Egan-Jones

Following yesterday's most recent Europe-led rout, the market is attempting a modest rebound, driven by the usual carry funding currency pair (EURUSD and USDJPY) levitation, although so far succeeding only modestly with not nearly enough overnight ramp to offset the bulk of yesterday's losses. In a centrally-planned, currency war-waging world, it is sad that only two key FX pairs matter in setting risk levels. But it is beyond hypocritical and highly ironic that according to a draft, the G-20 will affirm a commitment to "avoid weakening their currencies to gain an advantage for their exports." So the G-20 issues a statement saying nobody is doing it, when everyone is, thus making it ok to cheapen your exports into "competitiveness"? In other words, if everyone lies, nobody lies. Of course, also when everyone eases, nobody eases, and the world is back to square one. But that will only become clear eventually.

Synopsis: Chancellor Merkel continues to resist calls for EU bonds (shared liabs.) and money printing and is pushing for fiscal controls and the seniority of bailout funding. Germany is likely to be outvoted by other ECB members and therefore will have greater prospective exposure. Watch for the EFSF and the ESM morphing into banks (thereby depressing eventual recoveries) and a rise in the number of euros. Watch progress on the EU banking union. We used the IMF's data for Germany's debt which is greater than Eurostat's data. Downgrading.

Succinctly summarizing the positive and negative news, data, and market events of the week...

Thought you could shut up Egan-Jones? Sure, you could... as a NRSRO: the same worthless designation that is carried by Moodys and S&P. However, that does not prevent them to act, and provide their ratings opinion, as a non-NRSRO. Which is exactly in what capacity the infamous firm, which was targeted by the SEC for daring to downgrade the US (the same reason S&P was sued by the DOJ later), just downgraded the UK from AA- to A+.

As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire "developed" world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that "eventually", when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight's risk off session resumes in earnest.

Egan-Jones may have been barred from rating sovereigns for 18 months due to missing a comma here or there in its NRSRO application (when everyone knows this was merely retribution for downgrading the US ahead of all the other rating agencies), but now the time has come for that other rating agency which dared to follow in EJ's footsteps and downgrade the US of AmericaAA+ in August 2011 to be punished: Standard & Poors. Moments ago we learned that federal and state prosecutors will five civil charges against S&P for its mortgage bond ratings during the housing crisis.

Early in the 4th century, Emperor Diocletian issued an infamous decree to control spiraling wages and prices in the rapidly deteriorating Roman Empire. As part of his edict, Diocletian commanded that any merchant or customer caught violating the new price structures would be put to death. This is an important lesson from history, and a trend that has been repeated numerous times. When nations are in terminal economic decline, governments will stop at nothing to keep the party going just a little bit longer. I thought of Diocletian’s desperation a few days ago when I read about the recent sanctions imposed on US rating agency Egan-Jones. Given that all this is happening at a time when Congress is voting to suspend the debt ceiling entirely, these actions are the clearest sign yet of just how desperate the government has become. Could the warning signs be any more obvious?

• Doubt Greets Bank of Japan's Easing Shift (WSJ)
• Japan hits back at currency critics (FT)
• Japan upgrades economic view for first time in eight months (Australian) - only to lower them in a few months again
• GOP critics get opportunity to grill Secretary Clinton on Benghazi (Hill)
• Global economy set for ‘slow recovery’ (FT)
• Obama to back short debt limit extension (FT)
• Unfinished Luxury Tower Is Stark Reminder of Las Vegas’s Economic Reversal (NYT)
• Draghi Says ‘Darkest Clouds’ Over Europe Have Subsided (BBG)
• High-Speed Dustup Hits a Clubby Corner (WSJ)
• U.S. Budget Discord Is Top Threat to Global Economy in Poll (BBG)
• Sir Mervyn King says abandoning inflation target would be 'irresponsible' (Telegraph)
• Spain Says It May Cover 13% of 2013 Funding in January (BBG)

