CDS

CDS

Second Straight Hungarian Bond Auction Failure As Citi's Willem Buiter Calls For €2 Trillion European Rescue Facility, Ridicules Stress Tests

A week ago we highlighted that Hungary, in addition to liquidity problems, is now back to experiencing solvency issues, after suffering a bond auction failure. Today, Hungary had its second failed auction in a row, after it was unable to raise enough money as had been initially planned. "The state debt management agency sold 40 billion forint ($174 million) of bills, 10 billion forint less than planned, at a yield of 5.41 percent compared with 5.35 percent on June 10." The domino effect in Europe (contrary to the lies by G-Pap) is now in full force and nothing can stop it. Country by country will now need to be bailed out (for a few months - recall that Greece is supposedly solvent, yet its CDS are now wider than ever) or be forced to default. Which brings us to our second point: in a note to clients (attached), Citi's Willem Buiter goes so far as to say that Europe's current €860 billion bail out facility is insufficient by more than half, and a new rescue package will promptly need to be created to the tune of €2 trillion or more. He also slams the ongoing stress tests for the vile, malicious joke (which just so happens is squarely on Europe's middle class) they are.

Papandreou Says "Greek Banking System Is Resilient"

Well, our Italian readers need some cheering up. Enter George Papandreou with the biggest joke of the millennium. Presumably the Greek PM has not seen his country's CDS today which was last somewhere north of 1,100 as the market now says Greece is finished. Further the establishment of a Greek bank bailout fund is a virtual guarantee that the Greek banking system is now completely insolvent.

Global Sovereign Derisking As Greek 5 Year CDS Hits All Time Wide

So much for that Greek bailout plan. Greek CDS are now back at fresh all time highs as the market seems set on not only testing the EU's rescue resolve, but determined to get a fresh new bailout plan entirely. At last check CDS was just shy of 1,000 bps. The immediate catalyst is a Fitch report that says Greece risk has gone up and that the country will need further consolidation in 2011 and 2012. The broader catalyst is that the entire Greek credit market is completely dead (noi cash liquidity) and momentum trading has now arrived in CDS, which is the only place left to express a bearish stance on Greece. Should the spread onslaught continue, we expect all of Europe to follow Germany's example and immediately ban naked CDS shorts across the continent. Luckily, both China and India are now set to open CDS trading of their own.

The Media Campaign Begins: BP Is Now Too Big To Fail

As prospects before BP get darker by the day, and the likelihood of bankruptcy grows, the TBTF propaganda begins. Evidence A - Bloomberg headline: "BP Demise Would Threaten U.S. Energy Security, Industry." Just as the failure of bankrupt banks was supposed to lead to the destruction of capitalism, so the bankruptcy of BP plc is now supposed to lead to the degeneration of US energy independence. And who in their mind would force the Chapter 11 of a systemically important company? Once again, free market capitalism is about to walk out through the back door...

A Squeeze Or A Rally? Goldman Increasingly Doubting Its Bullishness (Time To Buy?)

Goldmans' Dominic Wilson,director of global macro & markets research, is out with a note which indicates a material shift in the firm's sentiment on risk. In a nutshell, the firm, unwilling to fight the macro double dip headwinds is prepared to concede that the American stimulus/reflation experiment has failed, and that investors should instead focus on underperforming markets (O'Neill's N-11 comes to mind): "Our own forecasts point to one other emerging theme. We see more risks of slowing in the economy where people have seemed most comfortable (US) and expect less slowing in places where people are more worried (Europe, China). If our forecasts are right, US domestic outperformance could ultimately reverse more." Also amusing is the attempt to reconcile a slightly bullish residual view on risk assets with the firm's 1.15 target on the EURUSD which would imply an S&P in the triple digit range. In summary - get out of America if you are a Goldman client, or, using the whole re-reverse psychology trick, now is the time to short the BRICs and Europe (even more), and buy the US. As usual with a Goldman report, more questions than answers, none more so than the original one - has recent market performance been a product of an actual rally, or nothing but massive squeeze?

Moody's Says UK Emergency Budget Supportive Of AAA Rating, Sends GBP, EUR Higher

Even as CDS spreads continue surging on solvency threats, FX markets seems comforted by the latest batch of drivel out of Moody's, which earlier reported that UK emergency budget is supportive of the country's AAA rating. GBP spikes immediately following the news, leading to a rise in all EUR pairs as well. Ironically all this isoccurring even as a new rumor of an imminent Fitch downgrade of France is making the rounds.

European Default Risk Surges As Soros Warns Germany Could Cause Euro Collapse

Ironically even with Greek CDS surging by 60 bps to 909 bps this morning, the biggest mover in percentage terms is not the bankrupt Mediterranean country but Europe's "stablest" one -  Germany, whose default risk has spiked by 9.19% according to MarkIt. Without splitting hairs, Europe is a sea of red this morning as the ugly specters of default and complete lack of credibility in the EU administration raise their ugly heads again.

