Because while the prospect of democracy returning to Greece may have been killed (for now), the world is discovering that not only will nothing else be accomplished at the "No We Cannes't" meeting, but the world will now be fully focused on Italy which unlike Greece, is not quite so easily fixable. Europe's propose solution: make italy an IMF protectorate. We give this plan exactly 24 hours before massive failure, and before attention returns to the top news of the week: the EFSF is a complete dud, and Europe will never be able to fund the €1 trillion bailout fund.
- BERLUSCONI SAYS ITALY AGREES TO EU MONITORING
- BERLUSCONI SAYS IMF TO CARRY OUT `CERTIFICATION' EVERY 3 MONTHS
- BERLUSCONI SAYS ITALIAN DEBT HELD MOSTLY HELD BY ITALIANS - like Mario Draghi
- BERLUSCONI SAYS ITALY HAS NEVER HAD TROUBLE SERVICING DEBT
And in other headlines, confirming just how impossible any form of organized decision-making is in Europe, how ironic it is to think that Obama will ever say no to his banker masters, or just how happy China will be to bail Europe out after it is about to be snubbed all over again, here they are...
While we have commented on the technical minutia of the LCH's margining rules and their blended AA benchmark, 450bps over Bunds remains a clear line in the sand in the market's mind. With Italy ever so graciously accepting (and if we believe the headlines - requesting!!) IMF's observation/supervision, it seems real money continues to leave the country's bonds in droves. With 10Y BTP yields breaking 6.3% today, the spread over Bunds just passed 450bps once again - will Draghi step up to the plate?
Amid average volume, ES managed to rally an impressive 45pts off overnight lows to close just shy of the 200DMA on what was mixed (at best) macro data in the US and seemingly more chaos in Europe (does anyone know for sure whether there will be a confidence vote?). High beta and most-shorted stocks dramatically outperformed the broad equity markets as 4% swing days have become so de-rigeur nowadays! Financials went from major loser soon after the open to middle of the pack by the close with only a very late day disconnect between HY credit and stocks (HY outperformed after the bell) of any note as we leaked higher all day long. Heavy new issuance in IG credit saw secondary bond trading pretty balanced from a net-buying/selling perspective - even as TSY yields rose significantly. TSYs saw 2s10s30s rise notably but combined with FX carry crosses, oil, gold, and the dollar - risk asset drivers in general were far less excited than stocks by the close. Commodities lifted further after Europe's close as the USD weakened more leaving gold and oil up around 1.5% on the day.
That today democracy died in Greece is no surprise to anyone (see note from Greek reader below). What may be unexpected, however, is that despite expectations that any talk of a Referendum is over and done with, this is hardly the case. In essence, what G-Pap said in parliament today is that there will be no referendum if and only if there is an agreement from the main opposition party. Alas, as the following headlines from Reuters indicate, this now appears to be a non-starter.
- GREEK OPPOSITION LEADER ASKS PM TO RESIGN
- GREEK OPPOSITION LEADER SAYS PM MUST QUIT, ELECTIONS MUST BE HELD
But most importantly,
- GREEK OPPOSITION LEADER SAYS RESIGNATION IS A CONDITION FOR TALKS
And so back to square one, as G-Pap's bluffing blows up in his face and any agreement is now contingent on his departure, something he has said will not happen.
At this moment, the headlines coming out of Greece are confusing and contradictory. It isn't clear whether or not there will be a referendum or a vote of no confidence. There may be a new leader, there may not be. All we can do is wait for the next headline. In the end I think there will be a referendum. You can't put the genie back in the bottle. If a referendum is cancelled now, how will the people of Greece react? Maybe the No Eurozone plan won't be so compelling, but if people start taking a serious look at how it would work, it might not be so bad, and don't forget, the Eurozone plan isn't that great. At some point, the citizens of the country need to make the decisions. Electing politicians that can then be corrupted by Merkozy is not a long term solution.
