Harry Reid’s publicly displayed dismay at the lack of progress in the fiscal cliff negotiations finally injected a dose of realism into the process after investors threw caution to the wind and seized on the optimism offered by the Senate Majority Leader and Speaker Boehner on November 16. We view yesterday’s sound bite as more negative than the aforementioned statement on the White House Lawn, for we now sit 11 days closer to the New Year’s deadline. Despite this asymmetry, equities suffered only moderate losses giving up just a modicum of the gains from last week. The relative lack of a response to the comments seem puzzling given the price action from the prior several days; however with month end looming, enough buyers kept stocks from selling off violently. My November 13 “Missive” outlined a game theory exercise that suggests this rancor will continue until very late into December and/or the capital markets dislocate thereby ensuring either a falling over the cliff or a band aid solution to avoid the crisis temporarily. Both parties unfortunately may assume that by agreeing to postpone the tough decisions, they will have prevented a rout in equities; however, the August, 2011 precedent of raising the debt ceiling out of desperation hints otherwise.
It seems like it was only 24 hours ago that Europe bailed out Greece for the third time and everything was "fixed", with a resultant desperate attempt to validate this by pushing the EURUSD above 1.3000. Sadly, as always happens, Europe, and especially Greece, refuses to be fixed, because as we will not tire of saying: you can't fix debt with i) more debt, ii) hockeystick projections or iii) soothing words of platitude and an outright bankruptcy, just like that which Argentina is about to undergo, will be needed. If that means the end of the EUR and the delusion that the Eurozone is a viable monument to the egos of a few technocratic career politicians, so be it. As a result, this time around the halflife of the latest bailout was precisely zero, as was that of the latest Japanese QE episode, as the entire world is now habituated to the lies emanating from Europe, and demands details, which in turn are sorely lacking, especially as relates to the question of just where will Greece get the money desperately needed to fund the Greek bond buyback. But at least Kathimerini was kind enough to advise readers that said buyback must take place by December 7 in time for the euroarea finmins to approve the payment of the next Greek loan tranche at the December 13 meeting, something which will likely not happen, especially if Germany's SPD party delays the vote on the Greek bailout until the end of December as was reported yesterday. We can't wait to learn the details of the buyback package, which will come in the "next few days" per ANA, and especially where the buyback money will come from, especially with the FT reporting that various European countries will already lose money next year on the latest Greek bailout.
With hope high that TPTB will see fit not to plunge us over the cliff, we thought it useful to get some perspective on what the grand compromise might look like. Goldman's central assumption - albeit a close call - is that an agreement is found that includes a tax increase of a magnitude similar to the upper income tax cuts, though the composition might differ. Entitlement reforms also seem likely to be part of a package, particularly related to health programs. "Down-payments" in both areas seem likely, with additional deficit reduction to be enacted in 2013 as part of a two-stage process. The working deadline for an agreement appears to be December 21. While talks are ongoing, we, like Goldman, would not expect serious negotiations to begin for another couple of weeks. In the interim, headlines out of Washington are likely to be mixed, but we would expect more negative than positive news until at least mid-December.
It wouldn't be Europe if the insolvent continent did not announce, to much pomp and circumstance, another final rescue for a broke country which was nothing but a short-termist can kicking exercise. It also wouldn't be Europe if the leaders did not do much if any math when coming up with said "rescue", and it certainly wouldn't be Europe if the initial EURphoria following such an announcement was not promptly faded. Sure enough, all three have now occurred with the EURUSD soaring to over 1.3000 in the moments after last night's soon to be obsolete announcement, only to see a gradual and consistent sell off over the next several hours, dropping to a week low of just under 1.2940 as details emerged that... there were not details. To wit, as Market News reported:
- EU COMMISSION: FUNDING FOR GREECE DEBT BUYBACK NOT WORKED OUT YET
In other words, the use of funds for the third Greek bailout has been more than detailed. The only tiny outstanding issue - the source of funds.
Following their brief interruption for calculations, the Eurogrouop is back hard at work and a few absolutely meaningless and ridiculous headlines are being spewed:
- *ECB SAID POISED TO RE-ACCEPT GREEK GOVT BONDS AS COLLATERAL (IF AID TRANCHE APPROVED)
- *ECB SAID TO REOPEN ISSUE OF PORTFOLIO PROFITS ON GREEK BONDS
- *ECB SAID TO ALSO LOOK AT OPTIONS OF BOND ROLLOVER, BUYBACK
The market, for reasons we note below, completely ignored this idiocy as anything of relevance as they continue to try to find a way to enable the Greeks to appear to pay their next principal via pure accounting shenanigans as opposed to the transfer of any real money. We wait with baited breath for how they are going to wriggle out of this one and remind readers of the buyback 'boondoggle' Q&A from the weekend, as it is the write-down that is what the market is focused on.
