The market is selling off today on rumors and fears of some European bank being on the brink of default. Monday, it was BAC that was rumored to be in big trouble. Markets are moving again because of rumors of bank problems. That sounds a lot like 2007 and 2008 to me. People are shooting first, asking questions later again. Any of SocGen, Intesa, Dexia, BAC are big enough to provide the market with a “Lehman moment”. Notice the geographical diversification? The contagion was never really at the sovereigns, it is at the banks. I have argued over and over that each sovereign problem was relatively independent; whereas, the banks are all inter-connected.
Just because 3 hours ago is so 3 hours ago:
- ITRAXX FIN SR +15, NEW RECORD 232
- IT +51
- SP +47
- PORT +39
- IRE +31
- GREECE +.5
- WAFFLES +37
- FR +15
- AUST +14
- ENG +3
- DEUTSCHE +2.5
Almost as if someone shouted fire in a crowded theater... And yet, the DJIA surged 400 points yesterday. That is unpossible. After all, the market iz a perfectly iffishynt discounting mechanizm.
"The two-notch downgrade of Cyprus's ratings to 'BBB' reflects the actual and anticipated fiscal slippage, compounded by Fitch's expectation that the sovereign will be unable to access the international debt markets in order to refinance an increasing debt maturity profile in H211 and H112. The 2011 deficit is now expected to be close to 7% of GDP and not all of the increase, from 4%, since the agency's most recent analysis in June can be attributed to the naval base explosion, which took out half of Cyprus's electricity generating capacity," says Chris Pryce, Director in Fitch's Sovereign Group. The government's calculations indicate its financing requirements in the last five months of the year will be close to EUR1.1bn, of which EUR650m will be existing debt falling due for redemption. Against this, the government has EUR570m of cash balances, representing about half of the total financing requirement. The government anticipates that it will be able to refinance the balance by borrowing from domestic financial institutions, although Fitch considers that this may prove challenging at a time when the banks are facing a decline in asset quality. Even if the sovereign can secure refinancing through H211, it will enter 2012 with minimal cash balances and refinancing needs of EUR1.2bn in the first two months. Under current market conditions (government three-year yields reached 15.4% in August), Fitch believes that the government will be unable to meet this target without recourse to external official assistance, reflecting a lack of options inconsistent with a sovereign issuer in the 'A-' category. At this juncture, Fitch anticipates that such assistance is likely to be forthcoming.
Below is a a chart of Italian bank equity performance. Countrywide bank run next? Whether the reason for the sell off is due to a typoed GOFO 12M SocGen print or there is a fundamental reason, remains to be seen, but US equities are not taking the risk. US stocks have wiped out all of yesterday's last minute gains.
Following earlier news that French CDS hit a record high on a rumor of an imminent French downgrade, the bloodbath in financials, first started in Italy, with 3 consecutive halts in Intesa causing endless headaches for Italin investors, the red tide has now shifted over to France, where SocGen, three years after fooling the Chairsatan that the world was ending and pushing him to cut rates by an unprecedented 0.75% on what was a trader error, now succeeded in getting the chairsatan to extend ZIRP for two years... And still that is not helping. SocGen was down 17%21% as recently as minutes ago, on a repeat rumor that SocGen is indeed on the verge of insolvency, and that it participated in an extraordinary meeting convened by Sarkozy this morning. We are following the story and will let you know if we see any halt in the relentless selling of the bank which is rapidly becoming the next Lehman. Elsewgere, BNP was down over 8%10%, and Credit Agricole about -7.5%9.2%. "If credit default swaps on France are under attack that’s not a good sign,” said Yves Marcais, a sales trader at Global Equities in Paris. “That means that France is under attack and that’s worrisome. French banks hold a lot of French bonds." Translated: another vicious and quite toxic catch 22, stemming from the blow out in French CDS. When will they ever learn?
After disclosing first that the EFSF could end up amounting to anywhere between 36% and 133% of German GDP in the form of contingent liabilities, depending on whether or not France is downgraded from AAA and whether the EFSF is raised to its proper size of €3.5 trillion, we speculated that life for German chancellor is about to become a living hell as the realization that Germany is forced to rescue all of europe permeates political discussions. The FT now confirms that this is indeed the case, and could be coming to a head much faster than expected. From the FT: "Battle lines are being rapidly drawn up in the German Bundestag for what promises to be a bruising debate over the crisis measures to stabilise debt markets in the eurozone. Angela Merkel, the chancellor, and her finance minister Wolfgang Schäuble face a revolt among their own supporters in both the Christian Democratic Union and the Free Democratic Party, junior partner in the ruling coalition in Berlin, over the deal they agreed last month with their 16 eurozone partners in Brussels." Add this latest political uncertainty to the possibility of the EFSF being scuttled before it even launches in September to concerns over just how bad the reality in Italy is, and one can see why French CDS just hit a record, and Italian banks are being serially halted.