- There were conflicting reports that Greek PM Papandreou has resigned. It was also reported that the EU referendum is off the table
- Also, according to party sources, Greek socialist MPs are forging proposal for coalition government headed by former ECB vice-president Papademos
- EU Commission said that the only option is for Greece to stay in the Euro as treaties don’t foresee an exit from the Eurozone. It also said that the Greek tranche payment is conditional on austerity implementation
- Market talk that Qatar is willing to invest into the EFSF, however earlier the Chinese President said that the Eurozone problem should mainly be solved by Europe
- According to a senior G20 official, the G20 is assessing the cost of a Greek default
UPDATE: ES -5pts, EUR -25pips *MERKEL SAYS EU PREPARED FOR ANY OUTCOME IN GREECE REFERENDUM
Just headlines, via Bloomberg, for now as Juncker and Sarkozy play good-cop / bad-cop:
*SARKOZY SAYS REFERENDUM WILL DECIDE GREECE'S EURO FUTURE
*SARKOZY SAYS REFERENDUM WILL BE AROUND DEC. 4 OR DEC. 5
*SARKOZY SAYS CAN'T HAVE 'PROLONGED PERIOD OF UNCERTAINTY'
*SARKOZY SAYS 'WE ARE READY TO AID GREECE'
*SARKOZY SAYS GREECE WON'T GET `SINGLE CENT' WITHOUT ENACTMENT
*JUNCKER SAYS AID PAYMENT DEPENDS ON GREEK VOTE
*GREECE HAS `LOST 8 BILLION. THAT IS A PITY,' JUNCKER SAYS
Initial reaction is ES selling off 3-4pts and very slight downtick in EUR
As the market marinades in the latest confusing Bernanke Q&A aftermath, we get two very disturbing headlines. The first:
- China’s Zhu Says ‘Too Soon’ to Discuss Further EFSF Purchases
- While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet so it’s too early to talk about further investments in these tools,” Zhu Guangyao, Vice Finance Minister, told reporters in Cannes today.
This goes hand in hand with the disaster that was the overnight news on the EFSF pulling a meager €3 billion bond auction. If you gave us Jefferies' rolodex, we could probably raise more for a bankrupt MF Global in ten minutes (kinda like what they did). Oh well, so much for Europe.
And in other news, and confirming what we have been saying over the past two weeks, namely that foreigners are dumping US bonds to shore up emergency balance sheet capital, we get the following confirmation from Dow Jones:
- IIF Sees Euro-Zone Banks Selling Govt Bonds To Meet Capital Targets
That's right: government.
Following this morning's busted issuance, it seems appropriate to take a deeper dive into the first-loss insurance that EFSF issuance may provide. There are still a lot of details to be worked out, but the €250 - €275 billion EFSF first loss insurance facility is starting to take shape. The amount of exposure that the EFSF can take in any form and retain the AAA rating is capped at €452 billion Euro – the amount of guarantees provided by the AAA entities. It looks more and more like the EFSF guarantees will be used in 3 different ways. A portion will be used to raise money to meet commitments already made to Greece, Ireland, and Portugal. Another portion will be allocated to provide additional capital to banks. Finally, a portion will be used to back first-loss insurance and we note that the EFSF First-Loss Insurance Program is like Nothing We Have Ever Seen Before. Why we have wound up at the stage that issuing binary options on sovereign debt is a good solution, I don’t know, but since we are there, it might as well be done as well as possible.
While expectations were for massive LSAPs and ZIRP to the moon, headlines from the FOMC statement so far appear to be disappointing:
- FED REITERATES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
- FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
- FED SAYS IT'S PREPARED TO EMPLOY TOOLS TO BOOST RECOVERY
- EVANS DISSENTS FROM FOMC DECISION, WANTS MORE ACCOMMODATION
- FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'
Just as JPM "predicted", we now have our first dovish dissent courtesy of Charles Evans:
- Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.
And here is the market coma as every vacuum tube is hoping Bernanke is holding out the surprise for the 2:15pm press conference.
As usual, nothing but pure concentrated essence from the Fermentation Supercommittee Chairman
The pulled EFSF bond sale, IIF's desperate hope to keep their 50% haircut, and the potential for Greece and China 'side-meetings' all add up to much more worrying signals than the market seems to be discounting currently.
- Market talk that China may contribute towards the EFSF. Meanwhile, Japanese PM Noda said Japan will consider continued buying of EFSF bonds
- According to an EFSF spokesman, the EFSF is putting off the sale of its 10-year securities
- Weakness in the USD-Index boosted EUR/USD, GBP/USD and commodity-linked currencies
- According to the German foreign minister, the Greek rescue plan cannot be renegotiated
- Markets look ahead to the FOMC rate decision followed by Fed’s Bernanke press-conference
While as usual only headlines will be market moving, today we get the always completely irrelevant and very much worthless October ADP report, followed by the FOMC statement and press conference this afternoon.