Portugal is a country that I’ve always enjoyed, full of warm, welcoming people, excellent wine, and great weather. I came to Porto, the country’s second largest city of some 1.5 million, to get a sense of what’s been happening since the eurocalypse...
European equity indices are plunged today - extending the losses from the US yesterday - with Spain and Italy underperforming. Spain's IBEX is now -1.4% from pre-EU Summit levels though the rest are all green still (with Italy's MIB lowest of the rest at +1.5%). However, it seems that broad European stocks are finally catching-down to the dismal weakness in European credit (both financials and corporates) since the EU Summit. Europe's sovereign bond spreads all leaked wider on the day (be careful with yields since the benchmark 'safe havens' are so bid right now thanks to the flood of deposits into the front-end of German, Swiss, Dutch, and Austrian repo-able instruments). Spain and Italy remain wider than pre-EU-Summit levels (marginally) - though today saw the CDS-cash basis (as we noted in the pre-European open was likely) compress on these as Spain's 5Y CDS tests 575bps again. EURUSD broke 1.22 - new two-year lows - and is closing the Europe session below that level but the EUR crosses are all heading towards record lows (interestingly watching EURJPY as chatter is a rotation from JPY to EUR as a funding currency). German 2Y joined Swiss 2Y in the NIRP world as we note that the Swiss curve us now negative out to 5Y once again.
While GM can still fool some of the people, most of the time with near record channel stuffing, even as more and more are waking up and suing the company for just this, it seems the same type of strategy of load up dealers with unsellable electric cars has failed miserably in Europe. From WSJ: "General Motors Co. said Karl-Friedrich Stracke has stepped down as president of its loss-making European division, though the restructuring program initiated under his leadership will continue. GM said Mr. Stracke will take another, unnamed position at the U.S. auto maker and that Opel supervisory board chairman Steve Girsky will serve in his place on an interim basis. "Karl Stracke worked tirelessly, under great pressure, to stabilize this business and we look forward to building on his success," GM Chief Executive Dan Akerson said in a statement." The 'success' that as pointed out, has led to a loss-making divions. With successful leaders like these who needs failures?
Anyone who has followed the MBIA vs Bank of America saga knows that the only reason why there has been no settlement so far is due to BAC's relentless stonewalling tactics that seek merely to delay the production of discovery which based on preliminary indications is sufficiently damning to let MBIA prevail in the case, and with that to force settlement that based on our and others' former evaluations, could lead to a doubling in the stock (ignoring the massive short-covering squeeze it would immediately create courtesy of the 15.5% Short Interest of the total float, sending the stock even higher than where fundamentals say it should go). Well, based on a just released transcript of Judge Eileen Bransten motion to compel discovery, the end may be in sight, and may come as soon as July 13, or tomorrow. And what is more important, her displeasure with BofA's relentless stonewalling has come to an end. Will Bank of America have no choice but to settle in the very immediate future? Stay tuned to find out.
In broad brush, financialization enabled the explosive rise of politically dominant cartels (crony capitalism) that reap profits from graft, legalized fraud, embezzlement, collusion, price-fixing, misrepresentation of risk, shadow systems of governance, and the use of phantom assets as collateral. This systemic allocation of resources and the national income to serve their interests also serves the interests of the protected fiefdoms of the State that enable and protect the parasitic sectors of the economy. The productive, efficient private sectors of the economy are, in effect, subsidizing the most inefficient, unproductive parts of the economy. Productivity has been siphoned off to financialized corporate profits, politically powerful cartels, and bloated State fiefdoms. The current attempts to “restart growth” via the same old financialization tricks of more debt, more leverage, and more speculative excess backstopped by a captured Central State are failing.
Neofeudal financialization and unproductive State/private vested interests have bled the middle class dry.
On a day when the reflexive NEW QE knife-catchers seem to have stepped away from the desk, we thought it useful to get some cognitive clarity on where exactly Treasuries think the post-FOMC-disappointment equity market is likely to end up in the short-term (especially as they retrace all the way down to yesterday's low yields). It seems, as we noted yesterday, that bonds believe ES needs to be well under 1300 before deflationary concerns rear their ugly head and NEW QE can be back on the table.
The selling started as Europe opened last night and despite a few pull-backs to VWAP, has continued all morning. S&P 500 futures have crossed the chasm and are heading back to new cycle lows here as the major financials are being sold aggressively on the back of tomorrow's release of the NY Fed's Libor report (among other things we are sure) and have given up all their post EU-Summit gains. USD strength, commodity weakness (with Silver And Gold leading the charge lower this week now) and Treasury yields back to yesterday's post-auction spike lows. VIX up to 19.5% and correlation rising very systemically.
The Fed is promising once again to pound nails with the only tools in its toolbox, a saw and a chisel. The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done. The Fed claims all sorts of supernatural powers to sink nails at will--"unconventional monetary policy," quantitative easing, money dropped from helicopters and so on. But all it really has are two tools which have no positive effect on unemployment or the real economy.
- The Fed can manipulate interest rates to near-zero
- The Fed can shove "free money" to the banks
That's it. That's all the tools the Fed has in its toolbox. Let's consider what these tools accomplish in the real world.
