After plunging by 19 points in the overnight session, and just touching the 100 DMA, ES has managed to score a recovery, one which has so far clutched at straws, namely stronger than expected German factory orders (+2.2% vs Exp. 0.5%) despite German GDP due in a week which may well push the core European country into the same double dip tsunami which has swept the resto of Europe, if it prints even a slightly negative GDP print. News from Spain that the "bad bank" bailout has started, with Bankia as the first casualty is also lifting spirits as it means that more taxpayer cash will be used to support risk assets. How long this micro euphoria of "bad news is good news" lasts is anyone's guess, but mostly that of the BIS which after failing to defend the 1.3000 EURUSD, has again managed to get the all important pair over the critical support area.
European cash equities opened sharply lower this morning following electoral uncertainties arising from various corners of Europe, notably Greece and France. Volumes also remain light as the market closure across the UK reduces the number of participants today. The mainstream political parties from Greece, PASOK and the New Democracy, failed to establish a majority this weekend as voters firmly expressed their discontent with the political establishment, evident in the rise of fringe parties. As such, the leaders of New Democracy and PASOK will now attempt to establish a coalition party with the splinter group Independent Greeks (a party notable for its anti-EU/IMF stance), due to begin as soon as today. The uncertainty in Greece’s future has taken its toll across the markets today, with EUR/USD beginning the session sub-1.3000 and all European equities trading markedly lower throughout most of the morning session. Elsewhere on the political front, Francois Hollande has won the French Presidency and is to be inaugurated on May 15th, as such; participants now look out for any comments regarding the relationship between the new French leader and German Chancellor Merkel. The Spanish government are set to make an announcement on Friday concerning the continuing troubles over the Spanish banking sector, with a government source commenting that the plans will include the creation of a 10- and 15-year ‘bad bank’. Recent trade has seen a recovery across forex and stocks as EUR/USD grinds higher and stock futures move closer to unchanged. Strong German factory orders data has helped the moves off the lowest levels, as demand from outside the Eurozone helps lift the figure above expectations of +0.5% to +2.2% for March.
- Greek pro-bailout parties lack majority, final poll results (Reuters)
- Greek Election Gridlock Raises Risk for Bailout, Euro Future (Bloomberg)
- Socialist Hollande ousts Sarkozy as French leader (Reuters)
- Merkozy End Means Franco-German Gulf; Greek Voters Rebel (Bloomberg)
- Election swing leaves Greece teetering (Kathimerini)
- Merkel's Coalition Appears to Suffer Loss in German State (WSJ)
- The Only Solution to the Eurozone Crisis (FT)
- Cameron Faces Clamour From Party Right (FT)
- Falcone’s LightSquared Said to Get Week Credit Extension (Bloomberg)
- Hungary plans three-year, 15 billion euro IMF deal: state sec (Reuters)
- Putin pledges unity on return to Kremlin (Reuters)
Germany's DAX is the hardest hit so far of the major European equity markets (futures) with a drop of over 2.2% (underperforming the French CAC40 -1.5% for now). The EuroSTOXX 50 is down 2% and reflects the general state of affairs in European equity markets as they open - which is a little worse than the S&P futures market's move since the European close on Friday. European credit markets are very quiet and illiquid thanks to the UK's May-Day celebrations (and its position as hub for CDS market-making) but sovereign bonds are trading across mainland Europe and are being sold relatively hard so far. Spain, Italy, and Greece are underperforming with the former two pushing towards recent wide spreads even if yields remain off recent highs. EURUSD rallied a little off its overnight lows as Europe opens but has started to give back some of those gains. As the cash markets open there is some buying-the-dip pressure in stocks - even as govvies remain offered while financials remain under significant pressure. US equity futures and Treasuries remain in sync as ES limps a little higher off overnight lows.
With Citigroup raising the odds of a Greece exit from the Euro to between 50 and 75% in the next 12-18 months, it is perhaps worth reflecting on just what is holding them back and where Europe goes next. There has been and will continue to be much written on the faulty premise or failed-experiment of the Euro and using George Soros' recent less-than-sanguine discussion (at the INET conference as we noted here) of Europe in general (how did they get here? exactly where are they? and what are the scenarios going forward?) Gordon T Long and John Rubino expand on these thoughts in a must-watch-before-you-hit-the-BTFD-button clip this week. If there was a dummies guide to Europe's problems, this is it - plain and simple - and as this weekend's elections perhaps reflect "when you borrow too much money as a nation - you become ungovernable - as there is no painless way out."