Yesterday Goldman finally made it clear that Bill Dudley's marching orders are given: QE3 or no soup for you. Well, it didn't take long for the order from top to hit Goldman's FX desk, which has just issued this logical note: "Going short the USD on additional Fed easing." Odd, no easing has yet been announced, and according to so many none will come. But Goldman said so. So it must be.
Back in May, when the market was once again trading purely on hopium and everyone's head was in the sand of denial, (or worse), Jeremy Grantham released his second quarter letter which was so bearish, it literally moved the market lower briefly (at which point visions of Ben Bernanke pushing CTRL-P repeatedly restored the levitation). Anyone who took his advice then, about 15% higher, to get out, has saved substantial capital: "whether [the market] will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it." Well, to anyone hoping that the latest letter from the GMO manager has anything more optimistic after an epic rout in the past week, we have bad news: "as for global equities, they range from unattractive (August 2) to very unattractive. The S&P 500, for example, is worth no more than 950 on our estimates. In general, risk avoidance looks like a good idea. Cash – despite its manipulated low rate, deliberately designed to make us reach for risk – should be seen as a safe haven replete with important optionality: dry powder to take advantage of possible opportunities." Grantham adds that it is recommended to "keep your head down" for the last two months of a President's third year, and to also "keep it down for the foreseeable future."He adds that GMO is modestly underweight equities in asset-allocation accounts, partly due to "desperately unattractive" yields on fixed income. As for those who pray to the altar of St. Ben, he says that "the main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop, then the pattern of market behavior this time may be more historically typical." In other words, and in keeping with his previous letter, the time to continue fighting the Fed is now more than ever.
As we predicted yesterday, the Italian market is hating its life right now, with traditional whipping boy Intesa Sanpaolo being halted half an hour ago, resuming trading, dropping 8.2%, and then getting halted again. Same thing with Banco Popolare which was halted down 6.02%, and we expect Unicredit is due for a halt next. The catalyst: a fresh new rumor that France is about to be downgraded, which would send all of Europe into a risk flaring tailspin as it would obviate the EFSF even before it has been launched. The rumor is also rattling the EURUSD, which has dropped about 50 pips from the highs. As a reminder, this is not the first time the French downgrade rumor has emerged, however it is the first time since a rumor about a major AAA-rated country downgrade was proven to be true (ref: last Friday).
- Global stocks rebound after Fed move (FT)
- Bernanke’s Interest-Rate Timeframe Draws Most Negative Votes in 18 Years (Bloomberg)
- Pass the Granade: BofA Sells Part of Mortgage Portfolio to Fannie Mae (WSJ)
- France Asserts Plans to Keep Triple-A (WSJ)
- S&P balks at SEC proposal to reveal rating errors (Reuters)
- Senate’s Baucus In Deficit Super Committee Trio (Reuters)
- SNB’s Franc Dilemma May Force Intervention Even After $36 Billion Losses (Bloomberg)
- Kan Moves Step Closer to Resignation After Japan agrees on Budget Funding (Bloomberg)
- Cracks in China Housing Push (WSJ)
- Australian Consumer Confidence Slumps to Lowest Since 2009 on Market Slump (Bloomberg)
- No exposure at all: none. Commerzbank Profit Drops 93% on Greek Debt (Bloomberg)
The Fed pledged yesterday to extend its near-zero interest rate by another two years, which together with weakness in the USD-Index provided support to WTI and Brent crude futures. Meanwhile, as the European session progressed, equities gathered strength partly on the back of a well-received T-Bill auction from Italy, which also witnessed tightening of the Italian/German 10-year government bond yield spread. The French/German spread also narrowed after comments from the French finance minister on potential measures to curb government spending further. Elsewhere, weakness was observed in CHF across the board after the SNB said that it has expanded measures against a strong CHF, which saw around 150 pips rise in EUR/CHF following the comments. In other forex news, GBP/USD traded under pressure leading up to the release of the BoE's inflation report, and declined further following the release of a downbeat report on UK's economy. However, some of the earlier losses were pared after BoE's King said that there is no reason for the MPC to commit to low rates. Also, USD/JPY traded below the latest BoJ's intervention level of 76.96, and made an approach towards its all time low of 76.24. Moving into the North American open, markets look ahead to economic data from the US in the form of wholesale inventories/sales, DOE inventories figures as well as the monthly budget statement. In fixed income USD 24bln 10-year Note auction is also scheduled for later in the session.
Several B-grade economic developments on the docket, as well as the first post-downgrade 10 Year bond issuance. Latest monthly QE Lite POMO schedule released today.
Risk update: today everyone is more blowy upy, both core and periphery
- MAIN -1
- XO -10
- SOVX 283/287 +8
- SOVX CEEMEA 245/249
- IT +16
- SP +12
- PORT +9
- IRE +5
- BELG +6
- FR +5
- UK +1
- DEUTSCHE +.5
And a special bonus: Intesa Sanpaolo -4.6%, Societe Generale - 4%, Unicredit -3.8%.