CDS

CDS

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.

A Morgan Stanley Clarification

Two days ago, we posted a story titled "Why VaR Is A Joke: Morgan Stanley Admits Losses in April And May Were "Much Higher" Than Anticipated" in which we extracted a segment from a report by Jim Caron to claim that VaR models are broken beyond fixing. Today, Morgan Stanley has asked us to provide a clarification on our post. We gladly comply.

Tyler,
The comments from Jim Caron that you reference in this article concern a model portfolio maintained by Morgan Stanley Research.  This fact isn't clearly reflected in the headline or in the article.  The headline in particular suggests that the Firm is disclosing losses.  This is not the case.  Again, Caron's comments concern a model portfolio within Morgan Stanley Research.  Please let me know if you can clarify this in an update, and let me know if you have any questions.

Thanks,
xxx
Morgan Stanley | Corporate Communications

We hope this clarifies everything.

Jim O'Neill Explains Global Economics Through The One Thing He Knows Well: Football

The Red Knights' attempt to buy ManU may have ended, but that won't curb the Goldman's BRICster's enthusiasm for all thing football. In his most recent Rose-Glassed commentary, Jim O'Neill explains why the world is great in 8 simple world cup parables, for all the ADDed traders who spend about 10 times as much time watching football than actually trading. Yet even the permabull is unable to contain himself in calling out the EU, ECB and the IMF in their Stress test hypocrisy: "The UK, the economy, the FSA, fiscal policy, and (oh dear), the team plays again tomorrow……..With a bit of luck, I wont be able to watch the match against Algeria which, if it is anything like the last one, will be much worse than a Spanish bank stress test…." Jim, you missed the news that according to the regulators in your favorite Europe, Santander is the healthiest bank in Europe. You have nothing to worry about: England should win by the same credible one thousand-nil, as the STD news.

Daily Credit Summary: June 16 - Spain, Pain, And BP's Bane

Stress in the Spanish banking system is nothing new but with DS-K swooping in this week from the IMF, and the oh-so-trustworthy Stress-Tests due to be announced, anxiety was running high as Spain sovereign risk broke back above 250bps and BBVA and Santander struggled wider and flattened (CEE sovereigns also floundered today). Of course, far more importantly, World Cup favorites Spain lost their first round football match to the Swiss 1-0 (shame I hear you all cry).

Trading In BP CDS Explodes By 60% In One Month

According to DTCC, net notional outstanding in BP CDS as of June 11 was $1,676 million, based on 2,072 (great error-proofing there Reuters) contracts. This represents an increase of about 30% from the prior week, when net notional was $1,284 million and 1,718 contracts. Most notably, however, the increase is about 60% from $1,066 million and 1,399 contracts as of May 14. The 60% ramp up in CDS "hedging" is to be expected, now that PIMCO has gloriously entered the water. Of course, since nobody has used CDS to hedge positions since about 2002, this simply means that bets on a default in BP have surged. Observant readers will say this is the dumbest way to conclude this, when one can just look at the price of 5 Year CDS, which has exploded in the past month. These readers would be right.