Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."
- First Japan now... Australia Ready to Help IMF (WSJ)
- "Not if, but when" for Spanish bailout, experts believe (Reuters)
- Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup (Bloomberg)
- Spain weighs financing options (FT)
- Spanish Banks Gorging on Sovereign Bonds Shifts Risk to Taxpayer (Bloomberg)
- Spain and Italy Bank on Banks (WSJ)
- Chesapeake CEO took out $1.1 billion in unreported loans (Reuters)
- China preparing to roll out OTC equity market – regulator (Reuters)
- Angry North Korea threatens retaliation, nuclear test expected (Reuters)
- North Korea Breaks Off Nuclear Accord as Food Aid Halted (Bloomberg)
First we got Italy telling the world quietly it would not meet its deficit target for 2013, and will in fact experience debt/GDP growth in all outer years, and now we get the Bank of Spain, also taking advantage of today's market rally to dump its own set of bad news, namely that Spanish banks will need to provision another €29.1 billion, and will have higher core capital requirements of €15.6 billion (this is fresh capital). 90 banks have already complied with the capital plan, 45 have yet to find the needed cash. Putting this into perspective, the amount already written-down is €9.2 billion. So, just a little more. And this assumes there are no capital shortfalls associated with any impairment from the YPF -> Repsol follow through, which as Zero Hedge already showed, would leave various Spanish banks exposed. In other news, there is one more hour of trading: we suggest every insolvent entity in the world to quickly take advantage of the interim euphoria, as tomorrow may not be so lucky. Of course, in the worst case, Japan will just bail everybody out.
European markets are seen trading higher as North America comes to market, with some momentum seen following the release of the forecast-beating German ZEW Survey. An economist from the institution commented that downside risks have decreased significantly over the past month, prompting some risk-appetite in Europe during the morning. Participants were also looking towards the Spanish T-Bill auction with particular focus, but it did not confirm the nation’s worst fears as the auction passed with strong bid/covers, selling to the top of the indicative range. Yields, however, did increase over both lines. As such, the Spanish 10-yr yield has fallen below the key 6% mark and remained below that level for most of the session. Peripheral 10-yr spreads against the German Bund are seen tighter throughout the day, amid some market talk early in the session of domestic accounts buying the paper, however this remains unconfirmed.
- This is just hilarious on so many levels: Japan Will Provide $60 Billion to Expand IMF’s Resources (Bloomberg) - just don't look at Fukushima, don't look at the zero nuclear plants working, don't look at the recent trade deficit, and certainly don't look at the Y1 quadrillion in debt...
- US Senate vote blocks ‘Buffett rule’ (FT)
- Reserve Bank of Australia awaiting new data before considering rate move (Herald Sun)
- Merkel Offers Spain No Respite as Debt Cuts Seen As Key (Bloomberg)
- RBI cuts repo rate by 50 bps; sees little room for more (Reuters)
- China allows banks to short sell dollars (Reuters)
- Central bankers snub euro assets (FT)
- Shanghai Econ Weakening’ Mayor Vows to Pop Housing Bubble (Forbes)
- Wen's visit to boost China-Europe ties (China Daily)
- Madrid threatens to intervene in regions (FT)
When it comes to sovereign bond issuance out of Europe the market either continues to be blissfully ignorant or is purposefully stupid: a few hours ago Spain sold €3.18 billion in 12 and 18 month bills, which was more than the expected €3 billion, and which, while coming at higher rates than before, set off a futures buying spark. What however has been pointed out over and over is that issuance of Bills that come due (by definition) within the LTRO's 3 year maturity is meaningless: all it does is concentrate and front-load maturity risk. After all what happens if and when the ECB were to ever not roll the LTRO forward? As such, the only true Spanish bond issuance test this week comes on Thursday when the country issues 10 year bonds. Everything else is merely designed to take advantage of a headline driven market. Specifically, Spain issued €2.09 billion in 364-day bills, which priced at an average yield of 2.623% vs 1.418% at auction on March 20, and at a 2.90 Bid to Cover compared to 2.14 previous. The yield on the second tranche, or €1.086 billion in 546-Day bills soared from 1.711% on March 20 to 3.11% as the Spanish curve again flattens, and despite the rise in Bid to Cover from 3.92 to 3.77, the internals were largely meaningless. Once again, when it comes to true paper demand, the only ones that matter are those that mature outside of the LTRO's 3 years. However today this sleight of hand has worked, and the Spanish 10 year is again under 6.00%, if only for a few hours, sending equity futures higher across the board. Elsewhere, proving once again that no other indicator is better at ramping up stocks, is the coincident indicator known as confidence, German Zew for April came in at 40.7 in April, much higher than expectations of 35, on what however we don't know: dropping markets, soaring inflation, or a return to a declining trendline. Even BofA noted that "There seems to be some disconnect between the latest releases of "hard data" (industrial production, orders received) and the investors expectations." Finally, the Royal Bank of India surprisingly cut its rate from 8.5% to 8.0%, as at least one country can not wait for Bernanke to do his sworn duty of CTRL-P'ing. Oh, and Japan, which has 1 qudrillion Yen in debt, promised to give the IMF $60 billion. So when Japan needs a bail out, we now know that Argentina will step up.
