Fitch

When yesterday we presented the view from CLSA's Chris Wood that the February 29 LTRO could be €1 Trillion (compared to under €500 billion for the December 21 iteration), we snickered, although we knew quite well that the market response, in stocks and gold, today would be precisely as has transpired. However, after reading the report by Credit Suisse's William Porter, we no longer assign a trivial probability to some ridiculous amount hitting the headlines early in the morning on February 29. Why? Because from this moment on, the market will no longer be preoccupied with a €1 trillion LTRO number as the potential headline, one which in itself would be sufficient to send the Euro tumbling, the USD surging, and provoking an immediate in kind response from the Fed. Instead, the new 'possible' number is just a "little" higher, which intuitively would make sense. After all both S&P and now Fitch expect Greece to default on March 20 (just to have the event somewhat "priced in"). Which means that in an attempt to front-run the unprecedented liquidity scramble that will certainly result as nobody has any idea what would happen should Greece default in an orderly fashion, let alone disorderly, the only buffer is having cash. Lots of it. A shock and awe liquidity firewall that will leave everyone stunned. How much. According to Credit Suisse the new LTRO number could be up to a gargantuan, and unprecedented, €10 TRILLION!

All you need to read.

It's all over but the crying at least as far as Greece is concerned. First, it was S&P's Kraemer telling Bloomberg yesterday the country is finished, now today for dramatic impact, we get Fitch's repeating the doom and gloom, stating that the country will likely default before its March 20 payment. From Bloomberg: "Greece is insolvent and will default on its debts, Fitch Ratings Managing Director Edward Parker said. The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said in an interview in Stockholm today. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default at Fitch, he said.  “The so called private sector involvement, for us, would count as a default, it clearly is a default in our book,” Parker said. “So it won’t be a surprise when the Greek default actually happens and we expect it one way or the other to be relatively soon." Europe’s debt crisis is likely to be “long and drawn out,” Parker said." And here we go again, with official attempts to make what appeared apocalyptic as recently as a month ago, seem trite, boring and perfectly anticipated. In other words, the fact that this like every other piece of bad news that should be priced in, is priced in, is priced in. And so on, at least according to the kleptocrats, until we finally learn that nothing is priced in but endless market stupidity.

It has been a busy weekend for Wall Street, which has been doing all it can to spin the S&P downgrade in the best favorable light, although judging by the initial EURUSD and EURJPY reaction, so far not succeeding. Below we present a quick report written by Goldman's Lasse Nielsen on why in Goldman's view the downgrade's "impact is likely to be limited" and also the quick notes from an impromptu call MS organized for institutional clients (which had just two questions in the Q&A section, of which only one was answered - it appears virtually noboby believes that global moral hazard will allow anyone to fail at this point, so why bother even going out of bed).

More reasons why quality blogs should be staple fodder for those who are serious about real information and analysis. Now reporters, editors, bankers, analysts, managers, politicos & regulators frequent blogs. Do you wonder why?

Not sure why they felt the need to wait until 430 since most of it was leaked already. Germany back to stable outlook is good. Austria and France chance EFSF but guess that is what LTRO is for. Italy and Portugal would be in trouble in the real world but so long as ECB views them as money good the countries and banks can keep printing money (sorry use LTRO). Roughly in line with expectations. I think the need to redo the EFSF and ESM concept is an issue that will need to be digested. Is BBB+ for Italy and junk for Portugal enough to cause some collateral provisions to be triggered or force some sellers? I don't think it will in any meaningful way but needs to be watched. I'm surprised Belgium got by but then again it is a rating agency.

All you need to read.

Demand in Asia continues to be strong.  China remains the world’s largest producer of mined gold. Premiums for gold bullion bars in Asia are rising again and are at their highest since October in Hong Kong and Singapore. Premiums are at $2.15/oz in Hong Kong and $1.65/oz in Singapore.  Bullion’s strength was also attributed to the euro’s 16 month low, with Fitch warning the ECB to purchase assets to try to stabilize the euro.   Spot gold was up 0.6 percent at $1,650.34 an ounce at 1009 GMT, having earlier touched a one-month high at $1,652.30. U.S. gold futures for February delivery were up $12.60 an ounce at $1,652.20.  A stronger rupee has boosted the purchasing power of gold bullion consumers in India.  This is in the run up for the Indian Wedding Season which resumes January 15th and continues until April, leaving a  few weeks break for a period that is considered bad luck for nuptials.  Chinese demand will weaken next week as many factories and businesses are set to close for the Lunar New Year’s celebrations.

