While the euro itself has recovered a bit from its worst levels in recent sessions, euro basis swaps have fallen deeper into negative territory on par with the epic nosedive of 2011. We are not quite sure what the move means this time around, since there is no obvious crisis situation – not yet, anyway. A negative FX basis usually indicates some sort of concern over the banking system’s creditworthiness and has historically been associated with euro area banks experiencing problems in obtaining dollar funding. This time, the move in basis swaps is happening “quietly”, as there are no reports in the media indicating that anything might be amiss. Still, something is apparently amiss...
It would appear Gazprom has once again come knocking for payment - or else. As Bloomberg reports, Ukraine is pressing the Obama administration to provide political support, as much as $3b in financial aid and “non-lethal weapons,” with the goal of some progress by the end of February, Ukrainian Deputy Foreign Minister Vadym Prystaiko says. Of course, given Europe's agreement to further sanction Russia (asEU agrees more "punitive" steps are now possible) President Obama will be happy to lend Ukraine more American taxpayer money (despite the market's perception that Ukraine's default probability is over 80% - six year highs).
Greek default risk has surged in recent days and today as it becomes clear what Syriza expects from Europe, short-term CDS are at post-crisis highs with 5Y CDS implying a 76% probability of default (based on standard recovery assumptions - which may be a little high in this case). Given the domestic bank dominance in the buying of domestic government debt, Greek banks are getting hammered as everyone's favorite hedge fund trade is an utter bloodbath. Greek stocks overall are down and GGBs are tumbling once again - back at 16 month lows (given back all the ECBQE hope bounce). Perhaps not surprising moves, given new Greek Finance Minister Yanis Varoufakis reality-exposing comments yesterday, "the problem with the bailout is that it wasn’t really a bailout... it was an extend and pretend, it was a vicious cycle, a debt-deflationary trap, which destroyed our social economy."
Currently there are a number of weak spots in the global financial edifice, in addition to the perennial problem children Argentina and Venezuela... The happy bubble in risk assets could presumably be derailed a bit if any of the possible worst case scenarios were to become manifest.
"Anything that becomes a mania -- it ends badly," warns one bond manager, reflecting on the $550 billion of new bonds and loans issued by energy producers since 2010, "and this is a mania." As Bloomberg quite eloquently notes, the danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt - as HY energy spreads near 1000bps - all thanks to the mal-investment boom sparked by artificially low rates manufactured by The Fed. "It's been super cheap," notes one credit analyst. That is over!! As oil & gas companies are “virtually shut out of the market" and will have to "rely on a combination of asset sales" and their credit lines. Welcome to the boom-induced bust...
With OPEC slashing demand expectations to 12 year lows, oil prices have re-cratered today putting further pressure on socialist-utopia Venezuala which needs $121/bbl to break-even. Credit risk for the South American nation has exploded today to record highs - implying a 93% probability of default and President Maduro has taken to the airwaves to calm a benefit-needy nation... tensions are mounting...
But, but, but... all the clever talking heads said they wil have to cut...
*OPEC KEEPS OIL PRODUCTION TARGET UNCHANGED AT 30M B/D: DELEGATE
WTI ($70 handle) and Brent Crude (under $75 for first time sicne Sept 2010) are collapsing... as will US Shale oil company stocks and bonds (and thus all of high yield credit) tomorrow. The Saudis are "very happy" with the decision, Venzuela 'stormed out, red faced, furious.' Commentary from various OPEC members appears focused on the need for non-OPEC (cough US Shale cough) nations to "share the burden" and cut production (just as the Saudis warned yesterday).
Suddenly it is not just the shale companies that are starting to look impaired as a result of tumbling energy prices. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized. "
If one was to believe the picture that most Western media outlets are painting, Ukraine has been lost to Russia. Though the country fought valiantly to sign an Association Agreement with the European Union in Vilnius, Lithuania last month, President Viktor Yanukovych suspended negotiations with the EU at the last possible moment, betraying Ukrainians everywhere. Two recent energy deals that Ukraine has reportedly made, one with Russia and the other with Slovakia, however, show that the reality of the situation is slightly more complex.
