At 2.43%, 10Y Treasury yields are back at June 2013 levels with the entire complex pressing low-yields of the day (down 5-6bps on the week). The USD is strengthening (now up 0.45% on the week) to new 11-month highs. Equity markets are reeling in US and Europe. All major US indices are now down almost 1% from last week's payrolls data, and the Dow and Russell 2000 remain notably red year-to-date. In Europe, it's getting ugly fast, the broad European stock market is now down for 2014 with the periphery suffering the most. For 2014, Portugal is worst but Germany's DAX is -3.5% YTD. European bonds are also hurting with Italy, Portugal, and Spain spreads up 12-22bps, with German 2Y yields at 1bps - their lowest in 13 months. Gold is up on the week, jumping above $1300 this morning as copper slides.
Greek 10Y yields, up 6 days in a row, have surged in the last few days to 2-month highs (bond price lows). The significant shift in sentiment appears related to two main factors. First, The Independent reports that Europe is considering pulling Troika (its economic oversight committee) - which has been likened to German Nazi occupation - out of Greece, forcing local politicians to come up with their own reforms by the start of 2015 (which clearly the market is not believing). Perhaps even more concerning is Goldman Sachs shift to neutral on European peripheral bonds, warning that "at current spread levels we think there is not enough of a buffer for investors to take credit risk in intermediate and long-dated peripheral sovereign bonds." Time for some more 'whatever it takes' we think.
- Second Ebola patient to arrive in U.S. on Tuesday (Reuters)
- Ebola Drug Made From Tobacco Plant Saves U.S. Aid Workers (BBG)
- Egypt plans to dig new Suez Canal costing $4 billion (Reuters)
- Apple Buybacks Pay Most Ever as CEOs Spend $211 Billion (BBG)
- DeMark Says Sell China Stocks Now After World’s Best Gain (BBG)
- Investors Stung by Losses After Exiting Struggling Property Fund in China (WSJ)
- B.A. in BTFD: MIT May Consider Granting Degrees in Less Than Four Years (BBG)
- Too late, money's already been spent: GPIF Needs Overhaul Before Asset Changes, Shiozaki Says (BBG)
- Oh look, another "truce": Israel withdraws troops, 72-hour Gaza truce begins (Reuters)
Another day, another case of unprecedented muppet brutality, or, as Cramer would say: "Bear Espirito Stearns is fine"...
Fearful of any impact to the Portuguese/European dream, EU commission leaders folded and bailed out Banco Espirito Santo. Bond and CDS traders are scrambling this morning to come to grips with the consequences of BES bail-out/bail-in. The $6.6 billion bailout's burden-sharing has wiped out shareholders and crushed subordinated debt holders (traded down to 16c on the dollar this morning) where "the likelihood of recovery for junior bondholders is minimal,” according to one trader; but leaves senior bond holders (+10pts to 100) and depositors unaffected. However, it is those 'smart' investors who bought insurance in the CDS market that are struggling this morning as the plan to transfer BES assets to a new company, Novo Banco, may constitute a so-called 'succession event' whereby all the contracts associated with CDS move to the new company (and this do not trigger the CDS to pay). CDS spreads ripped 350bps tighter.
Following a ghastly week for stocks, the momentum algos were desperate for something, anything to ignite some upward momentum and stop the collapse which last week pushed the DJIA into the red for the year: they got it overnight with the previously reported bailout of Portugal's Banco Espirito Santo, where the foreplay finally ended and after the Portuguese Central Bank finally realized that the bank is insolvent and that no more private investors will "recapitalize" it further, finally bailed it out, sticking the stock and the subs into a bad bank runoff entity, while preserving the senior bonds. So much for Europe's much vaunted bail in regime and spreading of pain across asset classes. At least the depositors did not get Cyprused, for now.
Dispassionate, non-conspiratorial rant , fact-based high level discussion of the sigificant drivers of the week ahead.
The summer months frequently see seasonal weakness as has been the case in recent years and since gold became a traded market in 1971. Gold and silver often see periods of weakness in the summer doldrum months of May, June and July.