In October of last year, when the last European crisis risk flare was peaking, we explained in gruesome detail the paradox of Euro strength in the face of crushing fundamentals - namely repatriation (or as BofAML calls it 'deleveraging'). Since the crisis hit in early 2010, EURUSD has average 1.35 - about 11% above its historical average - and in PPP terms, EURUSD has been overvalued by an average 18% during the crisis (over 8% above its overvaluation since the Euro was introduced). The mystery is over. Just as we said, it is bank deleveraging, as evidenced by the chart below which shows a massive $4 trillion (or 42.8%) drop in Eurozone banks' foreign assets since the peak in early 2008. At the same time the reduction in foreign bank claims from the Eurozone over the same period was only $0.4 trillion. As BofAML note, 'even if some of the Eurozone’s bank claims were not converted back into euros, these magnitudes are large enough to suggest a strong positive impact on the euro.' The concern remains that the recent weakening of the EUR has to do with increased risk aversion, the deterioration of the Eurozone crisis, and global policy uncertainty as they suggest in the short-term the worst of the deleveraging may be over thanks to ECB bank support measures - but with such a vicious circle of flow, the squeezes could be painful if the paradox of further crisis escalation hits and drives EUR stronger on these deleveraging flows starting again.
Nearly full employment in all the cited developed economies except the US shows that the deflationary environment of the recent months is only temporary. Deflation is rather an effect of the recent strong fall in commodity prices. No wonder that the Fed is still reluctant to ease conditions; they saw the opposite temporary commodity price movements last year. We do neither expect a global inflation nor a deflation scenario but a balance sheet recession in many countries but still an increase of wages and therefore a very slow global growth in both developed and developing countries and continuing disinflation (see chart of Ashraf Alaidi to the left). CPIs will look soon similar for all developed countries, with the consequence that the currencies of the most secure and effective countries (measured in terms of trade balance and current accounts) will appreciate. These are for us e.g. Japan, Switzerland, Singapore and partially Sweden and Norway. The overvalued currencies with weaker trade balances like the Kiwi and Aussie must depreciate.
Initial Claims In Holiday Shortened Week Drop To 350K From Upward Revised 376K Due To "One-Time Factors"Submitted by Tyler Durden on 07/12/2012 08:34 -0400
First the expected: last week's 374K in initial claims was revised upward to 376K as is now the norm. Then the unexpected: this week's initial claims dropped to 350K, well below expectations of 372K, and purely an artifact of the holiday shortened week as this was the biggest miss to expectations since November 2008. Of course, the Not Seasonally Adjusted claims number rising by 70K is very much irrelevant: it is all about statistical smoothing as those who have leaked access to early release BLS data will tell us. Finally, here is what the BLS actually said: "onetime factors such as fewer auto-sector layoffs than normal likely caused the sharp decline." Continuing claims did miss expectations of 3300K printing at 3304K, and down from a revised 3318K. The market reaction is typical schizophrenia: first risk is up on "better than expected" news, then right back down as the meme spreads that this makes the NEW QE even less realistic. Our condolences to all whose job it is to trade this newsflow. Finally, in the all important cliff category, another 13K fell off extended claims programs, and no longer are eligible for Uncle Sam funded X-Box 360 playtime compensation.
Because I pay attention to these things; I have the sense that there has been a lot of praying recently. Prayers for QE3, prayers for Quantitative Easing mortgage bond buying, “Please SIR;” and for words to the effect in each and every FOMC minutes that “Money will be printed forever and ever Amen.”
“Now I know I'm not normally a praying man, but if you're up there, please save me, Superman!”
Now I hate to do this to you and I feel like the bad boy with the pin about to prick someone’s bubble but these prayers have gone unanswered as you know and are not likely to be answered any day soon unless Europe goes up in pixie dust which, while certainly possible, will be far more serious for the markets and will more than offset the Fed dragging out their printing presses and plugging them in once again.
European equities are seen softer at the North American crossover as continued concerns regarding global demand remain stubborn ahead of tonight’s Chinese GDP release. Adding to the risk-aversion is continued caution surrounding the periphery, evident in the Spanish and Italian bourses underperforming today. A key catalyst for trade today has been the ECB’s daily liquidity update, wherein deposits, unsurprisingly, fell dramatically to EUR 324.9bln following the central bank’s cut to zero-deposit rates. The move by the ECB to boost credit flows and lending has slipped at the first hurdle, as the fall in deposits is matched almost exactly by an uptick in the ECB’s current account. As such, it is evident that the banks are still sitting on their cash reserves, reluctant to lend, as the real economy is yet to see a boost from the zero-deposit rate. As expected, the European banks’ share prices are showing the disappointment, with financials one of the worst performing sectors, and CDS’ on bank bonds seen markedly higher. A brief stint of risk appetite was observed following the release of positive money supply figures from China, particularly the new CNY loans number, however the effect was shortlived, as participants continue to eye the upcoming growth release as the next sign of health, or lack thereof, from the world’s second largest economy.
Something is different this morning. Whether it is the aftermath of yesterday's inexplicable 10 Year auction demand spike, or more explicable plunge in the ECB's deposit facility usage, or, the fresh record low yield in the supreme risk indicator, Swiss 2 Year bonds, now at under 0.5%, market participants are realizing that the status quo is changing, leading to fresh 2 year lows in the EURUSD which was at 1.2175 at last check, sliding equity futures (those are largely irrelevant, and purely a function of what Simon "Harry" Potter does today when the clockworkesque ramp at 3:30pm has the FRBNY start selling Vol like a drunken sailor), and negative yields also for German, French, and Finland, with Austria and Belgium expected to follow suit as the herd scrambles into the "safety" of the core (which incidentally is carrying the periphery on its shoulders but who cares about details). Either way, Europe's ZIRP is finally being felt, only not in a way that many had expected and hoped and instead of the money being used to ramp risk, it is further accelerating the divide between risky and safe assets. Look for the Direct take down in today's 30 Year auction: it could be a doozy.