An expectedly low volume day saw equity futures wiggle around VWAP until the day-session open at which time Energy and Materials sectors surged to lift stocks 10 pts higher into the European close. Commodities all surged - led by Oil with its 'Hormuz'-premium pricing in - and while the USD weakened after the European close ( driven by EURUSD bouncing off the 50% retracement of the EU Summit spike), equities also lost ground and rapidly reverted back down to VWAP. The strength in gold and silver was interesting as they extend their gains from pre-Summit lows (gold up over $70) and most notable to us was the recoupling of risk assets broadly with equities. Gold and stocks are seemingly back in sync and so are (separately) the USD and 10Y Treasury yields. After stocks hit VWAP they rapidly resurged back up to the highs of the day and closed there dragged up by a push into the green by HYG (with both stocks and high-yield seeing some sizable blocks going through at the highs). VIX closed down very modestly at 16.6% but most notably was the rise in implied correlation (and implicitly index vol - VIX - from around 1045ET into the close, even as stocks rallied). It would seem that the rise in WTI back over $87.50 (and Brent over EUR80) has been the 'risk-driver' for much of this rally (with CONTEXT - broad risk proxy - playing squeeze catch up to equity's health). In summary, equities are up over 5% as oil is smashing higher due to pending Hormuz strait closing and WAR; Germany and Finland basically saying NEIN to EU Summit deal as it stands; JPM in an energy market probe and BARC told to lower rates by the government!! All is well in nominal, central-bank, asset-value land.
After two days of solid gains, European equities continue the upward trend and are seen higher at the North American crossover, with the Basic Materials sector leading the way, followed by financials. The moves in equities follow overnight reports from Chinese press, once again calling for the PBOC to slash their RRR, as well as expectations that this Thursday both the ECB and the BoE will conduct monetary easing, possibly boosting future commodity demand. In the fixed income markets, the European 2s/30s curve continues to see bear-steepening following last night’s announcement from the Dutch Central Bank that has changed Dutch insurers’ Solvency II interest rate curve; modifying the maturities in which the firms must hold assets towards the longer-end. Today also saw official confirmation from the Irish debt agency that they are to return to capital markets with T-bill issuance on July 5th, their first return to the market since 2010. Investor reaction to this news is evident in the shorter-end of the Irish yield curve, where the 2-yr bond yield spread against their German counterpart is firmly indicating the risk of returning to the market; currently wider by around 20bps.
Consequently, the real question is: “when does Germany and the rest of the EU stop picking up the tab for Greece?” Judging from the above survey in which even the French and Italians now think Greece should leave the EU if it doesn’t start paying its bills, it won’t be long: Greece will need another €16 billion in financing if the EU accepts its request for another extension (yes, this would be the third bailout).
From what seemed like a very low bar on expectations, last week's summit headlines surprised modestly on the upside, even if the details remain far from clear - and implementation even murkier. Political talk of wanting to break the link between sovereign and banking risk was well-received by markets - but we remind all that talk-is-cheap with these Euro-pols. As Goldman noted this weekend, "we do not see the outcome as a game changer", rather can-kicking until one of four possible endgames are realized. The absence of any explicit commitment to plans for fiscal or political integration; the lack of reference to any pan-European deposit insurance; and Ms. Merkel's limited concessions (to ensure passage of the growth compact) to the terms on which the existing pool of EFSF/ESM resources are offered leaves the underlying issue - the terms on which mutualisation of financial risk is offered by Germany in return for mutualization of control over fiscal decisions throughout the Euro area - remaining inharmonious. German tactical concessions at the summit do not change their basic position on this issue: that discipline, reform and consolidation must be achieved and cemented first before mutualization of financial obligations is possible. Looking to the future Goldman sees four paths for the Euro are from here - and short-term too many crucial issues are left unresolved.
Understands who can… The Brussels nightly drama yielded first tweeted “results”, then none, then yes. Then some bickering, Southern drama, then truce. Then they still were not done haggling.
Given the rather weak near-term and long-term outlook for US coal demand, it’s not surprising that within such a capital-intensive business, a number of smaller coal producers were hit recently with bankruptcy rumors. Indeed, even large cap names like Arch Coal have seen an escalation of concern over debt levels. Accordingly, many have concluded that coal -- in an era of solar, wind, and natural gas -- has finally displaced itself due to its problematic extraction, distant transportation, and overall costs. Is coal finally going away as an energy source?
Not a chance.
Indeed, everything currently unfolding for coal in the United States is precisely what is not unfolding for coal globally. Prices to import natural gas to most countries via LNG remain sky-high, easily protecting coal’s cost advantage. And the demand for coal in the developing world remains gargantuan. Accordingly, just as with oil, lower US demand simply frees up supply to elsewhere in the world. The global coal juggernaut rolls onward.
UPDATE: Added 'The Post-FOMC Window-Dressing Roadmap' - or high-beta-rescue...
Stocks opened around 2% gap higher this morning after the late-night headlines from Europe made many think that the tooth-fairy and Santa are real once again. S&P 500 e-mini futures saw some selling into the open but then stabilized amid a very narrow range for much of the rest of the day - leaking higher on low volume-driven short-covering. The news from Germany of ESM ratification was greeted with absolutely no price movement as an indication of just how insane things are but the need to drive stocks up in the last few minutes was crazy. Into the close, volume exploded as ES rose 10pts in minutes from absolutely nowhere. Average trade size was very heavy during this period and delta skewed notably to block selling into the ramp though it is never that obvious. ES closed above its 50DMA back to its highest since 5/8. Everyone enjoyed the day's window-dressing escapades aside from JPM which dropped 3% from its opening levels and closed in the red. The main takeaway is that most risk assets recovered to last week's highs but stocks turned the amplifier of insanity to 11 and pushed back to near two-month highs not to be outdone into quarter-end (wink wink).
