Judging by the market's response to the latest European bailout, the one associated with Germany supposedly 'folding' on austerity and being beaten down by her broke neighbors, and which according to the chart below had a half-life of one full day; the market has already priced in all the news and is now praying for more monetary morphine from the ECB and BOE this week. It will almost certainly get those. Then what: a half life of 12 hours? 6 hours? Or zero (and will Torres come on with 45 minutes to the close to save the day?)
With the end of Operation Twist and a dismal multi-year low print in ISM, it seems Treasuries are a little less sanguine at the hope for a week-/month-/quarter-start bid for risk than equities. 10Y rates are back near Friday's lows while S&P 500 e-mini futures are 40-45 points higher. Does Operation Twist+ have that much impact? Is 'bad' good once again for QE hopes?
What goes down, must come up. In this case crude, which is soaring on news out of FARS that Iranian lawmakers have drafted a bill proposing a blockade of the Straits of Hormuz for oil tankers heading to sanctions supporters, i.e., embargo countries. Naturally, if implemented, this would mean an almost inevitable military retaliation on behalf of the "western world." Then again, this is not the first time Iran has postured with a blockade. If indeed willing to follow through, it surely mean Iran has at least implicit whisper support of Russian and Chinese support when the situation inevitably escalates.
Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals. Sorry, Bucko--Europe is still in a financial death spiral. Friday's "fix" changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:
And so we have recoupling, with the ISM printing below 50 (i.e. contraction) at 49.7 for the first time since July 2009. Expectations of a 52.5 print were obviously blown away, as the final number came well below the lowest Wall Street forecast of 50.5. Prices plunge to 37 on expectation of 57 and there go your corporate margins; Employment down from 56.9 to 56.6, and New Orders implode from 60.1 to 47.8. Epic disaster which proves that no, decoupling, does not exist and now puts the Fed back in play, which however, with the S&P just shy of 2012 highs, can do didley squat.
Some time ago we said that in a world in which virtually every risk and liquidity benchmark is manipulated by either private banks (thank your Liebor) or central banks, if one needs to know the true state of events in Europe, the only real remaining, unmanipulated benchmark remain Swiss nominal bond yields. And at -23.5 bps for the 2 Year it is telling us that nothing is fixed. As usual. Also judging by the SNB's new head Jordan statements which just hit the tape, in which he says that he would not rule out capital controls or negative rates if the crisis worsens, the SNB gets it. Or does it? Jordan also said that the SNB is ready to defend the FX market with unlimited market purchases if necessary. However, as the note below from JPM shows, the SNB may simply be faking it, hoping it too can get away with simple jawboning, instead of actually putting its money where its mouth is. As it turns out the SNB has indeed been intervening in huge size in the month of May to keep the EURCHF peg. The previously undisclosed news is that it has also been sterilizing its purchases. As JPM further notes: "This is highly significant and undermines the credibility of the SNB’s claim that it is willing to do whatever it takes to hold EUR/CHF 1.20. For the floor to be credible the SNB needs to surrender control over the Swiss monetary based, i.e. it has to be willing to deliver both unlimited and unsterilised FX intervention. The intervention in May was certainly unlimited; it most definitely was not unsterilised." How long until the FX vigilantes decide to test just how far the SNB is truly willing to go in defending the peg? And what happens when Swiss nominal yields hit record negative numbers once again?
The spread between HSBC's and China's version of Manufacturing PMI increased a little over the weekend when the headline of China's data point managed to cling perilously above the 50-line of expansion over contraction (while HSBC's drifts lower and lower under 50). The headline print - still its lowest since Nov 11 - however, hides a much less sanguine truth in the sub-indices with the new orders index fell once again staying in the contractionary territory under 50. What is more worrisome for China (and implicitly the rest of the world) is that while transport equipment and electrical machinery improved (explicitly thanks to government funded infrastructure projects) there has been no multiplier effect of a broad-based investment rebound. As Credit Suisse notes: "The stimuli launched in middle of May seems to have failed to jump-start the overall economy, yet the moderation in PMI is not severe enough to justify a much more aggressive rescue package."