The markets seem to think we live in a largely riskless world. Are risk assets now riskless assets or are they risk assets disguised as riskless?
Another day, another melt up overnight wiping out all the post-Moody's weakness, this time coming courtesy of Europe, where following the French downgrade, the EURUSD filled its entire gap down and then some in the span of minutes following the European open, when it moved from 1.2775 to 1.2820 as if on command. And with the ES inextricably linked to the most active and levered pair in the world, it is is no surprise to see futures unchanged. It appears that the primary catalyst in the centrally planned market has become the opening of said "market" itself, as all other news flow is now largely irrelevant: after all the central planners have it all under control.
As we warned here first, and as the sellside crew finally caught on, while the key macro event this week is the US presidential election, the one most "under the radar" catalyst will take place in Greece (currently on strike for the next 48 hours, or, "as usual") on Wednesday, when a vote to pass the latest round of Troika mandated austerity (too bad there is no vote to cut corruption and to actually collect taxes) takes place even as the government coalition has now torn, and there is a high probability the ruling coalition may not have the required majority to pass the vote, which would send Greece into limbo, and move up right back from the naive concept of Grimbo and right back into Grexit. Which is why the market's attention is slowly shifting to Europe once more, and perhaps not at the best time, as news out of the old continent was anything but good: Spain's October jobless claims rose by 128,242, higher than the estimated 110,000 and the biggest jump in 9 months, bringing the total number of unemployed to 4,833,521, a rise of 2.7%, according to official statistics released Monday. This means broad Spanish unemployment is now well above 25%. In the UK, the Services PMI plunged from 52.2 to 50.6, which was the lowest print in nearly two years or since December 2010, and proved that the Olympics-driven bump of the past few months is not only over, but the vicious snapback has begun.
From Egan-Jones, which downgraded the US for the first time ever last July, two weeks ahead of S&P: "Up, up, and away - the FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US."
Speculation that the ECB might, as part of its proposed bond-buying programme, announce an interest rate target (or band) for short-dated peripheral government bonds has sparked a further rally in Spanish and Italian bonds in the past week. Such an 'unlimited' move is a complete volte face from past policy, but Daiwa's research team believes hopes that the announcement of an interest rate or spread target would spare the ECB the pain of having to intervene in the markets at all are flawed in our view. For the ECB to credibly communicate an interest rate or spread target requires it to quantify the excess risk premia. Given the inherent inaccuracy (or falsehoods) of the forecasts underlying these estimates, the ECB would risk having to review these targets regularly, leaving markets uncertain about their permanence. The success and the sustainability of any future ECB interventions will ultimately depend on the peripheral governments’ ability to meet the conditionality required - and we know how that has ended up - always and every time.
Peugeot, Its Record High Default Probability, And A Brief Primer On Corporate Viability Under SocialismSubmitted by Tyler Durden on 07/17/2012 13:41 -0400
With central bankers dominating the airwaves, and the only thing that matters is who prints where and how much, most can be forgiven to have missed one of the more important micro developments in the past few weeks: namely the case study of emblematic French automaker Peugeot, which just happens to be Europe's second largest, and its Credit Default Swaps, which have doubled in the past 4 months, to a record high spread of 813 bps, which means the probability of default for the company has nearly doubled from 29% to 52% in a few short months. Yet what is it about Peugeot that is interesting - well the fact that the biggest spike in its default risk has taken place in the last few days, which have seen a nearly 100 basis point spike. The catalyst: "French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector." The problem is that this type of state intervention into corporate viability and profitability is precisely what precipitates wholesale bankruptcy. And this is precisely what the bond market has reacted to. Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM, the reality is that by enforcing what he thinks is "right" and "fair" dooms not only Peugeot and its 200,000 employees, but millions of upstream and downstream workers.