It is refreshing to see that the SEC has taken a much needed break from its daily escapades into midgetporn.xxx and is focusing on what is truly important, such as barring outspoken rating agency Egan-Jones from rating the US and other governments. From the SEC: "EJR and Egan made a settlement offer that the Commission determined to accept. Under the settlement, EJR and Egan agreed to be barred for at least 18 months from rating asset-backed and government securities issuers as an NRSRO. EJR and Egan also agreed to correct the deficiencies found by SEC examiners in 2012, and submit a report – signed by Egan under penalty of perjury — detailing steps the firm has taken." Hopefully the world is no longer insolvent in July of 2014 when this ban runs out.

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

As reported over the weekend, the German press did some work and discovered that despite Spain being rated practically junk across the board, its bonds pledged as collateral with the ECB had virtually no haircuts, despite as we said back in April, them needing to be haircut by a solid 5% or more an amount which would force the Spanish banko-sovereign system to scramble to procure the critical €17 billion margin call. Well, moments ago the Bank of Spain (not the ECB) came out and said that the ECB had applied collateral rules correctly. However, by that they meant not that the ECB had demanded the needed 5% haircut due upon a downgrade into sub A-range, but that the rating agency which absolutely nobody has every heard of, Canadian DBRS, has a "rating that needs to be taken into account." In other words, Spain's collateral call is now dependent not so much on Moody's downgrading the country to junk, which likely will happen soon if Rajoy does not demand the bailout which has been priced in for about 3 months now, but on what a tiny Canadian ratings firm, which has most certainly not gotten any quid pro quo from Europe to keep Spain at is A-low level (for long-term debt, not so much short-term) says is the Spanish rating quality.

Mostly boring.

European equity resilience seems surprising, given the otherwise gloomier mood. No news still played out as being good news and even catch-up to US levels seems a doubtful explanation.

Beats me.

Just two weeks after Egan-Jones started the party, S&P has downgraded Spain to BBB- (with a negative outlook). As we discussed here when Egan Jones pushed all-in with Spain to CC, of course, Moody's (Baa3 Neg) will likely follow shortly with Fitch (BBB Neg) deciding to avoid the office-raid and keep its French parents happy. The main reasons - and concern going forward, via Bloomberg:

• *S&P MAY CUT SPAIN IF POLITICAL, EUROZONE SUPPORT WANED
• *S&P MAY CUT SPAIN IF NET GOVT DEBT RISES ABOVE 100%/GDP '12-'14
• Doubts over some eurozone governments' commitment to mutualizing the costs of Spain's bank recapitalization are, in our view, a destabilizing factor for the country's credit outlook.
• In our view, the shortage of credit is an even greater problem than its cost.

Those confused by yesterday's rapid move higher in stocks, which fizzled by day's end, which was catalyzed by the non-event of the Spanish budget declaration which will prove to be a major disappointment as all such announcement are fated to be, can take solace in the following summary by DB's Jim Reid: "Yesterday's risk rally on the back of the 2013 budget announcement coincided with a trend seen over the last couple of years of rallies into month and quarter ends. We'll probably get a clearer picture of underlying sentiment by early next week with the new quarter starting, especially as it commences with a bang with the Global PMI numbers on Monday." In this vein, tonight's overnight sentiment showing weakness confirms yesterday's move was one which merely used Spain as a buying catalyst without reading anything into it. Because an even cursory read through shows major cracks. Sure enough the sellside readthroughs appeared this morning: "In our view the Spanish 2013 budget is based on a too optimistic GDP growth assumption" from Citi. Once again, the market shot first, and asks questions later, as the weakness in the futures confirms, EURUSD retracing all overnight gains, and Spain now 1.6% lower on this, as well as uncertainty of today's latest non-event - the local bank stress test vers 304.2b - whose results will be announce at noon NY time, and which just may find Bankia (and its Spiderman towel collection) is quite solvent once again.

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