Presented with little comment aside to remind the gung-ho stock-buyers who have been convinced (because the mainstream media has moved on from Banco Espirito Santo contagion concerns) that Portugal is anything but fixed. No government bailout coming means bail-ins and bail-ins means confiscation... Banco Espirito Santo bonds are collapsing today... down almost 8 points as they know this doesn't end well.
- Secret Path Revealed for Chinese Billions Overseas (BBG)
- Traders Flood U.S. With $3.4 Trillion of Bond-Auction Demand (BBG)
- Just in time to cover bad earnings in a massive $3.8 billion "one-time charge": Citi says to pay $7 billion to settle securities investigation (Reuters)
- Troubled Epirito Santo family loosens grip on Portugal's BES (Reuters)
- BES puts in place new executives after central bank push (Reuters)
- Bank of China-CCTV drama may reveal power struggle in Beijing (SCMP)
- Portugal speeds up Banco Espírito Santo management changes (FT)
- Dark pool probe builds pressure on Barclays boss (Reuters)
- Russia Vows to Respond After Shelling From Ukraine (BBG)
- Ukraine forces end rebel airport blockade (Reuters)
- Obama Contends With Arc of Instability Unseen Since '70s (WSJ)
Another round of overnight risk on exuberance helped Europe forget all about last week's Banco Espirito Santo worries, which earlier today announced a new CEO and executive team, concurrently with the announcement by the Espirito Santo family of a sale of 4.99% of the company to an unknown party, withe the proceeds used to repay a margin loan, issued during the bank's capital increase in May. This initially sent the stock of BES surging only to see it tumble promptly thereafter even despite the continuation of a short selling bank in BES shares this morning. Far more impotantly to macro risk, it was that 2013 staple, the European open surge in the USDJPY that has reset risk levels higher, while pushing gold lower by over 1% following the usual dump through the entire bid stack in overnight low volume trading. Clearly nothing has been fixed in Portugal, although at least for now, the investing community appears to have convinced itself that the slow motion wreck of Portugal's largest bank even after on Sunday, Portugal’s prime minister said taxpayers would not be called on to bail out failing banks, making clear there would be no state support for BES.
A look at key events and data in the week ahead.
“The fundamental problems are not solved and everybody knows it,” Maximilian Zimmerer, CEO of Allianz, said at Bloomberg LP’s London office. The “euro crisis is not over,” he said. “There is only one country where the debt level last year was lower than 2012 and this is a signal the debt crisis can’t be over, only a recognition of the debt crisis has changed,” Zimmerer said on July 9. “If the debt levels are not going down in the end we will have a problem, that is for sure.”
It’s time to think like a contrarian. Why? Because capital markets seem as bulletproof as one of those up-armored military personnel carriers you see in war zones. So what could really rattle stock, bond and commodity markets over the next 3-6 months? The go-to answer, steeped in history, is geopolitical crisis, where the logical hedges are precious metals, volatility plays, and possibly crude oil. Look deeper, however, and other answers emerge.
There has been an informational overload this morning, when as we reported previously, one after another bank scrambled to issue reports, some full of typos and clearly unvetted by compliance, calming the market and desperate to see all important confidence return to the peripheral market. Most of these notes have been nothing short of outright propaganda and disinformation, or a confirmation the analysts had zero idea what they were doing (case in point Goldman which had the stock at a Buy rating until this morning, even as the stock was virtually wiped out in recent weeks). Some, actually, have done the work. Below we provide some of the less then insightful reports, as conveniently summarized by Bloomberg, and we conclude with perhaps the best piece so far - one written by Bank of America's Richard Thomas who alone among the sell-side penguin circus, was as close as he could be, to predicting this week's outcome.
- Carl Icahn says 'time to be cautious' on U.S. stocks (Reuters)
- Banco Espirito Santo Lifts Lid on Exposure to Group (BBG)
- Slowing Customer Traffic Worries U.S. Retailers (WSJ)
- Insurgents enter military base northeast of Baghdad (Reuters)
- Obama tells Israel U.S. ready to help end hostilities (Reuters)
- Japan economics minister warns of premature QE exit, sees room for more easing (Reuters)
- Greek Banks See Quadrupling of Housing Loans by Next Year (BBG) ... to fund buybacks like in the US?
- Piggy Banks Being Raided Signal Swedish Housing Dilemma (BBG)
- London Seeks New Spenders as Russians Skip $719 Champagne (BBG)
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
European markets were ugly going in: Portugal's largest bank on the ropes and macro data weak. US earnings calls confirmed no Q2 bounce back and macro data piled on (along with various GDP downgrades). Equity markets opened gap down with a big flush of "most shorted" longs and Russell 2000 dipped into the red for 2014. Then the rally-monkey turned up, slamming VIX and lifting USDJPY to squeeze shorts and drag stocks "off the lows." Once shorts reache dunch, stocks limped lower "off the highs." Away from the v-shaped recovery in stocks, Gold broke above $1340 (4-month highs) and silver gained. Oil turned around early losses closing up for 1st time in 9 sessions ($103). The USD rose (on EUR weakness) but remains lower on the week. VIX ened 0.8 vols higher at 12.5 (well off its intraday highs though). The day ended with Carl Icahn warning that "it's time be cautious about US markets." VIX pushed higher into the close as investors remember Europe opens in 8 hours.
Earlier this summer, IMF bureaucrats went to Sofia, Bulgaria to study the country’s economic progress; and roughly a month ago, they released an official report which stated, among other things, that Bulgarian banks are “stable and liquid.” Then 2 weeks later, there was a run on two of the nation’s largest banks (as we discussed at length here). But it's not just the IMF...the EU Commission soothingly announced that "the Bulgarian banking system is well-capitalized and has high levels of liquidity compared to its peers in other member states." The lesson here is clear: The people in charge of regulating the system and making these proclamations about bank safety are totally clueless. Clearly, Bulgaria (and Portugal) shows that the entire system can really be a bunch of smoke and mirrors.
- PORTUGAL'S BANKS MORE CAPITALIZED, MORE TRANSPARENT NOW: COSTA
- PORTUGAL TO OUTPERFORM ITALIAN BONDS ON MACRO OUTLOOK, MS SAYS
- BARROSO SAYS FOREIGN INVESTOR CONFIDENCE IN PORTUGAL INCREASING
- PORTUGAL OUTLOOK REVISED TO STABLE AT S&P
Broad European stocks are down over 4% in the last few days but that hides the carnage among the most exuberantly excited names on the way up. Portugal, Spain, and Italy have been battered in the last few days (despite everyone explaining how Portugal is so small, contained etc..). Portuguese bond spreads spiked 25bps today as the central-bank-inspired coupling of sovereign-health and banking-system stability drag each other down (Spain and Italy jumped 9bps higher in risk). European bank stocks have cratered and are now negative year-to-date.
The PSI20 - Portugal's "Dow" - is down 22% from its exuberant early-year highs (when Europe was fixed). Who could have guessed that under the surface, nothing was fixed? We are sure the next few days will be full of reassurances from asset-gatherers and TV anchors proclaiming that "Portugal is a small country", "BES is contained", "Draghi's put will protect from any contagion." Now where have we heard that before.. and remember as Juncker told us, "when it gets serious, you have to lie."
But... but... the VIX said everything is ok, and European rates were the lowest they have been in centuries... How can something possibly go wrong?
It just did.