Following a series of bad economic news (Eurozone unemployment, rising inflation, plunging retail sales in Germany, Spain and Greece) out of Europe, and the usual sound and fury out of the ECB signifying nothing (was there finally news that Weidmann and/or the Buba are endorsing anything Draghi is doing - instead of seeking to potentially quit his post leaving the ECB in limbo? No? Then stop flashing red headlines which are completely irrelevant), the EURUSD has decided to go on its usual countersensical stop hunt higher in hopes an algo or two will push it even higher on nothing but momentum, with has one purpose only: to allow the pair enough of a buffer so that when it does fall after the J-Hole disappointment, it has more room to drop. And as European newsflow fades into the periphery, everyone is once again focusing on Wyoming where Bernanke is now broadly expected to do absolutely nothing. What else are market participants focusing on? Here is the full ist courtesy of Bloomberg daybook.
My blood pressure is up, my nails are bitten down to the quick, I haven’t slept in days. I’m ready for Ben.
The fulcrum security is bleeding; 10Y Spanish government bond spreads jumped 19bps today, the largest gain in almost a month, and are trading back above 525bps over Bunds (the worst in over three weeks). Even the front-end of the Spanish and Italian bond curves lost ground today - as the game of chicken between Rajoy and Draghi continues - with the ridiculous brinksmanship highlighting the entirely dysfunctional dis-union that really exists behind the scenes. European equity markets drifted lower all day, slammed lower after the US opened (with Germany's DAX underperforming - thanks to weak Autos - no surprise there for us), but bounced a little into the European close. EURUSD slumped 70 pips from its post-US-open intraday highs today - ending at 1.2500. Europe's VIX jumped back above 28% (from 21% just 10 days ago) - its highest in a month. Credit widened on the day, financials underperformed, and notably credit did not jump into the close like stocks did.
As the Dow crosses 13000 and S&P crosses 1400 - the wrong way - the noise from Europe is picking up:
*IMF SAYS IMPLEMENTING MEASURES A `MAJOR CHALLENGE' FOR GREECE
*IMF: No Request From Spain For IMF Financial Help
*SLOVAK PREMIER FICO SEES 5O% CHANCE OF EURO AREA BREAKUP
Bah, what does the Slovak premier know: it is not like he is a member of the Eurozone. Oh wait...
EURUSD has fallen 50pips from its intraday highs; Spain 10Y (+19bps to 525bps) is at 3-week wides.
The Spanish bank run has started - as was explicitly warned about 6 months ago!
Spain is hotting up again. Just a day after Catalonia's beggars-are-choosers moment, Valencia is making headlines with its rear-view mirror demands for a bailout:
- *VALENCIA NEEDS FUNDS TO COVER PAST YEARS' SPENDING: OFFICIAL
- *VALENCIA NEEDS OVER EU3.5BLN FROM SPAIN REGIONS FUND: OFFICIAL
- *VALENCIA TO NEGOTIATE AID AMOUNT WITHIN WEEKS, OFFICIAL SAYS
It would seem the sheer idiocy of yesterday's unconditional demands have been recognized as at least these come with comments that they had previously 'promised' to meet 1.5% deficit targets, but we wonder, given the bailout is to pay for past years' spending what that 'promise' is worth. With expectations that a liquidity fund will be produced within 10 days according to his statement, it appears they are all coming out with their begging bowls. The region of Murcia earlier today also demanded EUR700mm bailout.
With GDP not providing the kind of dismal print that assures NEW QE, market eyes rotate back to Europe and just in time as Merkel and Monti complete their meeting and mumble a few generic (yet entirely market moving) un-newsworthy headlines, via Bloomberg:
- *MERKEL SAYS EURO AREA NEEDS MORE COHERENCE (yes, thank you, water is wet)
- *MERKEL SAYS ESM OF PRIMORDIAL IMPORTANCE FOR EURO AREA (indeed - with all its conditionality)
- *MERKEL SAYS EURO AREA HAS AMBITIOUS AGENDA IN WEEKS AHEAD ('ambitious' is one word!)
- *MERKEL SAYS SHE, MONTI DISCUSSED GERMAN COURT CASE AGAINST ESM (ya think)
and sure enough S&P 500 futures jump 4 points to overnight highs and EURUSD pops 25 pips.
In what is shaping up to be another listless trading day, where attention is glued to Hurricane Issac making not one but two landfalls, and the implication for US refining capacity or the lack thereof, here is what has happened so far, via BBG and Deutsche. The overnight session is mixed with Chinese equities under-performing again. The Nikkei and the KOSPI are both around two-tenths of a percent higher. The Shanghai Composite (-0.4%) is lower as the economic slowdown is adding negative pressure on cyclical sector earnings, closing at fresh 3 year lows. Iron ore prices continued to fall amid the weaker growth backdrop in China. Spot iron ore prices were down nearly 5% overnight to their lowest since November 2009. Rio Tinto's 5yr CDS has widened by about 25bp in a week. Rio's share price is down by about 6.6% over the same period. European markets fall, led by the commodity-heavy FTSE 100, with Swedish, Swiss markets rising. The euro rebounds against the dollar. Crude oil falls, metal prices decline. Spanish, Italian bond yields rise slightly, German, U.K., Irish bond yields fall. U.S. futures little changed and 2Q GDP figures are released later today. The state of Italy has sold EUR9 billion in 6 month bills at a 1.69 BTC, yielding 1.585%, the lowest since March, on prayers that Draghi, who was last heard defending the ECB as a non-political institution (whose sole product is the political construct known as the Euro - go figure), will finally step up and act instead of just continuing to talk and make empty promises.