US Treasuries opened just over an hour ago and are now trading considerably lower in yield. 10Y yields are under 1.84%, their lowest since February 3rd and within a few bps of ther 1.7959% yield lows of mid-December which would all but guarantee a return to the September 2012 2011 low yields. More critically for all those QE-hopers, the massive divergence which we have been vociferously arguing as unsustainable between 10Y yields and the S&P 500 has how collapsed and converged perfectly. From last Tuesday's Bernanke press-conference when he hinted (albeit hedged with chatter of recklessness) that QE was still on the table (which we argued meant that - should the entire world suddenly go pear-shaped, we will step in but until then we are on hold), US equities decided that they should forget fundamentals once again and simply bid the market on nominal price improvement based on fiat-debasement - which enabled a 50 point divergence from reality- which has now completely converged and in fact S&P futures are now 10-15points below the pre-Bernanke-week-hope lows.
Two big events down, many, many others more left to go. Below is a full European event calendar for the rest of May and June. Just like in 2011, Europe got unhinged around this time and things peaked by November when only a coordinated global intervention saved the world courtesy of $1.3 trillion from the ECB, expanded FX swaps from the Fed and a PBOC rate cut. Only unlike in 2011, with Silvio and Sarko both now gone, the roster of political scapegoats is getting very, very thin. Whose head wil the vigilantes demand next? We will find out over the summer and fall, which promise to be even more exciting than last year.
While it is still early in the overnight session, initial indications are for a full spectrum Risk Off market. In fact, S&P 500 futures (ES) have not fallen this fast over a two- or three-day period since the third week of November last year. As many may remember - a few days of drops like this took ES from 1260 to 1136 in a week but more importantly was followed very quickly by a massive and coordinated Central Bank intervention that ripped ES over 6% higher in an overnight session - sparking the entire rally of the last six months as it appeared the central bank put strike had been dragged higher. Admittedly the two-day fall so far (while the largest in almost six months) is still small in context, it would appear the world is waking up to the true event risks of a debt-saturated fiat system going through its death throes. Back of the envelope would suggest we need to drop to 1285 or so on the S&P before the same kind of hit-the-big-red-central-bank-panic-button kind of move comes into play. Sure enough, Gold is only very modestly lower (-$3 at $1640) so far in the face of a rip higher in USD and broad liquidation everywhere else - perhaps the patience of sound money will be paid off once again.
While clearly dramatic, the outcome of the French presidential election was very much anticipated and at this point the only real question is how many promises will Hollande reneg on before the week is over: if Berlusconi is any indication, all it will take is for OAT yields to spike by 20-30% and all shall be well for the status quo. Greece, on the other hand, where as we said the people have lost everything so are free to do anything, just did more or less that, and have shocked Europe with an outcome which as we warned could result in the lack of a pro-bailout coalition government, which means no IMF aid, which means "no bailout for the Greek people", which means no bailout for European banks under the guise of a Greek DIP loan. And with 63% of precincts reporting, ND + Pasok have 153 as of this moment which is enough for a majority although paradoxically the anti-bailout parties will have among them nearly 60% of the finaly vote which means they could form an anti-bailout coalition if they buried their diferences. Finally, there is still time, so for all those curious if the two Greek parties will be able to form an all important coalition government, can keep track of the vote count in real time at the link below.
UPDATE: EURUSD just broke down through 1.30 to 3-month lows and WTI opened with a $95 handle - lowest of the year and < 200DMA.
S&P 500 e-mini futures (ES) just opened down over 11pts from Friday's close and have traded below the 4/10 and 4/23 lows to trade back to their lowest since 3/8 taking out the 1350 stops. The EUR is at its lowest against the GBP since Nov 2008, closing in in the first sub-1.30 print since 4/16 with a little more pain taking us to 4-month lows in EURUSD (now within 20pips of 4-month lows). Gold and Silver (spot) are modestly lower relative to the 0.4% raise in the USD. Treasuries are not open yet but broad risk assets imply a considerably lower print for ES in the mid-1320s at current prices. WTI has opened with a $95 handle crossing its 200DMA to its lowest since 12/20.
The only saving grace of the earlier horrendous Greek parliamentary vote was that, based on very preliminary results New Democracy and Pasok would be able to form a coalition government with precisely 151 seats needed in parliament to give them status quo powers. However, according to a more recent re-rack of the votes (New Democracy 18.9%, 108 seats, Pasok 13.4%, 41 seats, Syrizia: 16.6%, 51 seats, and all others), this assumption is now in jeopardy as the two pro-bailout parties will have just 149 seats in the new parliament, or not even a full majority. Why is this problematic? Because virtually every other party in the new parliament, and there may be up to 10 there including the New Dawn, have voiced their opposition to the bailout of Greece, which as everyone knows is merely a bailout of Europe's insolvent banks using Greek taxpayer funds as a conduit. And, adding insult to injury, Reuters now reports that "Greek leftist leader calls for anti-bailout coalition." It appears that finally, after many years of delays, the anti "bailout" genie is finally out of bottle...
And so one more tumbles to the popular wave of anger and discontent.
Francois Hollande wins 51.9% of the vote according to exit polls
The 57-year-old Hollande got about 52 percent against about 48 percent for Sarkozy, according to estimates by pollsters CSA and Harris Interactive
Nicholas Sarzkoy concedes defeat in presidential election to Francois Hollande