Before there was seamless connectivity, before there was one global electronic currency and instantaneous global debt creation, before there was the internet, supply-chain "logistics", World Bank, IMF, and economic hitmen, there were... ships. Because in order to allow modern Ricardian economics to flourish (we would be curious to read some/any scholarly papers probing the failure of Ricardo's theories in a ZIRP regime, unfortunately there are none, as never before has the cost of money been zero essentially until regime end), and before money could be printed with impunity, backed solely by full lack of faith and eroding credit, nations had to actually trade with each other, and money was simply a means to facilitate said trade, which in turn allowed the formation of wealth and subsequent asymmetric power relationships. Needless to say, any nation that imported itself to death would be promptly wiped out by its heretofore friendly neighbors who would simply invade it when the money to buy stuff and to fund armies ran out: sadly TARGET2 was not available during Victorian times. So where are we going with this? Ben Schmidt, a Princeton graduate student, using ship logs has conceived of this tremendous time lapse of every single major known ship route taken by Dutch, Spanish and English vessels during the "age of transition", the period between 1750 and 1850, which set the stage for today's "global economy." The result is a fantastic insight into the early stages of globalization.
The time has come to raise the 'noise' level for global markets to Defcon 3 as Clive Hale, of View from the Bridge, discusses his four largest stressors currently. Instead of going 'hmmm' as Grant Williams regularly does, Hale is screaming 'aaargh' as he sees Japanese radioactivity uncertainty, market manipulation, the main-stream media's anaesthetising propaganda, and finally the euro (that last lingering but fatally flawed bastion of european union) plethora problems all increasingly weighing on global macro concerns.
The February TIC data is out and here are the notable items. Total long-term purchases across all securities classes came in at an underwhelming $10.1 billion on expectations of a $42.5 billion increase, although when combined with Short-Term transactions, the total rose to $107.7 billion, greater than expected. However, since this series includes extensive irrelevant noise, tracking just LT data on a sequential basis, shows that in February foreign purchases of the 4 key security classes (TSYs, Stocks, Agencies and Corporate bonds) came in at a relatively weak $24.8 billion, down from $95.7 billion in February, of which $15.4 billion was US Treasurys. What is notable is that equities accounted for $7.6 billion of this total, the largest foreign purchase of US equities since May of 2011. Well, if US consumers will not buy stocks at least foreigners stepped up, and it also explains where at least some demand came from. It also means that the 6 month moving average of foreign stock dumping has finally reversed from all time lows. However, what chart 1 vividly shows, is that over the past several months foreign flows into US securities, previously stable regardless of global events, has also become Risk On - Risk Off, with ever increasing a monthly amplitude. In other words everyone now has a 30 day attention span tops. Finally, now that the UK has been "disambiguated" from Chinese data, and thus saw its holdings drop to a realistic $103 and about to slide into double digit territory for the first time in years, Chinese holdings in turn tose to $1178.9, the highest since the big selloff in December, while Japan continues to find better bargains in US paper, with its holdings soaring to a record $1.095.9 billion.
All you need to read and some more.
Eurozone periphery concerns continue to loom as Italian and Spanish spreads against the German 10yr remain elevated, but have come off their widest levels in recent trade amid some unconfirmed market talk of real money accounts buying Spanish paper. Despite the concerns in Europe, the major European bourses are trading higher with individual stocks news from over the weekend propping up indices with reports of intra-European M&A and a string of good news for mining stocks pushing up markets today. Some stock stories of note include the agreement of an offer between France’s GDF Suez and UK’s International Power for GBP 4.18 per share, and a speculated merger of BHP Billiton’s and Rio Tinto’s diamond units by private equity firm KKR. The financials sector, however, is showing the strain, as the 3m EUR basis swap moves sharply lower to -53.87 from approximately -50 on Friday, with particular underperformance noted in the French banking sector. The session so far has been very data-light, with Eurozone trade balance coming in slightly lower than expectations but markets remained unreactive to the release.
- Downgrades Loom for Banks (WSJ)
- China Loosens Grip on Yuan (WSJ)
- Sarkozy Embraces Growth Role for ECB (WSJ)
- A Top Euro Banker Calls for Boost to IMF (WSJ)
- Wolfgang Münchau - Spain has accepted mission impossible (FT)
- Hong Kong Takeovers Loom Large With Banks Lending Yuan: Real M&A (Bloomberg)
- Banks urge Fed retreat on credit exposure (FT)
- Drought in U.K. Adds to Inflation Fears (WSJ)
- France faces revival of radical left (FT)
- Euro Area Seeks Bigger IMF War Chest as Spanish Concerns Mount (Bloomberg)
What a difference a month makes. About 4 weeks ago the European crisis was "over" - French President Sarkozy exclaimed that: “Today, the problem is solved!” Christine Lagarde, former French finance minister, and current IMF head following the framing of DSK, added that “Economic spring is in the air!”... Fast forward to today when following the inevitable end of the transitory favorable effects of the LTRO (remember: flow not stock, a/k/a the shark can not stop moving forward), the collapse of the Spanish stock market, the now daily halting of Italian financial stocks, the inevitable announcement that shorting of financials in Europe is again forbidden, and finally the record spike in Spanish CDS, Europe is broken all over again. Which brings us again the Sarkozy and Lagarde. The Frenchman who is about to lose the presidential race to socialist competitor Hollande (an event which will have major ramifications for Europe as UBS' George Magnus patiently explained two months ago), no longer sees anything as solved, and instead is openly begging for the ECB to inject more, more, more money into the system to pretend that "problems are solved" for a few more months. Incidentally, so is Lagarde, for whom in an odd change of seasons, economic spring is about to be followed by a depressionary winter. The problem is both will end up empty handed, as the well may just have run dry.
Better stock up on the Depends now.