One of Portugal's biggest companies - Espirito Santo International SA - is in a "serious financial condition" according to a central bank driven external audit by KPMG identified "irregularities in its accounts." Rather stunningly, the details are nothing short of ponzi-like as WSJ reported in December that Espírito Santo International was highly leveraged and had been relying heavily on selling debt to an investment fund held by the financial group (i.e. funding debt issuance in one entity with another) and overvaluing hard-to-value assets (ring any bells?). However, the 'ponzi-like' maneuver, as WSJ concludes shows that while legal and in line with regulatory rules, highlights how corporations, including banks, used financial gymnastics to survive the region's financial crisis. Given the massive domestic bank demand for sovereign paper, one has to wonder if the sudden 60bps spike in Portuguese bond risk is a signal that all is not well in the European periphery.
The last few days have been the worst for peripheral European bonds in well over a year. Spain, Italy, Greece, and Portugal have all seen yields jump and credit spreads soar in the last week as 'faith' in Draghi appears to be faltering. The reason this is concerning is, as we explained here, in the new normal, negative feedback loops have gone and instead we have hyperbolic loops which, when broken, end much more badly than a self-correcting un-rigged market would.
The ECB, the Swiss National Bank (SNB) and the Riksbank of Sweden announced a new gold agreement this morning. They announced they have no plans to sell significant quantities of gold and reaffirmed the importance of gold bullion as a monetary reserve asset.
They say that gold is a geopolitical metal. Gold is real money with no counterparty risk and, furthermore, an excellent wealth preserver in time and space. Like fiat currencies (dollar, euro, yen, Yuan etc.), gold’s price is also influenced by political events, especially those having an international impact. Alan Greenspan, ex-chairman of the Federal Reserve, said that gold is money “in extremis”. This is why gold is part of most central banks’ reserves. It is the only reserve that is not debt and that cannot be devalued by inflation, contrary to fiat currencies.
Dispassionate discussion of the investment climate.
Once upon a time Wall Street Journal reporters were economically literate. Now, apparently, when they muster-in for the job they get a Keynesian chip implant while signing their HR forms. Otherwise, how can you explain the bullshit penned this morning by Brian Blackstone on the EU’s “disappointing” Q1 GDP report. He didn’t say Keynesian economists say you need more inflation to get jobs and growth. He just declared it!
The one-way street in European peripheral bond yields/spreads... is over. Today saw Italian, Spanish, and Portuguese bond spreads smashed higher by the most in over 15 months. European stock markets all tumbled too with the FTSE-100 down over 3.5% and Portugal down 2.8%. Greece's retroactive tax idea (quickly denied) drove Greek stocks into the red for the year and slammed the new GGB issue lower. Europe's credit markets cratered wider and Europe's VIX burst back over 17.
- EU Court: Google Must Remove Certain Links on Request (WSJ), people have right to be forgotten on Internet (Reuters)
- Harsh weather: German Investor Confidence Drops for Fifth Straight Month (BBG)
- More harsh weather: China Slowdown Deepens (BBG)
- Harsh weather as far as the eye can see: China’s New Credit Declines (BBG)
- "Alien" artist, surrealist H.R. Giger dies aged 74 (Reuters)
- Pfizer urges AstraZeneca to talk as UK lawmakers slam offer (Reuters)
- Property sector slowdown adds to China fears (FT)
- Russia says EU sanctions will hurt Ukraine peace efforts (Reuters)
- U.S. Considers Relaxing Crude Oil Export Restrictions (WSJ)
Dispassionate discussion of the near-term forces at work in the foreign exchange market.
- Fed’s Fisher Says Economy Strengthening as Payrolls Rise (BBG)
- Russia Knows Europe Sanctions Ineffective With Tax Havens (BBG)
- EU Cuts Euro-Area Growth Outlook as Inflation Seen Slower (BBG)
- U.S. Firms With Irish Addresses Get Tax Breaks Derided as ‘Blarney’ (BBG)
- Portugal exits bailout without safety net of credit line (Euronews)
- Puzzled Malaysian Air Searchers Ponder What to Try Now (BBG)
- Barclays, Credit Suisse Battle Banker Exodus, Legal Woes (BBG)
- Germany says euro level not an issue for politicians (Reuters)
- Alibaba-Sized Hole Blown in Nasdaq 100 Amid New Stock (BBG)
- Obamacare to save large corporations hundreds of billions (The Hill)
After months of ignoring events in Ukraine, HFT algos suddenly, if one for the time being, have re-discovered just where the former USSR country is on the map, and together with the latest economic disappointment out of China in the form of its official manufacturing PMI which missed expectations for the sixth month in a row, futures are oddly non-green at this moment now that talk of a Ukraine civil war is the new black (after two months of ignoring the elephant in the room... or rather bear in the room). Lighter volumes, courtesy of holidays in Japan and UK, have not helped the market breadth and stocks in Europe are broadly lower with the DAX (-1.33%) and CAC (-1.19%) weighed upon by risk off sentiment and market positioning for the eagerly anticipated ECB policy meeting especially after the EU cuts its Euro-Area 2014 inflation forecast from 1.0% to 0.8%. But what's bad for stocks continues to be good for equities, and moments ago the 10Y dropped to a paltry 2.57%, the lowest since February... and continuing to maul treasury shorts left and right.
As we noted on the last day of March, April was supposed to be the best month for stocks, with an average return since 1950 of over 2%. It wasn't.
It has been exactly six days in which algos, reversing the most recent drop in the S&P with buying sparked by a casual Nikkei leak that the BOJ may, wink wink, boost its QE (subsequently denied until such time as that rumor has to be used again), have pushed the market higher in the longest buying streak since September, ignoring virtually every adverse macroeconomic news, and certainly ignoring an earnings season that is set to be the worst since 2012. Today, the buying streak may finally end on rumors even the vacuum tubes are scratching their glassy heads if more buying on bad or no news makes any sense now that even the likes of David Einhorn is openly saying the second tech bubble has arrived. Keep an eye on the USDJPY which has had seen some rather acute "trapdoor" action in early trading and is approaching 102 after breaching its 55-DMA technical support of 102.38. If the support is broken here we go again on the downside. Keep an eye on biotechs and GILD in particular - if the early strength reverts into more selling again (after the two best days for the biotech space in 30 months), the most recent euphoria phase is now over.
Ask any European why their standard of living is so atrocious (after years of freeflowing debt-funded largesse) and the answer is well-known: austerity.Also ask any European if austerity means public debt should go up or down and the answer is also as clear: down. Which is why most Europeans will likely be confused to very confused when presented with the latest Eurostat data according to which not only did Eurozone debt rose remain just shy of all time record highs and certainly increasing from a year ago, but those PIIGS nations which are the first to blame austerity for everything, such as Greece (net of the debt wiped out as part of its 2012 bankruptcy of course), Portugal, Spain and Italy, all saw their public debt hit all time highs.