Heading into the North American open, European equity futures are trading lower, with comments from Fitch’s Riley, who suggested that the ECB must do more to prevent cataclysmic EURO collapse, causing the most recent bout of risk averse sentiment. As a result, major FX pairs are trading lower, with EUR/USD testing 1.2700, while GBP/USD fell through 1.5400 level. Looking elsewhere, apart from being buoyed by Fitch comments, German Bunds benefited from a well received German Bobl auction. Of note, European bond yield spreads are predominantly tighter for the time being, with analysts noting buying of Spanish and Italian paper by domestic and real money account names.  Finally, there is little in terms of macro-economic data and instead the attention will be on the publication of various EU related economic outlooks and the US Treasury is set to sell USD 21bln in 10-y notes.

Over the past hour the EURUSD has tumbled by nearly 100 pips on what some believe is a liquidation program, but is largely driven off continued European data weakness (and with the recession here, we will be getting much more of this in the days to come), as well as continued scramble for safety. Germany auctioned off a 5 year note which received €9billion bids for €4billion target; the bund yield 2.3bps was indicative of a safe haven bid, and explains why bank deposits with the ECB rose to a new record €486billion. The strength is somewhat peculiar as it was earlier reported that the German economy contracted by 0.25 bps in Q4, which is never a good thing, but the assessment is that German weakness will hit others more than Germany itself. Elsewhere, Spanish industrial production declined -7.0% Y/y vs an estimated -5.4%, the worst decline since Oct. 2009. Spain 2-year yield down -34bps, causing spread to bunds to fall 33bps. We doubt that this contraction will last, or the BTP yield flirting with the 7% barrier especially after Rabobank finally noted what we have been saying for a while, namely that LCH will soon have to hike Italian margins again. In Greece, CPI rose 2.2% Y/y vs est. 2.7%; a decline which is seen as a symptom of economic downturn. Confirming the slowdown, we learn that Euroarea Q3 economic growth was reduced to 0.1%, meaning that the recession likely started in Q4. Hungary is again a center of attention, after the forint drops following an EU statement it may suspend Hungary funding (unless the country hands over its legislative apparatus to the EU entirely). Finally, we find out that French Fitch is now channeling France, after saying that the ECB must do more to prevent a cataclysmic Euro collapse. All this leads to a drop in the EUR to under 1.27, a slide in crude to under $102, and a decline in gold to $1634 after nearly hitting $1650 in overnight trading as the world realizes that a return in Chinese inflation (that SHCOMP surge isnt coming on its own) courtesy of a loose PBOC, will mean a prompt retrace of the metal's all time highs.

All you need to read.

Markets are moving positively across the board today following comments from Fitch, dampening speculation that France may be downgraded from its Triple A status. Fitch’s Parker commented that he does not expect to see France downgraded at all throughout 2012. However he added that there are continuing pressures for France from national banks and EFSF liabilities, Parker also reinforced German confidence stating that Germany’s Triple A rating is safe. Markets were also experiencing upwards pressure from strong French manufacturing data performing above expectations and successful Austrian auctions today, tightening the spread between France and Austria on 10-year bunds.

There was not much to note in the overnight session, where aside from artificial market-boosting developments out of China (noted here) which have carried over into a risk-on mood for the US market, however briefly, Europe has been virtually unchanged following two quiet auctions by Austria and the Netherlands. Austria sold a total of €660m of 4% 2016 bonds, and €600m of 3.65% 2022 bond. Avg. yield 2016 bond 2.213% vs 1.96% in the previous auction, in other words the shorter borrowing costs roses, and the longer ones fell. Holland sold a total of €3.105b of 0.75% 2015 bonds; the target was up to €3.5b. with an average yield 0.853%. End result EURUSD is virtually unchanged for the day at 1.2770 as of this writing despite some serious short covering earlier (as expected), while the Italian BTPs remain unch at 7.15%. What is probably more disturbing and is to be expected, is that now virtually all the free cash from the December 21 LTRO (all €210 billion of it) and then some has been allocated to the ECB, where the Deposit Facility usage rose by nearly €20 billion overnight to a new record of €482 billion, €217 billion more than the December 21 notional. The question that should be asked is just what do banks know that lemming long-only investors don't. Hint - ask UniCredit.

• Italy Is Biggest Risk to Euro, Says Fitch (WSJ)
• Greek Bailout in Peril (WSJ)
• Swiss Currency Test Looms for SNB’s Jordan in Race to Replace Hildebrand (Bloomberg)
• Daley to Depart as Obama Shifts Strategy From Compromise to Confrontation (Bloomberg)
• BOE Stimulus Expansion May Not Be Enough to Revive U.K. Recovery, BCC Says (Bloomberg)
• Geithner in China to Discuss Yuan, Iran (Bloomberg)
• China Won’t See Hard Landing in 2012, Former PBOC Adviser Yu Yongding Says (Bloomberg)
• Measures to boost China financial markets (China Daily)
• Obama Panel to Watch Beijing (WSJ)

Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.