Belgium

While European leaders would prefer to eschew concerns about individual sovereign nations' ability to pay, borrow, and spend in favor of an aggregate EU that they believe reflects better in the world comparisons (if any aliens are considering stimulus support we assume), Goldman's Hugo Scott-Gall is out today with his normal compendium of insightful charts. One specifically caught our eye on How Governments Spend as we makes the critical point (from a real money investor and not a talking-head perspective) that it is crucial to look at end-market exposures as well as geography. Investors exposed to consumers in countries facing significant ongoing household deleveraging (ring any bells?) face a demand picture that is likely to be challenging for some time. In his view this is more likely Southern Europe than Northern Europe and his critical point is that while many extrapolate trends in GDP multipliers for corporate earnings expectations, the need to reduce deficits relatively quickly for many European governments will reduce corporate revenue forecasts dramatically relative to empirical ponzi spending habits.

The rolling euphoria continues. European sovereigns have performed well again today with a significant surge into the close (helped earlier by ECB buying and optically successful auctions). Italian 10Y is trading back at 450bps over Bunds (one-month tights) and European banks ripped higher in equity and credit markets (as belief in capital raising plans takes hold). As we noted earlier, GGBs have been underperforming all week but equities and credit seem unstoppable here. USDJPY has crumbled in the last hour or so (around the same time as sovereign spreads started to accelerate their compression) and Treasuries (and Bunds) are very significantly underperforming (with the former now 13bps higher in 30Y for the week). While the dollar continues to weaken (and EUR strengthen back over 1.29) commodities are 'oddly' rolling over with Copper, Oil, Gold, and Silver all well off their earlier highs as Europe closes.

Why anyone thinks that any one of a group of highly interlinked and interdependent countries heavily reliant on EU trade & toursim in a severe economic downturn facing harsh auterity measures may be doing well in the near to medium term is beyond me!

The good news out of Europe is that despite the long-overdue downgrade 4 countries plus the EFSF issued debt successfully, namely the EFSF as well as Spain, Belgium, Greece And Hungary. The bad news is that all of the debt issued was Bills, which at least for now is not an issue when it comes to market access as the market believes that LTRO cash will cover anything with a sub-3 year maturity courtesy of the LTRO, even if in reality nobody is using the LTRO for debt roll purposes and all auctions are net cash withdrawing from the system. In brief: the EFSF sold €1.5 billion in 6 month bills at a 0.2664% yield and 3.10 BTC; Spain issued €4.9 billion out of a €5 targeted in 12 and 18 month bills, which priced better than the last such auction from December 13, at mixed Bids to Cover; Belgium raised €1.76 billion in 3 month bills at a higher yield or 0.429% compared to 0.264% before and in line BTC as well as €1.2 billion in 12 month Bills at a 1.162% yield compared to 2.167% and a lower BTC; Greece bill yields fell at a 3 month bill auction to 4.64% vs 4.68% before, selling €1.625 bn with €1.25b in competitive auction, meeting maximum competitive auction target of EU1.25b and so on. The picture is simple: when it comes to funding itself, Europe is great at ultra-short term debt, and not so good at anything longer. Regardless, Europe will spin this as a great success considering the S&P downgrade over the weekend. We'll wait to see how bond auctions longer than 5 years will fare, if of course any non-Bill auctions are conducted in Europe in the future. Some other good news came from the German Jan. ZEW confidence index which came at 28.4 vs est. 24.0. The result is that the expected EURUSD short covering has kicked in, and the pair is flirting with 1.28, as we get recoupling between asset classes. Bottom line: ultra short term debt and a rise in confidence is sufficient to push futures up by about 11 ES points. In the meantime, as the chart below shows, we get another record high parking of cash by European banks with the ECB at €502 billion, as the European superstorm - the failure of Greek restructuring talks - is about to hit, and banks have to prepare for the unknowable. Also, today we will likely see S&P begin downgrading hundreds of European banks and insurance companies. But that to is surely largely priced in.