Another week begins which means all eyes turn to Europe which is getting increasingly problematic once more, even if the central banks have lulled all capital markets into total submission, and a state of complete decoupling with the underlying fundamentals. The primary event last night without doubt was Catalonia's definitive vote for independence. While some have spun this as a loss for firebrand Artur Mas, who lost 12 seats since the 2010 election to a total of 50, and who recently made an independence referendum as his primary election mission, the reality is that his loss has only occurred as as result of his shift from a more moderate platform. The reality is that his loss is the gain of ERC, which gained the seats Mas lost, with 21, compared to 10 previously, and is now the second biggest Catalan power. The only difference between Mas' CiU and the ERC is that the latter is not interested in a referendum, and demand outright independence for Catalonia as soon as possible, coupled with a reduction in austerity and a write off of the Catalan debt. As such while there will be some serious horse trading in the coming days and week, it is idiotic to attempt to spin last night's result as anything less than a slap in the face of European "cohesion." And Catalonia is merely the beginning. Recall: "The European Disunion: The Richest Increasingly Want To Fragment From The Poorest" - it is coming to an insolvent European country near you.
With EURUSD hitting one-month highs, Greek and Spanish government bonds pushing higher day after day, and EU stocks up 5% this week, one could be forgiven for thinking all is well across the pond. Tail-risks removed, firewalls in place, and everything ticking along nicely. The reality, of course, is a rather different picture. As Credit Suisse notes, the apparent inability of the euro area to reach any sort of decision on how best to address Greece’s debtload is far more negative in our view than just its impact on Greece. It speaks, once again, in our view, of the inability for progress at the euro area level in the absence of market pressure. The ECB’s (unactivated) OMT backstop has worked extremely well until now, but the ability of it to continue to do so without progress on the political side is limited in our opinion. As we head into year-end, European storm clouds are building. Meanwhile, the private sector is voting with its feet: German exposure to the periphery continues to fall (down 56% from the peak to the end of September), with exposures to Italy and Spain in particular lower this year. As Santander’s CEO said this week: while the Treasury may not need the Spanish bailout, the Spanish economy and firms do.
Aside from fading any headlines and articles about a "recorder-er" Thankgsiving and holiday sales season...
First it was Greece, which Europe couldn't "resolve" on Monday night despite Juncker's vocal promises to the contrary, and was embarrassed into postponing until next Monday when everything will surely be fixed. Now, the time has come to delay the "resolution" of the EU budget, which was supposed to be implement last night, then a decision was delayed until today, and now every European government leader is saying a new meeting will likely be needed to resolve the budget impasse. As BBG summarizes, "Divisions between rich and poor countries flared over the European Union’s next seven-year budget, leading German Chancellor Angela Merkel to rule out an accord until the new year. France defended farm subsidies, Britain clung to a rebate and Denmark demanded its own refund, while countries in eastern and southern Europe said reduced financing for public-works projects would condemn their economies to lag behind the wealthier north. “Positions remain too far apart,” Merkel told reporters early today after the first session of a summit in Brussels. “Probably there will be no result at the end of this summit. There may be some progress but it is probable that we will need to meet again at a second stage." In other words the same old absolute and total chaos from the European Disunion we have all grown to love, in which the only solution each and every time is to delay reaching a solution, at least until after Merkel is reelected and in the meantime kicking the ever greater ball inventory in Draghi's court, where he too will promise to make everything better as long as he actually dosn't have to do anything.
With America shut for Thanksgiving today, what was going to be an abysmal volume day, coupled with the usual any news is good news levitation following the lowest volume day of the year, will be even worse. Sure enough, the overnight session started off with a bang, when in the vacuum of night, a lift everything algo sent the EURUSD soaring by 40 pips higher on no news. With the entire risk complex firmly anchored to the EURUSD pair as the key driver, it pushed risk across the entire market well higher to set the early session mood with the very first trade. Followed light trading and a gradual drift lower which could not be offset even with a China HSBC Flash PMI print of 50.4, up from 49.5 in October, and the first 50+ print in 13 month (to accompany the new political regime: after all, the US is not the only nation where economic data mysteriouly levitate with key political events). This continued until about Europe open, when the monthly release of European PMIs came out, which once again were confusing to say the least with France posting the biggest and most surprising pick up, after its Manufacturing PMI rose from 43.7 to 44.7, on expectations of 44.0, while the Services PMI increased from 44.6 to 46.1, well above the expected 45.0 print. Germany was less exuberant with manufacturing rising from 45.5 to 46.2, although the Services PMI dropped from 48.4 to 48.0, missing expectations of 48.3, sending the series to its lowest in 41 months.