It ain't safe no more???
We advise you to take note of the political opposition that is coalescing in Europe. The cry across the Continent, in various languages, is “Enough.” All of the grand designs speculated about for the ECB rest upon the use of the EFSF and/or the ESM as stated specifically by Mr. Draghi. Over the weekend the Bundesbank was absolutely critical of any such plans and they were supported by several statements made by Ms. Merkel. It is now dubious, in my view, whether Austria, the Netherlands, Finland and perhaps Germany would support not pledges but more actual money to be used for Greece, Portugal and Spain. The rub is on and the size of these potential programs will, without doubt, affect the funding nations in Europe along with the nations that need the capital. Muddling is no longer possible, delay has run out of road, postponement is no longer an option as recession grips the Continent and as each solvent nation seeks to defend itself.
The lull in market activity over the past weeks is poised to give way to a multitude of events that could potentially determine the market direction for the remainder of the year. Policy responses from both sides of the Atlantic are awaited, though nuances rather than headlines may be more important. In the short run however, Deutsche Bank notes some indicators suggest that risky assets may be vulnerable. Specifically, relative to fundamentals they also find that the US equity rally over the past quarter has now been excessive relative to the US economic leading indicators. Looking at cross asset valuations by comparing the level of asset prices today vs. their peaks and troughs since Sep-2008 we also find that the S&P500 appears to be the richest relative to fundamentals.
While Belize is comfortable buggering bondholders, the Greeks (following this morning's headlines) remain beholden to their euro-zone overlords - having survived a few more months on the back of reach-around 'bailouts' and ponzi-financing - all in the effort of providing more time for the 'rest of Europe' to figure out how to handle the 'Athens moment' that is surely coming. With September and October critical 'event-rich' months, Patrick Young, of DV Advisors, provides the clearest and least 'rose-tinted' perspective on where Greece has been, where they are now, and where this will all end. From the forged application for euro-zone membership to Oz-like fantasies of growth and austerity targets that remain pipe-dreams (and are constantly being missed), the bold Irishman in this brief clip explains "Greece has not done anything to really help itself, missed every deadline its been given" and the PM's comments on their 'spectacular come-back' clarifies the 'utter delusion' among the Greek political class because "Greece is bankrupt; full stop; game over" and Merkel must agree to 'let' Greece leave the Euro (post Troika) - as the rise of civil unrest, since whatever new money flows their way exits right out the back door and never 'helps' the people, is inevitable.
UPDATE: Added Romney's Bernanke-Busting Clip
With Romney's comments (that QE2 didn't work, that he doesn't back QE3, and that Bernanke should go) somewhat cornering the Fed-Head's decision-making, CNBC's Rick Santelli's comments this morning are even more prescient. The Chicago truth-sayer vociferously noted the increasingly politicized Federal Reserve actions, highlighting Schumer's recent 'demand' that Bernanke do his job. With Bullard this morning noting that muddle-through was not enough to justify the size of QE3 the market seems to be anticipating, it appears any actions by the Fed in the near-term can only be seen as political. The only way to justify any sizable NEW QE is then surely for the market to crash - and with Spain's no-bailout-soon, and Merkel back in the headlines, who knows what's possible. One thing is certain: under Romney the country will need a Fed Chairman. And if it is not Bernanke, despite Glenn Hubbard's promises yesterday, one very likely name will be Hubbard's close friend and co-author: Goldman's Bill Dudley, who now runs the NY Fed. One wonders which choice will be worse for the country (if not for gold longs) - the Chairsatan or Bill Dudley? Of course, look for Obama to retaliate and promise to para-drop dolla dolla billz if elected. Critically, the wizened ex-Gold trader Santelli notes the precious metal knows this and is acting as a barometer of anxiety in this stand-off.
Here come the facts!!! Warning, if you get your feelings hurt over hearing the truth, simply move on. You may have a couple of quarters lefft.
Reports that the ECB is discussing a new variation for sovereign bond purchases involving secret caps for interest rates failed to support peripheral EU bonds and instead provided market participants with an opportunity to book profits following recent strong gains. As a result, 10y peripheral bonds with respect to the benchmark German Bund are wider by around 12bps, with the shorter dated 2y bonds wider by around 15bps. This underperformance by peripheral EU assets is also evident in the stock market, where the IBEX and the Italian FTSE-MIB failed to match performance of the core indices today. The latest PMI data from the Eurozone, as well as China overnight underpinned the need for more simulative measures either from respective central banks or the government. While the PBOC continues to refrain from more easing, the release of the FOMC minutes last night revealed the members favoured easing soon if no growth doesn’t pick up.