Greece CDS Blows Out, Approaches Record Wides Again; Portugal Sells 5 Year Debt At Massive Spread

Markit reporting that Greek Bund Spreads have suddenly exploded by 65 bps to 776, the highest since May 7, and inches away from the all time record of 900 bps, even as CDS blows out to over 900 bps. The reason quoted is that traders have cited forced index selling and the absence of central bank buying: have banks finally left Greece to dry? Or is it just that Greece is once again caught lying, pardon, having to issue a public retraction: apparently German Handelsblatt ran an interview with Greek finance minister George Papaconstantinou, in which the Greek was "misquoted."According to Market News: "Some of the headlines issued earlier Wednesday on the basis of an interview Greek Finance Minister Giorgos Papaconstantinou gave to German business daily Handelsblatt were based on an erroneous version of the interview placed by the paper on its website. Papaconstantinou did not say in the latest interview with Handelsblatt that Greece would get its deficit-to-GDP ratio below 3% by mid-2012; that and some other headlines were based on an older interview the paper accidentally published. In the actual interview, according to the print version of the newspaper, Papaconstantinou said, "Of course not," when asked if he expects his fiscally troubled country to go bankrupt." The credibility-deficient minister also noted: "The country will “absolutely” endure the crisis without
restructuring its debt, he vowed, since such a step “would exclude Greece for a long time from the financial markets." The punchline was the conclusion that Spain and Portugal are “in a much better position” than Greece. Which bring us to our next point - Portugal's 5 year auction which came in at 4.657%, almost a full percentage point worse compared to the last auction on May 26, which closed at an average yield of 3.70%. Portugal may be better, but at this rate of collapse it means absolutely nothing.

BP Net CDS Hits Another Record, As APC Weekly Change Is Flat, Implying BP-APC Pair Trade Overhyped

According to DTCC, BP net notional CDS has hit another weekly record, coming in at $1.794 billion on 2,590 contracts as of June 18. This is a change from past week's $1.677 billion net notional outstanding, and 2,072 contracts: an increase of $117 million in net notional derisking as an increasing number of bets on BP's bankruptcy are made. Another very popular name, Anadarko, came in at $1.630 billion net with 3,051 contracts: the exact same notional as the prior week (which however saw 2,877 contracts outstanding). In other words, even as traders derisked in BP, they were flat in Anadarko, implying that a short risk BP - long risk APC trade was not being actively put on in the past week, contrary to media reports of this being a prevalent pair trade. Instead speculators took on unhedged short risk exclusively in BP. Alternatively, we could see accelerated derisking in APC soon as the long risk leg of a possible BP-APC pair trade catches up with FV.

S&P Butchers Europe, Says France Has High Deficits, Spain Needs Additional Measures, And UK Rating Being Evaluated

Not sure how this is news, but apparently it is impacting spreads currently. S&P officials are heard saying that they are evaluating the UK (-1 to 77.5 bps) rating in light of the emergency budget, that Spain (+26 to 244) needs additional measures to meet fiscal targets, and that France (+3 to 80.75) has very high deficits. This will certainly not help once again surging European cash and CDS spreads. And does anyone remember Greece? As the chart below shows, its various spreads to all other European sovereigns are blowing out. Risk off in Europe, as the EURCHF just hits a new all time low of 1.3590.

BP's Bankruptcy Would Impair 117 (18% Of Total) Collateralized Synthetic Obligations, Lead To Pervasive Losses

Even as increasingly desperate falling knife catchers try to convince someone, anyone to buy up some or all of their shares of BP stock, which is certainly on its way to a guaranteed doubling, tripling or more, the real investing community is ever more carefully looking at the worst case, and its implications. Said implications would be vast, and in addition to wiping out billions in capital from BPs direct counterparties which are already limiting their BP exposure, a topic we touched upon briefly previously, would also impair indirect holders of pre-packaged securitized BP exposure. Today Moody's provides an analysis of which CSOs (just like CDOs but packed purely with synthetic products - think Goldman's Abacus) would be impaired should BP go bankrupt. The rating agency does not stop there, and also analyzes what a bankruptcy of BP peers Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International would look like, and who would be wiped out. Below are the results, which upon further analysis will likely indicate total loss potential well beyond BP's total outstanding debt exposure.

China's Trade Balance By Country, And Why The FX Action Is Less Of A Deal Than The Media Will Have You Believe

As every kitchen sink appears to have a definitive opinion on the impact on the CNY rebalance, we would like to step back for a second and present a historical chart of the country's trade balances not only in total, but by individual country. As the chart shows, and as David Rosenberg also highlights, providing a blanket summary as to the impact of a CNY revaluation is a rather foolhardy thing: while China may enjoy a positive trade surplus with the US and EU, it certainly has a trade deficit with some other key producer countries, namely Korea ($61 billion LTM), Japan ($47 billion), Taiwan ($79 billion), and Australia ($27 billion). So while it could be argued that the US and EU's manufacturing sectors benefit from a stronger Yuan, what happens to the exports of the traditional Chinese partners? Absent the PBoC going full tilt and scaling up its imports across the board, there will be some very unhappy traditional Chinese trade counterparts. Although in this age, when even presumably smart economists beckon to "Spend now, save tomorrow", why bother with something as simple as the Capital to Current account equality. China should buy up everything, and use reverse money or something to then reinvest the reverse proceeds from all the exports into sovereign bonds... or something.

BP Finalizing 5-10 Year, $5 Billion Unsecured Bond Offering, 8-10% Yield

Just reported on CNBC. The yield on the issue is massive and is certainly a means to encourage basis traders to cover their naked CDS positions at a profit. Look for 5 year CDS to widen to the neighborhood of the new issue spread. BP better hope this is all the liquidity it will need, as the next bond offering will have to come at 10-15%, the third even wider, etc. By then, of course, there would be no equity value left.

10yr approaching breakout

Treasuries, employment, manufacturing data, Spain, head & shoulders, BP, PIMCO, & World Cup... All in one.