Portugal

Guest Post: The European Union Is Destroying European Unity

So we know that the pro-bailout parties in Greece have failed to form a coalition, and that this will either mean an anti-bailout anti-austerity government, or new elections, and that this will probably mean that the Greek default is about to become extremely messy (because let’s face it the chances of the Greek people electing a pro-austerity, pro-bailout government is about as likely as Hillary Clinton quitting her job at the State Department and seeking a job shaking her booty at Spearmint Rhino). It was said that the E.U.’s existence was justified in the name of preventing the return of nationalism and fascism to European politics. Well, as a result of the austerity terms imposed upon Greece by their European cousins in Brussels and Frankfurt, Greeks just put a fully-blown fascist party into Parliament.

Dan Loeb Explains His (Brief) Infatuation With Portuguese Bonds

Last week, looking at Third Point's best performing positions we noticed something odd: a big win in Portuguese sovereign bonds in the month of April. We further suggested: "We suspect the plan went something like this: Loeb had one of his hedge-fund-huddles; the cartel all bought into Portuguese bonds (or more likely the basis trade - lower risk, higher leverage if a 'guaranteed winner'); bonds soared and the basis was crushed; now that same cartel - facing pressure on its AAPL position (noted as one of Loeb's largest positions at the end of April) - has to liquidate (reduce leverage thanks to AAPL's collateral-value dropping) and is forced to unwind the Portuguese positions. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?" Since the end of April, both AAPL and Portuguese bonds have tumbled, and Portugal CDS is +45 bps today alone, proving that circumstantially we have been quite correct. Today, we have the full Long Portugal thesis as explained by Loeb (it was a simple Portuguese bond long, which explains the odd rip-fest seen in the cash product in April). There is nothing too surprising in the thesis, with the pros and cons of the trade neatly laid out, however the core premise is that the Troika will simply not allow Portugal to fail, and that downside on the bonds is limited... A thesis we have heard repeatedly before, most recently last week by Greylock and various other hedge funds, which said a long-Greek bond was the "trade of the year", and a "no brainer." Sure, that works, until it doesn't: such as after this past weekend, in which Greece left the world stunned with the aftermath of what happens when the people's voice is for once heard over that of the kleptocrats, and the entire house of cards is poised to collapse.

European Credit Risk Surges Near 4-Month Highs

Just as we warned last night, the lack of an active European credit market to look over the shoulders of their more exuberant equity colleagues quickly came to bear today as London traders turned up for work in no mood for bullish hope. Investment grade credit spreads in Europe jumped their most in a month and pushed close to four-month wides as the entire credit complex sold off aggressively. It seemed Main (the European IG credit index) was instrument of choice for hedgers (cheaper and more liquid with a smattering of financials) as opposed to XOVER (the European HY credit index) but we suspect the latter will rapidly catch up. Stocks fell further with Greece hitting multi-decade lows but Italy and France underperforming (as reality bit following yesterday's pump). Euro Stoxx 50 was down around 2% (now -3.5% YTD) but Spain remains the YTD biggest loser -18.2% (as opposed to Germany's DAX +9.25%). Sovereign credit was also not happy (just like yesterday) but as US opened, Italy and Spain saw notable derisking pushing their 5Y spreads +7bps and +15bps respectively on the week now. Portugal is +24bps on the week so far as the basis trade unwind begins. Europe's VIX surged above 31% for the first time since the beginning of the year and while Treasuries were bid (with 30Y touching 3%), 10Y Bunds outperformed on the safety rotation now 28.5bps inside of the 10Y TSY. EURUSD slid back under 1.30 shortly after the US opened but some miraculous gappiness (and comments from Greece) dragged its lumbering body back over the 1.30 Maginot line for now.

Fitch Sets The Stage: "Greece Leaving The Euro Would Be Bearable"

If French Fitch, which will first be Egan-Jonesed than downgrade France from its unmovable AAA rating is starting to say that the unthinkable, namely the departure of Greece from the Eurozone, would be "bearable", then things are about to get once again exciting, as this is merely setting the stage for the next leg down. Among the other google translated gibberish said by Fitch chief Taylor, here is the argument: Germany would merely soak up the damage caused by a Greek departure: "Greece's exit does not mean the end of the euro. Above all, Germany has a fundamental interest in preserving the common currency remains. Would the D-mark re-introduced, they would add value compared to other currencies strong. The export industry, that is: would the engine of the German economy, damaged. This will not allow Germany - even if one or more countries leave the single currency area." How about Italy's exit? Or Portugal's? Or Spain's? At what point does it become unbearable for German taxpayers to burn their wealth to preserve a system that virtually nobody but a few select career politicians demand?

David Rosenberg's Take On Europe

"In less than two years, we are now up to a total of seven European leaders or ruling parties that have been forced out of office, courtesy of the spreading government debt crisis — tack on France now to Ireland, Portugal, Greece, Italy, Spain and the Netherlands. Even Germany's coalition is looking shaky in the aftermath of the faltering state election results for the CDU's (Christian Democratic Union) Free Democrat coalition partner. This is quite a potent brew — financial insolvency, economic fragility and political instability."

Greek Bonds Monkeyhammered As Hedge Funds Slash Hands Catching Falling Knives

About two years ago the Norwegian sovereign wealth fund did something truly remarkable: it invested for infinity: "Norway, which has amassed the world’s second-biggest sovereign wealth fund, says Greece won’t default on its debts. The Nordic nation’s $450 billion Government Pension Fund Global has stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy, which contributed to a 3.4 percent loss on European fixed income in the second quarter, compared with gains on bonds in Asia and the Americas. Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said." Well, we all know how the experiment ended: "Norway Sovereign Wealth Fund Purges All Insolvent Eurozone Debt Holdings." So much for infinity. But that has not stopped others to boldly catch falling knives where so many other have tried to catch falling knives before, and failed. Enter Greylock Capital and various other hedge funds who are positive they have rediscovered the wheel.