A down day in the US on Tuesday could begin to trigger intermediate sell signals...~ Lee Adler

All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

Not sure why they felt the need to wait until 430 since most of it was leaked already. Germany back to stable outlook is good. Austria and France chance EFSF but guess that is what LTRO is for. Italy and Portugal would be in trouble in the real world but so long as ECB views them as money good the countries and banks can keep printing money (sorry use LTRO). Roughly in line with expectations. I think the need to redo the EFSF and ESM concept is an issue that will need to be digested. Is BBB+ for Italy and junk for Portugal enough to cause some collateral provisions to be triggered or force some sellers? I don't think it will in any meaningful way but needs to be watched. I'm surprised Belgium got by but then again it is a rating agency.

The moment BTPs broke above 500bps over Bunds this morning, it was clear that the ECB was in buying (and confirmed by desk chatter). Early in the day, European corporate, financial, and sovereign credit markets were in quite positive territory with the former at highs of the year. As downgrade rumors broke, and then were exacerbated by the increasing realization that Greek PSI is not going to happen, sovereigns broke wider rapidly and corporates and financials fell off a cliff (their biggest drop of the year so far) with XOver (the European high-yield credit index) widening 30bps almost instantly. EURUSD took out recent lows trading back to 1.2624, its lowest since August 2010 and EFSF (the much-heralded firewall) widened 9bps off its tights. The last hour or so of trading was dominated by improvements in BTPs and OATs as the SMP went to work and this provided some relief across all assets leaving European stocks at day's highs and modestly lower (after nearing the lows of the year so far earlier), non-sovereign credit marginally wider but sovereigns (Belgium, Spain, and Austria worst) still decently wider. While the impact of the downgrades on EFSF's structure and Germany's willingness to shoulder even more implicit guarantees is critical, we wonder if the PSI talks breakdown is the more important driver as investors face yet another a-ha moment and just as when the USA was downgraded, that the impossible may actually be possible (disorderly Greek default). In the US, ES (the e-mini S&P 500 futures contract) has also rallied nicely off the earlier lows but is holding at VWAP (and is in line with broad risk drivers for now).

Now that a "few good hedge funds" have finally made CDS a credible instrument all over again but trampling all over ISDA putrid, corrupt and meaningless corpse, here is an update of Eurozone CDS.

A gold standard, abandoned mostly due to a shortfall in the amount of the metal required to back the monetary system? A common bloc designed to simplify trade and commerce? Macro-economic reform of the union from the centre? Voluntary adoption by England who was not part of the union? Ah, well almost. Anyway, my point is this: In the mid-700s it probably seemed inconceivable that Europe would be united under a common ruler, much less a common currency and, by the mid-800s, it probably seemed equally inconceivable that such a union could split asunder - but  such is the nature of unions (and currency blocs for that matter). As the individual members undergo the individual stresses associated with running individual and idiosyncratic economies under a common banner, it is inevitable that there will be periods when maintaining the status quo becomes impossible. It was true of Europe in 800 - it holds true today.

Equities traded their lowest volume of the week (-19% from yesterday alone). The NFP print this morning provided ammunition for some vol early on but as we drifted into the European close, risk assets in general were pushing lower. Unlike the last few days the circa-Europe-close dip-and-rip only occurred in the equity market today as the USD stayed near its highs and TSYs near their low yields of the day (and high yield credit near its wides of the day) as stocks took off back into the green and meandered either side of VWAP for the afternoon. It seems odd that the afternoon's divergence between TSYs and stocks was not accompanied by Gold or USD weakness (QE hopes) and in fact as we got into the last few minutes, stocks started to push back lower on much larger average trade size but was trapped between VWAP and unchanged on the day. Gold outperformed on the week (+3.4%) just inching out Silver and Oil as they appeared to converge on a 3x beta of the USD 'appreciation' of around 1.2% this week. Treasuries rallied 4-6bps and the curve flattened overall as we saw duration reduction in corporate bonds (with highest quality names (Aaa-Aa3) being net sold). DXY stayed above 81 as the EURUSD scrambled back above 1.27 (down an impressive 1.85% on the week). AUD was the only major to gain relative to the USD on the week (and very marginally). Finally, we saw VIX dropping and stabilize and implied correlation diverged and rose this afternoon which combined with the divergence in risk assets suggests stocks are short-term overdone at best.