The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: "Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world."
"I wish I could say that this was an isolated case... You will hear more on this in due course" is how the UK FSE's Director of enforcement described Lie-borgate to Reuters this weekend. It seems incredibly that the US regulators and investing public alike are shunning this interest rate rigging scandal as the UK goes to DEFCON 1 with more than a dozen other banks being investigated in the long-running global probe. The Barclays Chairman quit over the weekend (and we assume will not be the last casualty) as The Telegraph notes the 'dislocation of libor from itself' - since banks could not be seen borrowing at higher rates for fear of liquidity repercussions, as widespread. According to the trader the BBA asked for a rate submission but there were no checks and "everyone knew" and "everyone was doing it". What is incredible is the level of nonchalance that this illegal act had taken on with entire teams of people well aware as open discussion occurred (not clandestine blue-horseshoe-likes-low-libor-style). Indeed this widespread and well-known action of dislocating libor from itself (since in a trader's words "everyone knew we couldn't borrow at Libor, you only needed to look at CDS to see that... with real Libor rates 3 to 4 per cent higher than the BBA's submitted Lie-bor") has now led George Osbourne, as per the FT, to launch a 'Leveson-style' probe into standards in the banking industry - a full, public independent inquiry into the $504 Trillion market's underlying integrity. Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.
The markets are getting mislead, one more time, by the spin that Europe places on events; by the focus that the giant European propaganda machine spits out from various sources again and again and again. You may recall, in the not too distant past, how the firewall was the thing, how the money needed to be bigger and how we were all led to believe that this giant, massive wall of Euros would protect the core nations of Europe. These nations included Spain and Italy without question and now the first mighty oak has fallen as Spain stepped up to the plate and swung the begging bat. Firewalls, of any size, do not do one thing to stop the infection of those that are heading economically south and Europe has placed its full concentration on the totally wrong aspect of the problem which has been to ward off the evil spirits of the bond vigilantes instead of on fixing the financial problems of the nations and so the problems continue and worsen. Over the weekend Spain said their second quarter results would be worse than the first quarter and Italy said there may come a moment when she needs help and the basis of what is driving the markets heightens as the economies of a mostly recession bound Europe are getting worse. What have we learned in short, in brief, in actuality is that the concept of some mighty firewall is a failed concept and Spain has just proved the truth of that.
- The Real Victor in Brussels Was Merkel (FT)
- German Dominance in Doubt after Summit Defeat (Spiegel)
- Euro defeat for Merkel? Only time will tell (Reuters)
- The Twilight Zone has nothing on Europe: European Banks Bolster Capital With Shunned Bonds (Bloomberg)
- Krugman is baaaaaack and demands even more debt: Europe’s Great Illusion (NYT)
- Republicans See Way to Repeal Obamacare (FT)
- Hollande Ready to Tackle Public Finances (FT)
- China’s Manufacturing Growth Weakens as New Orders Drop (Bloomberg)
- Protesters March in Hong Kong as Leung Vows to Fight Poverty (Bloomberg)
While Belgian caterers are delighted that Europe's increasingly more unelected leaders quarrel endlessly over who gets to foot the bill to keep the market fooled for one more week that things are fixed, Europe is burning. The just released MarkIt PMI data showed that while Spanish bonds may be up 50 bps one day, down 75 bps the next, "the downturn in the Eurozone manufacturing sector extended to an eleventh successive month. Production and new orders suffered further severe contractions, leading to the steepest job losses since January 2010." And here is where Germany, which as noted earlier, is becoming isolated in its European bailout ambitions, should pay attention: "The rate of decline in Germany was the steepest for three years, and marked a fourth successive monthly decline in the region’s largest economy." This metric is only going to get worse, only in the future it will be coupled with increasingly more direct and contingent debt all around. And further confirming that there is no easy way out for Europe was the May Eurozone unemployment number which at 11.1% rose to a new record