With everyone scrambling to buy into the bathsalts rally, and shorts rushing to cover with a panic bordering on a QE-announcement, it is somewhat ironic that today's voice of muted reason comes from none other than Liebor expert extraordinaire: Barclays, whose suggestion is simple: lock your profits: "We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD." Why? They have their listed reasons. The unlisted ones are the same that every other bank has for becoming bearish recently (we have recently listed Citi, Goldman, SocGen and DB to name but a few): for a real fiscal and monetary policy intervention to take place (i.e., a rescue package that lasts at least a few months, as opposed to today's several day max rally): the market has to be tumbling. That, as we have explained repeatedly, is the only way to get a powerful response. Everything else is (quarter end) window dressing.
Last week it was Merkel promising she would die before she allowed Eurobonds (technically this has not been refuted: all she has done is allowed... uhmm... err... we don't really know - lots of confusing headlines out there, lots of chatter, a big short squeeze and no actual details). And now, here comes...
- GERMAN FINANCE MINISTER SCHAEUBLE SAYS NO EURO BONDS IN HIS LIFETIME EITHER WITHOUT COMMON FINANCIAL POLICY
And by common financial policy of course they mean "joint sovereignty" or at least all European gold pledge at Geld4Gold. Time to send Goldman's ambassador to Germany to investigate.
In the final analysis Europe is quite exposed at this moment and may be for quite some time. The ESM, after the change in seniority status, must be re-affirmed in at least two countries that are the Netherlands and Finland and Germany has not yet approved it yet either. The EFSF has already spent $450 of its capacity on Greece, Ireland, Portugal and now $125 billion for Spain. The balance left in the fund is tissue paper thin and that is all that is in existence presently for any more problems in Europe. Plans and schemes aside, the amount of money that could actually be used today is a drop in the proverbial bucket.
Juncker 'Hoped For More' As Italy And Spain (Oh, And Ireland Now) Get (To Share Same-Size) 'Band-Aid'Submitted by Tyler Durden on 06/28/2012 23:03 -0400
So To Clarify: Dropped seniority and overseeing of ESM (unratified) and EFSF rescue funds (which will not be boosted in size) to fund not just Italy and Spain but Ireland too...conditioned on agreeing to EU banking oversight
- *MONTI SAYS EURO LEADERS HAVE NO PLAN FOR BOOSTING BAILOUT FUNDS
- *ITALY HAS NO INTENTION TO `APPLY FOR THIS,' MONTI SAYS
- *IRELAND'S KENNY SAYS WHAT WAS IMPOSSIBLE IS NOW POSSIBLE
Early morning (drunk-dialing/texting) headlines from the EU Summit that there has been some short-term measures approved in terms of the removal of the seniority preference for ESM/EFSF rescue fund recaps of Italian and Spanish banks (though no details of the levels of dilution, cram-downs, or amounts have been discussed). The market, being as thin as it can be, is ripping higher on this realistically 'not much' news - though clearly someone 'blinked' a little. Headlines via Bloomberg:
- *EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS
- *EURO LEADERS AGREE TO OPEN FUNDS WITHOUT AUSTERITY PROGRAMS
- *BANKS CAN RECAPPED DIRECTLY WITH AID FUNDS, VAN ROMPUY SAYS
But it's not all free-money and unicorn tears:
- *MERKEL SAYS EU LEADERS TO CONTINUE WORK ON LONG-TERM MEASURES
- *JUNCKER SAYS WOULD HAVE `HOPED FOR MORE' FROM EU SUMMIT
- *EU BANK SUPERVISION IS CONDITION FOR ESM LOANS TO BANKS: RUTTE
UPDATE: ES has lost over 60% of its late-day spike gains...
France's 'happy' Hollande is out, apres-dejeuner, opining on what occurred today and where he stands. The critical items appear to be the growing divide between his immediate need for 'debt stability' measures versus his disagreement over the assumptive 'fiscal pact' that Merkel will require before any money leaves that nation's shores in its transfer-of-wealth way. Headlines via Bloomberg:
- HOLLANDE WITHHOLDS ENDORSEMENT OF EU FISCAL PACT
- HOLLANDE SAYS MUST FIND ALTERNATIVE TO ECB IN CUTTING YIELDS
- DEBT STABILITY MEASURES NEED TO COME FIRST, HOLLANDE SAYS
- HOLLANDE SAYS GROWTH MEASURES `AREN'T ENOUGH'
and the piece-de-resistance:
- EUROPE SHOULD HAVE MORE THAN MARKET ECONOMY, HOLLANDE SAYS
- WE WILL RENEGOTIATE COUNTRY SPECIFIC RECOMMENDATIONS AND WILL ONLY IMPLEMENT WHAT WE AGREE WITH
When we said that the Spanish bailout inspired Syriza to push on with renegotiating all the Greek pacts, little did we know that Syriza itself would inspire all of Europe to gang up on Merkel. Problem is: Syriza failed as Germany sadly still has all the leverage aka money. The other beggars will be no more successful.
Why Germany won’t blink.
In a day full of political news, here is the latest fixture to the soap opera to keep the electorate happy with water cooler talk.
HOUSE HAS ENOUGH VOTES FOR HOLDER CITATION; VOTE CONTINUES
House votes 255-67 to hold AG Eric Holder in criminal contempt of Congress for withholding documents in the Fast and Furious probe
Now, if only someone, somewhere can tell us the answer to the only question that matters in a world that just happens to have run out of money: who will pay for everything in this increasingly insane world, we would be very grateful. Or is everyone too distracted by meaningless flashing headlines, and ideological agenda to actually care?