RobertBrusca's picture

In France, Hollande has the rep of having no backbone like a jelly fish (or flan). We will see what he really stands for and what he can achieve. Moreover when he tries to govern we’ll see if this election was more about picking him or dumping Sarkozy. I suspect it was more the latter... Greece is just a mess and I don’t know what model you apply to understand it. It may take a number of election iterations before the ‘people’ figure out they have a bitter pill to swallow and pick someone to figure out what it will look like.

Complete European Event Calendar: May, June Edition

Two big events down, many, many others more left to go. Below is a full European event calendar for the rest of May and June. Just like in 2011, Europe got unhinged around this time and things peaked by November when only a coordinated global intervention saved the world courtesy of $1.3 trillion from the ECB, expanded FX swaps from the Fed and a PBOC rate cut. Only unlike in 2011, with Silvio and Sarko both now gone, the roster of political scapegoats is getting very, very thin. Whose head wil the vigilantes demand next? We will find out over the summer and fall, which promise to be even more exciting than last year.

Sarkophagus: Hollande Wins French Presidency

And so one more tumbles to the popular wave of anger and discontent.

Francois Hollande wins 51.9% of the vote according to exit polls

The 57-year-old Hollande got about 52 percent against about 48 percent for Sarkozy, according to estimates by pollsters CSA and Harris Interactive

Nicholas Sarzkoy concedes defeat in presidential election to Francois Hollande

A Preview Of Monday Morning In Europe

While most will be following what appears to be an almost certain Hollande victory in the French presidential runoff elections tomorrow (InTrade odds around 10%), it is very likely that the Greek election will have a greater acute impact on the political and financial facade of Europe, especially in the short term. As we noted in what we dubbed our first (of many) Greek election previews, the biggest problem facing the new political regime will be its near certain inability to form a coalition government (with just 32.6% of the vote going to PASOK and New Democracy)  that does not undo most of what has been achieved through popular sweat and tears over the past 2 years to assist Europe's bankers in transferring what little Greek wealth remains to fund the insolvent European bank balance sheets. This in turn could begin the latest cascading contagion waterfall, which coupled with an anti-austerity drive emanating from a newly socialist France will threaten to topple Angela Merkel's carefully constructed European hegemony.

Dan Loeb And The Portugal Connection

UPDATE: We can't help but see the symmetry between the Norwegain Sovereign Weath Fund selling all its Portuguese debt and Dan Loeb's biggest winner in Portuguese bonds as we suspect he was wrappping these purchases in the basis trade.

Portuguese bonds imploded this week with 10Y spreads rising over 70bps, which given its recent performance, got us wondering. For the last few weeks we have commented on the improvements in the Portuguese bond market's yields and spreads - specifically how this seemed much more about the CDS-Bond basis (on cheap carry and renewed confidence in CDS trigger events via ISDA) than simple risk appetite. It was especially surprising given the rest of Europe's sovereign bonds were deteriorating gradually in a somewhat range-bound market. Today we get some insight - courtesy of Dan Loeb's Third Point hedge fund's month-end performance details. The Dapper-Don notes Portuguese Sovereign Bonds as among its top-winners for the month of April - which overall was a poor month for the fund. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?

A Tide In The Affairs Of Man

There are two forthcoming dates which will set the direction and strength of the tide and certainly have a marked affect upon the ventures. They are this Sunday, May 6, when both the French and Greek populace will decide on who is running their government and then on May 31 when the Irish have their refrendum. At the least one must be thankful that there are Democracies that are working and that no group of Generals or some thug is making the decisions. Forthcoming we visualize many Socialist demands such as Eurobonds being made and Germany standing alone in the corner and refusing to fund which will make for all kinds of volatile markets. The bigger crisis though, we fear, will be when Germany says no to funding some grand Socialist idea. The problem is the size of the economy. The German economy is 25% of the American economy and it is going to get down to a matter of capital and what Germany can afford without being downgraded and a European Union without a AAA rated Germany is a very different affair both for the EU’s debt structure and for the Euro. In June the Fed’s Operation Twist comes to an end. There is no new stimulus plan on the table in either America or in Europe now. This means that the last four years of monetary easing and living off of that which has been printed is coming to an end. The consequences of this, historically, have been declines in the equity markets.

Eurosis Is Back With A Bang: PMIs Collapse, Unemployment Surges To Record

Yesterday we poked fun of Goldman for suggesting that the reason for the late-day sell off was "Prudent profit-taking as folks remember Europe isn’t closed tomorrow." Turns out Goldman could not have been more right: around 4 am Eastern this morning Europe reported a series of economic updates which showed that the European economy continues to be nothing but a slow motion trainwreck and is getting far worse. Starting with final April Eurozone Manufacturing PMI which printed at 45.9 vs an initial print of 46.0, a 9 month low with a core breakdown is as follows:  Italian manufacturing PMI 43.8 at a 6 month low, est 47.1 (prior 47.9), German manufacturing PMI at a 33 month low 46.2 vs initial 46.3 (prior 48.4), France manufacturing PMI 46.9 vs initial 47.3 (prior 46.7), which also followed Italy by recording sharpest drop in manufacturing new orders in 3 yrs in April, and so on as can be seen in the chart below. As every sellsider who has opined so far this morning, these numbers are all "hugely disappointing."