eighth in 2005 and 19th in 2010. By 2009, the United States had fallen behind Switzerland, Canada, Australia, Chile, and Mauritius, countries that chose not to follow the path of massive growth in government financed by borrowing that is now the most prominent characteristic of US fiscal policy. By 2010, the United States had also fallen behind Finland and Denmark, two European welfare states. Moreover, it now trails Bahrain, the United Arab Emirates, Estonia, Taiwan, and Qatar. The Fraser Institute's massive volume on the Economic Freedom Of The World - based on the following five factors: Size of Government, Legal System & Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation - covers 42 variables with the goal of quantifying the key ingredients of economic freedom.
The Japanese have a peculiarly virulent strain of right-wing militarism that continues to influence domestic politics. In this worldview, reverence for the Imperial household is mixed with an aggrieved sense that Japan's expansion in World War II was justified (though few would say this publicly). As a result, any official Japanese attempt to apologize for the horrendous destruction, murder, enslavement and torture inflicted by Japanese forces in World War II sparks outrage in one sector of the domestic political order. Deep within this mindset is the view that the only thing wrong with World War II was that Japan lost. Even more galling to those who suffered so mightily, Japan has refused to publicly acknowledge (though they claim they have) and compensate the "comfort women," young women who were forced into prostitution to serve Japan's armed forces in the Asian/Pacific theater of World War II. This official dance between apology and refusal satisfies no one, and the general sense outside Japan is that the Japanese acceptance of guilt is grudging public relations rather than sincere. Combine an obsession with "face" and a plethora of deep-seated resentments, and you get the tinder for territorial disputes. What appears to be lost on the Chinese is the consequence of their saber-rattling and bluster: they appear to have obliterated 20 years of careful diplomacy aimed at convincing their neighbors of China's peaceful intentions.
Remember Jean-Claude Juncker? The guy who promised he would quit his unelected post in Europe's neo-vassal imperial council, and tend to his garden or something due to the endless acrimony between France and Germany, only to clarify later he lied? Well, here he is again
- JUNCKER SAYS THOSE BETTING ON EURO BREAKUP 'SERIOUSLY MISTAKEN'
Got it. Of course, this is the same guy who said "When it becomes serious, you have to lie." It is, again, serious.
We have not been aggressive anti-CDS fanatics in the past - since the ignorance of mainstream media types satisfies that need - as the reality in the credit market is less extreme than many would love it to be. However, the latest move by Markit and its self-aggrandizing dealer owner/clients, to bring names into the high-yield credit index that do not even have CDS trading on them, is simply remarkable. While they will defend the move on the basis that it will force dealers to provide single-name CDS liquidity in three of the high-yield credit markets most-indebted companies (CIT, Charter Comms, and Calpine), the fact is that they are using the liquidity/fungibility of the index to enable risk to be unwound on what is likely bloated balance sheets containing too much of this crap. By imagining (or fixing LIBOR-style) where the CDS would trade, based on where the firms' bonds trade, we worry that the hitherto somewhat liquid source of 'fast' macro-hedging or positioning has become even more manipulable than before - and in the event of a default (or stress/illiquidity event), we can only imagine the law-suits. As the FT notes - all this does is provide more 'arbitrage' opportunities as opposed to real hedging; simply amazing that as with equities - it is now the synthetic indices that run the entire market.