- Portugal may use the Resolution Fund to recapitalize Banco Espirito Santo, Diario Economico reports, citing unidentified people linked to the process.
- Resolution Fund may inject more than €3 billion
- A “bad bank” may be created for the toxic assets of the credit portfolio
- Solution aims to rescue Banco Espirito Santo without spending taxpayers’ money, and is being prepared by the government and the Bank of Portugal
- From Aug. 4, Banco Espirito Santo will leave the stock market and will be 100% owned by the Resolution Fund, an entity created in 2012 and financed by Portuguese banks and by revenue from the special contribution that the banking sector pays the Portuguese state
Alarm bells in the European banking system have been ringing for quite a while but nobody seems to be listening. The roaring capital markets are just too loud. But we have been keeping track of a few things.
But but but... the crisis is over and Europe is recovering? European stocks dropped 3.2% in the last 2 days - the most in 7 months - taking the broad index into the red for 2014. Portugal (remember how BES was contained) collapsed 10.3% this week (down 26% from its highs in April) to one-year lows. Europe's VIX spiked over 20 today - its highest in over 4 months.
Up until the last day of July, everything was going great: stocks were solidly up for the month, the DJIA was on the verge of 17,000, and the wealth effect was flourishing, if not the economy. Then yesterday happened, and everything changed: not only did the S&P turn red for the month, but the DJIA slid to red for 2014. So what is the best performing asset class in July? With the PBOC now openly unleashing QE in its economy, no surprise that it was the Shanghai Composite, which returned over 8%, if virtually nothing since 2009. However, don't expect this to last: for China real estate is orders of magnitude more important than the stock market to boost the wealth effect. As for the best returning assets class in 2014 YTD: don't laugh - it's still Spain and Italy. Expect the day of reckoning for Europe's periphery to be fast, unexpected and very brutal.
- As we predicted yesterday, the "big" Gaza ceasefire lasted all of a few hours (Reuters)
- To Lift Sales, G.M. Turns to Discounts (NYT)
- Espirito Santo Family’s Swift Fall From Grace Jolts Portugal (BBG)
- Argentine Debt Feud Finds Much Fault, Few Fixes (WSJ)
- Fiat Says Ciao to Italy as Merger With Chrysler Ends Era (BBG)
- Euro zone factory growth eases in July as inflation fades away (Reuters)
- CIA concedes it spied on U.S. Senate investigators, apologizes (Reuters)
- Ukraine Reports Losses After Pro-Russian Ambush Near Malaysia Airlines Flight 17 Crash Area (WSJ)
- U.S. says India refusal on WTO deal a wrong signal (Reuters)
- Why Putin Has 2006 Flash Before His Eyes After Sanctions (BBG)
The stealth phenomenon that is silver stackers or long term store of value buyers of silver coins and bars continues and is seen in the record levels of demand for silver eagles from the U.S. Mint. Silver stackers are those who are more informed about the fundamentals of the silver market and are concerned regarding systemic and monetary risks ...
It has been a deja vu session of that day nearly a month ago when the Banco Espirito Santo (BES) problems were first revealed, sending European stocks and US futures, however briefly, plunging. Since then things have only gotten worse for the insolvent Portuguese megabank, and overnight BES, all three of its holdco now bankrupt, reported an epic loss despite which it will not get a bailout but instead must raise capital on its own. The result has been a record drop in both the bonds (down some 20 points earlier) and the stock (despite a shorting ban instituted last night), which crashed as much as 40% before stabilizing at new all time lows around €0.25, in the process wiping out recent investments by such "smart money" as Baupost, Goldman and DE Shaw. The result is a European financial sector that is struggling in the red, while adding to its pain are some large cap names such as Adidas which also tumbled after issuing a profit warning relating to "developments" in Russia. Then there was European inflation which printed at 0.4%, below the expected 0.5%, and the lowest in pretty much ever, and certainly since the ECB commenced its latest fight with "deflation", which so far is not going well. The European cherry on top was Greece, whose dead cat bounce is now over, after May retail sales crashed 8.5%, after rising 3.8% in April.