The New Year has ushered in a new pattern for the market - or perhaps has clarified an old one. The last 3 days has seen European credit markets notably underperform equity markets but stage a significant rally around the equity close each day. This rally then flops into US markets. Today was no different from yesterday - EURUSD leaked lower (holding under 1.28 here) all through the European day session - the question is whether we will see the same stability we saw during yesterday's US afternoon session in FX which will enable the equity strength to hold. We suspect not given that broad risk assets (CONTEXT) has notably not participated in the equity markets pull higher so far. At the same time as Europe closed, with financials massively underperforming, US financials were breaking out as XLF went green and BofA broke above $6. Volumes are above yesterday but below Tuesday for this time of day - still notably low on a medium-term basis. TSYs have been very volatile this morning but European sovereigns have been on a one-way path wider all day - closing near their wides. Commodities are lower (USD strength) but Gold is holding up relatively best for now - well above $1600.

While nothing out of Italy or France was on the bond docket today, other countries in Europe will be issuing bonds on a virtually daily basis as the continent prepares to roll an record amount of debt in Q1, and in January as well (full calendar here). As such we saw new Bill issuance from Belgium and from Netherlands. The waffle country sold €1.280 billion in 3 Month T-Bills at a 2.13 Bid To Cover, a plunge compared to the 8.59 previously, albeit with the yield dropping from 0.78% to 0.264% as it falls flatly within the risk-free period defined by the 3 Year LTRO. Belgium also issued €1.155 6 Month T-Bills at a 2.01 Bid To Cover compared to 2.76 previously and a rate plunging from 2.438% to 0.364%. Elsewhere the Netherland also took advantage of the now mixed LTRO euphoria to sell €4.65 billion in Bills, specifically €2.99 billion in March 2012 Bills pricing at 0.00% (compared to negative -0.007% before), and €1.66 billion December 2012 Bills at a yield of 0.05% - obviously the market is still enamored with Netherlands as a safe haven on par with Germany. And speaking of the LTRO, that carry trade concept is now dead with the year end cash parking theory scrapped following the announcement thet banks parked the second highest amount in history at the ECB, or €446 billion, just shy of the €452 billion hit on December 27.

It appears Moodys is not having server issues.

• BELGIUM'S CREDIT RATINGS CUT 2 LEVELS TO Aa3 BY MOODY'S

Following a series of modestly successful debt auctions out of Europe, primarily in Spain and Greece, the morning capped its positive tone after the EFSF managed to sell €2 billion of 3 month deals: an event to which the EURUSD popped by 40 pips as apparently investors do not expect the EFSF to go insolvent in 91 days. However, the positive mood was quickly wiped out after Reuters reported minutes ago that private bondholders have concluded talks in Athens without reaching a deal, which confirms that that very basis of the July 21 deal, not to mention its October revision, the NPV "trim" of Greek notional bonds, is and continues to be elusive, which means that Europe's banks are certainly unable to still take even a 50% haircut, despite all protestations to the opposite namely that everyone has cut their Greek exposure. In other words, Europe's banks have, once again, lied to everyone. And rounding up the sour note of the morning is the breaking out of Liege, Belgium where one or more attackers are said to have thrown Grenades at a bus stop, with at least 2 people confirmed dead and 10 wounded. Unfortunately, the deadly anger is spreading ever closer to the core of Europe.