Following Nomura's Bob Janjuah's 'wine into water... are we there yet?' note in February, the market has followed his script almost perfectly with a continued push to new highs and a small sell-off that was bought excitedly. While he remains convinced that "in terms of positioning and sentiment, we are 'not there yet'," for his 50% S&P 500 plunge; he does believe Q2 will see a 5-10% dip to 1450 as the shambolic policy responses to Cyprus and the 'cat' that #DieselBoom 'let out the bag' add to increasingly weak global growth data. While this dip will also likely be bought, the bearded bear expects the market's comeuppance to arrive late 2013.
While France's Hollande and Spain's Rajoy are double-teaming the 'unique, exceptional' nature of Cyprus, the non-template nature of the 'deal', the need for Europe-wide guarantees, and that the ESM should be used to recap banks and not depositors, none other than Dutch FinMin Dijsselbloem is at it again as he admits what many have suspected:
- *DIJSSELBLOEM SAYS LEVY ON WEALTH IS DEFENDABLE IN PRINCIPLE
and, as if responding to the desperate French and Spanish leaders:
- *DIJSSELBLOEM SAYS DEPOSIT GUARANTEE SYSTEMS ARE NATIONAL
It would appear our views are increasing appearing true - that a wealth tax is coming in much more systemic a manner than many expect currently.
There is a reason we think of youth unemployment as the 'scariest' thing in Europe as we have discussed here and here. After a few months of relative calm, it appears the youth are once again finding their hopes dashed and are protesting. As Reuters reports, thousands of students and bank workers protested in the Cypriot capital Nicosia today. "They've just gotten rid of all our dreams, everything we've worked for, everything we've achieved up until now, what our parents have achieved," is how one young protester exclaimed his feelings, as a bank worker added, "we are scared." It appears President Anastasiades comment that, "the agreement we reached is difficult but, under the circumstances, the best that we could achieve," is not reassuring an increasingly volatile people.
It would appear, all else being equal, that the algos have found a new leverage asset to save stocks. Given the uncertainty in Europe, EURUSD and EURJPY have lost their effectiveness; Treasuries won't play along due to the safety bid and Fed footprint; high-yield won't budge as fundamentals are making people nervous; and even VIX won't shift as protection is sought. So it seems, given the entire lack of any fundamental reasoning for today's move, that WTI crude is the asset of choice to ramp correlations with stocks higher. This last 3-day push is the biggest move in WTI since August of last year as it pushes back towards the year's highs (and RBOB is following suit) - not exactly boding well for the price at the pump shortly.
In this past weekend's missive we showed, in rather excruciating detail in multiple charts, that complacency in the financial markets is at extremely elevated levels. Investors behave much the same way as individuals who addicted to gambling. When they are winning they believe that their success is based on their skill. However, when they began to lose, they keep gambling thinking the next “hand” will be the one that gets them back on track. Eventually - they leave the table broke. It is true that bull markets are more fun than bear markets. Bull markets elicit euphoria and feelings of psychological superiority. Bear markets bring fear, panic and depression. What is interesting is that no matter how many times we continually repeat these “cycles” – as emotional human beings we always “hope” that somehow this “time will be different.” Unfortunately, it never is, and this time won’t be either.
UK's deVere advisory group reports, "more and more expats in Spain, Italy, Portugal and Greece are now not unreasonably worried for their deposits in these countries," and are seeing a "surge" in the number of British expats seeking advice about moving funds out of eurozone's most troubled economies. As EUBusiness reports, "Whether the institutions like it and accept it or not, there is a real risk of a major deposit flight from these countries as people feel their accounts could be plundered next." It is hardly surprising obviously (as we noted earlier the bid in German bunds) but we fear this escalation in cash exodus from the periphery will increase the need for a broader EU capital control scheme sooner rather than later.
There are some good features of the Cyprus deal and, of course, some bad aspects. However, its repercussions for the Eurozone as a whole are exceptionally ugly and will, we submit, mark a turning point for Europe; a point at which Europe took a nasty turn toward a set of mutually disagreeable outcomes.
The Bank of Spain just sent a stark message. In its annual update of economic forecasts, it estimates Spain's economy will shrink 1.5% in 2013 - that is three times as bad as the official government forecast of -0.5%. As Reuters reports, this is even worse than 2012's 1.4% contraction as the bank notes that, Spaniards "remain immersed in a process of deleveraging...and families have seen a notable shrinking of income." The GDP estimate is around consensus which was roundly ignoring the Spanish government's 'lying' optimism but under the cover of the Cyprus debacle, the Spanish have been pushing to ease their deficit restrictions as the deficit is expected to reach 6% in 2013 (well above the 4.5% target set by the EU). With unemployment expected to rise over 27.1%, we suspect youth unemployment will once again take center stage as the European Union's scariest chart.
Close-to-close, headlines will be happy that things do not appear to be collapsing in Europe. The broadest equity indices only lost a fraction of a percent and bonds ended unchanged. But the action in the last hour or two (which saw Spanish and Italian bonds weaken considerably) and the relentless leak lower in Italian and Spanish stocks (now down 4.5 and 3.5% on the week respectively) suggest risk-appetite is fading fast. German and Swiss 2Y rates are negative once again as safety is chased and EUR-USD basis swaps are holding their lows. EURUSD tried to rally but failed and ended at the lows of the session as European banking credit markets continued to weaken - now at 5-month wide spreads (and their stocks still playing catch down).
While Germany quietly bailed out all investors in one of its own rotten banks.
If you had a deposit greater than EUR100,000 in any peripheral European bank, where would you place it (assuming it was not already under some anti-European Union capital control)? It seems we have the answer - German 2Y Bund yields just went negative for the first time this year as investors and savers scurry for safety...
In an unsurprisingly supportive tone for the ECB and the Eurogroup, Cypriot Central Bank governor Demetriades says:
*DEMETRIADES SAYS SUPPORTED FIRST EUROGROUP PROPOSAL ON CYPRUS, and
*DEMETRIADES SAYS ECB DOING ITS JOB RIGHT ON CYPRUS BANKS
But, it seems, in recognition that there are 'leaks' in their current capital control scheme, Demetriades has just admitted that:
- *DEMETRIADES SAYS CAPITAL CONTROLS TO BE SAME FOR ALL BANKS
- *DEMETRIADES SAYS CAN'T GO INTO MORE DETAILS ON CAPITAL CONTROLS
Not only that but he clarified that if the deal had not happened then ATM limits would be EUR30 per day not the current EUR100 per day. Now that all the Russian money is gone, the only question remains just how big the capital shortfall will be - earlier we learned that it will be at least EUR2.5-3 billion.
What is the robbing of a bank compared to the founding of a bank?--Berthold Brecht
The MSM and Cyprus pretend to yell victory after wiping out the business sector and upper middleclass & wealthy's liquidity stores - all to remain part of the euro. It's worth it! Depression is the new success!!!
UPDATE: Well that didn't take long - The Portuguese Finance minister just denied his earlier comments and added that the Cyprus deal is NOT a template for future actions (EURUSD doesn't believe him).
The shambles continues in Europe. This morning we saw a plethora of EU officials explaining how the Cyprus 'deal' is a unique, one-of-a-kind debacle helping to talk back #DieselBoom's mis-words, only to have their credibility destroyed by the actual transcript and his actual words. Then we get the fact that a new EU-wide bill on deposit bail-ins is introduced... and now the Portuguese finance minister has added to the dysphoria by explaining that, "the Cyprus deal sets Euro precedent on deposit protection," and we therefore assume on deposit impairment. It seems EURUSD also sees this...