Few would argue that markets are almost entirely apathetic to even the worst and most negative of headlines in this post-crisis world. As we noted earlier, it seems we are 'shell-shocked' at a 'recovery' that UBS describes as 'not exactly an uplifting experience' – global growth went straight from 'collapse' to 'mid cycle' without ever enjoying the healing properties normally associated with a one to two year recovery process. For economists, one interesting question is whether this 'new normal' is unduly influencing economic sentiment. We would somewhat expect traders/managers to be behaving in an increasingly agitated manner; jumping at sudden noises, overreacting to shifts in economic data and generally exhibiting signs of stress, economic hysteria, and volatility. In reality, both consumers and businesses have become quite blasé about the economy. Sentiment is actually a lot less volatile than the economic circumstances would normally suggest it should be, and so (via UBS) we present 'The Indifference Indicator' to track just how 'subdued' regions have become.
An initial lower open in major European cash bourses has been pared despite concern over Greek and a lack of any progress in agreement between Eurozone officials and the IMF. Source comments early on in European trade helped provide renewed optimism that a plan for Greece is edging closer after it was reported that the German Chancellor Merkel told lawmakers Greece's financing hole through 2016 can be filled with combination of lower rates and increased EFSF. The FTSE is under-performing its European peers at the mid-point of trade today as several large cap stocks go ex-dividend, although strength has been seen following the latest Bank of England minutes which showed a less dovish than expected 8-1 vote split to hold fire on QE between the MPC meetings. Following the release of the minutes, a now reduced expectation for asset buys at the December meeting saw upside in GBP/USD in a move away from the 1.5900 handle, and Gilt under pressure, although short-sterling shrugged off the comment that the central bank is unlikely to cut bank rate in foreseeable future.
After tumbling to lows of 1.2735, and dragging the entire 100% correlated risk complex down with it, the EUR has since seen a straight line push higher despite the sad reality that for all expectations, Europe was embarrassingly simply unable to come to a resolution over Greece and has kicked the can to November 26, leaving Greece with zero cash to fund obligations to European banks, and if anything is left over, to fund domestic operations. The reason for the move up? The market, in all its wisdom, hopes that 6 short hours after saying "9", Merkel has already softened her stance and that a deal in 5 days is inevitable. Of course, these are the same people who said a deal last night was inevitable. These are the same people who also said that Washington is this close from a reconciliation on the Fiscal cliff, despite this thing called reality (see Rough start for fiscal cliff talks from Politico). Adding to the surrealism was a French spokesman who said the country would "do everything to reach a Greek accord." Since a recently downgraded France will "do" nothing (that's Germany), but will "say" everything, it is safe to say that France is now the comic relief typically attributed to Jean-Claude Jun(c)ker. Finally, and wrapping up the bizarro surreality of central planned markets, the recent spike in Brent on Gaza re-escalations has been interpreted by those uber-complex DE Shaw algorithms as a risk on move, and pushed all risk indicators to overnight highs. With volume today set to be abysmal as trading desks will be empty around noon, expect some more absolutely insane zero volume moves in the SkyNet battleground formerly known as the "market."
Given our earlier comments, it is hardly surprising but the Eurogroup meeting just ended and there is no agreement; headlines via Bloomberg:
- *FRIEDEN SAYS NO DECISIONS REACHED TODAY ON GREECE BY EUROGROUP
- *FRIEDEN SAYS EURO FINANCE CHIEFS TO CONTINUE TALKS ON MONDAY
- *SCHAEUBLE SAYS EUROGROUP UNABLE TO REACH CONCLUSIVE AGREEMENT
- *LAGARDE SAYS MORE WORK NEEDED FOR GREEK SOLUTION
- *JUNCKER IDENTIFIED 'CREDIBLE' IDEAS TO BRING DOWN GREEK DEBT (well he would wouldn't he?)
EURUSD is tumbling (as are S&P 500 futures in their oh-so-correlated manner)
Umm yeah...close-to-close, equity indices were mixed (Dow small red - HP/IBM, NDX/SPX small green on closing rampfest) amid dismal volumes but for anyone that paid attention to the debacle in the markets today, this was another odd one. Thanks to EUR strength's correlated power (retracing last night's France loss), stocks trickled up all morning into the European close; Bernanke suggested he was not omnipotent and stocks dumped 13 S&P points (~1%) to yesterday's day-session open; and then on no news - as Greece remains unfixed and cease-fire deadlines come and go, we pumped ingloriously on small lots and stupid volume up to VWAP/unch - paused for thought - and then ran to the day's highs just after the close day-session close in S&P futures. Treasuries suffered - yields up 5-6bps on the day as our broad risk-asset proxy lifted along with modest moves in FX carry pairs and USD weakness into the close. Oil was headline-maker (away from BBY and HPQ that is) - down almost 4% from the highs yesterday but closing still green on the week just above $87 as Israel re-flared. Credit was less noisy and VIX compressed a little more to 15.11% at the close (lowest in 5 weeks).