Portugal

While a crippled Europe continues to gladly enjoy being in the shadow of Fed-driven revolutions and natural disasters, its time in the sun is coming to an end. Soon everyone will realize that just today, 2 Year Greek bonds traded at all time wides of over 17%. That's right - holders of Greek bonds for 2 years will be rewarded with a 17% gain if the country actually repays these at maturity. Alas, for those who are paying attention, this has a snowball's chance in Hades of happening. And speaking of Hades, Knight Capital's Alfredo Viegas has released a note explaining not only why Greece has just passed the Rubicon following the release of its disastrous budget deficit details earlier, but also advising those who care, how to be positioned to best profit from Greece's descent into Hades, which will be promptly followed by the rest of the Eurozone. His advice: short Spanish and Italian cash bonds (this trade will work just as well using horrible, evil CDS which no politician still understands and therefore continue to be the scapegoat for everything).

The market has been acting very weird all morning, with the oddness culminating in peripheral European bonds as of several minutes ago. Something odd is happening in the shorter end of Portuguese and Irish bonds, where a sudden move sent the curve to an unprecedented inverted levels as if by a fat finger across the board. Note the dramatic move in the 5 Year of both countries' bonds without any catalytic newsflow, which sent the Portuguese 5 Year to a lifetime high 7.93%. Have the stock HFT algos gone rogue and are now taking over the sovereign bond space?

An earthquake in Japan earlier today sent markets down this morning as today’s EU summit on a rescue mechanism lingers in the background. Treasuries rallied again yesterday as European sovereign news and slow Chinese export growth clogged headlines. The budget deficit expanded in February, pushing out to its largest point ever at $220.5B due to increased spending. The new record occurs in the background of a split Congress that has not yet been able to meet a compromise on this year’s budget and a CBO-projected $1.5T deficit in 2011. Today’s release of February’s retail sales will likely be strong given the spike in gas and food prices, with advance retail sales at 1.0%E v 0.3% prior. Excluding those inflationary boosts, retail sales should still be moderate given the lighter weather experienced in months prior. We expect some upside to expectations here, but note that any disappointment will certainly exacerbate the negative headlines this AM.

Markets in negative territory this morning on the combination of Spain’s credit rating downgrade and an increase in oil prices linked to Libyan President Qaddafi’s airstrike against his country’s own oil export centers yesterday. The U.S. budget remains in limbo as the Senate rejected both a Republican and a Democratic plan yesterday, showing that some compromise is necessary for the budget to move forward. Note that the government’s spending authority ends on March 18. Trade balance figures to be released this morning are expected to show a larger deficit for January at -$41.5BE v -$40.6 prior, owing to the increase in the price of oil imports. Treasuries rallied yesterday as European risk became more apparent. Today’s initial jobless claims are estimated to increase slightly to 376KE from last week’s 368K, the lowest level in nearly three years.

You know, timing is everything. If you hit brakes after you pass the red light... Bang! If you pucker up after you press your face against that of your sweetheart's.... You bonk her/him on the forehead. If you downgrade a nation after obvious signs of insolvency...
As the markets slowly wake up to the risks I've been outlining over the last two years, reality will reassert itself in a most assertive fashion. The (re)adherence to fundamentals will feel like the reinvention of gravity.

The European Union is facing a similar set of events as those leading up to the 2008 US financial crisis. In 2007/08 the US economy was teetering on the brink of recession and the talk among many was that of a goldilocks soft landing. Economic data was still somewhat positive including job growth while equity markets were still holding up. The housing market was beginning to show signs of exhaustion. Manufacturers were confronting rising input costs while consumers were paying more at the pump. The Federal Reserve introduced a new chairman who tried to calm markets with his infamous quote on March 28, 2007, "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Two top ECB officials indicated yesterday that interest rate increases might come sooner than ECB Trichet alluded to last week. Given Europe’s slow economic recovery, opinions are mixed on the matter. Recession-predicting economist Nouriel Roubini told reporters yesterday that if oil reaches $140/barrel, a level seen in the summer of 2008, the rate action will cause many advanced economies to slip into double-dip recession. Recent turmoil in the Middle East has sent oil prices nearing $120/barrel. Greek, Spanish, and Portuguese yields rose again yesterday as Friday’s EU summit on a new debt crisis solution draws closer. Portugal sold €1.0B in 2Y bonds at 5.993% v 4.086% prior with b/c 1.6x v 1.9x prior. The SOVXWE widened out again to 183bp from 177bp a week ago with Spain underperforming as it is most vulnerable to rate hikes. We feel that the longer the periphery/core support process drags out, the more rating agencies will be forced to look at interest rate burdens for periphery countries as being normal moving forward. German industrial production rose 1.8% MoM v 1.7%E. Greek unemployment for December moved up to 14.8% v 14.5%E and 13.9% prior. U.K.’s visible trade balance for January strengthened to -£7.1B v -£8.5B E, its smallest deficit since April of last year. The figures show an improvement over December’s -£9.7B even after considering weather’s impact on exports that month.

Oaktree's Howard Marks has just released his "year in review" letter, which like any letter by Marks is a must read, as the Oaktree manager has proven his presence in the pantheon of asset managers is well-deserved. Not surprising, and as we had repeatedly highlighted, when we pointed out the near record implied correlation between all asset classes, 2010 was a year of "correlations" which we believe may be just as appropriate a word to describe last year's market as "austerity" (which has so far completely missed the US). Quote Marks: "The word for 2010 was “correlation,” meaning macro trends dominated performance within asset classes. Thus most securities performed in line with their market benchmarks and the returns to security selection were limited. It wasn’t easy to outperform benchmarks."All this and much more on the firm's performance below.

As is customary in these times of uncertainty and economic turmoil, the quite timely intellectual giants at the ratings agencies pull up to a burned down house stating that they smell smell something asunder.
Alas, better late than never and yet the Greek government seeks to have even that very late Truth... "Adjusted"!

Markets positive this morning, recovering from last week’s leap in oil prices and continued Middle Eastern violence. All eyes will continue to watch the escalating situation in Libya. The Fed releases January consumer credit numbers this afternoon, estimated to increase $3.4BE v $6.1B prior. Look for the release of retail sales this Friday amidst a light release calendar.

The macro picture and market reactions became more complex last week. On one hand global activity and hence demand remain solid. Last week’s global PMIs have been very strong and now stand at exceptionally high levels with a few exceptions. The US labour market continues to perform strongly. But on the other hand, Oil prices continue to be the main focus, as market participants continue to debate the risks for supply disruptions. The sudden shift to a much more hawkish stance by the ECB highlights that inflation targeting central banks may have to act to keep inflation expectations anchored...In a relatively data-light week, the main focus will therefore be on policy developments again. First, the instabilities in the MENA region will remain key, with heightened focus on potential demonstrations in Saudi Arabia on Friday, March 11. The second political development is the intensification of Eurozone sovereign negotiations ahead of the “grand bargain” summit on March 24/25. Finally, the US budget negotiations remain a critical issue and there are some tentative signs that the policy consensus shifts slightly towards more frontloaded fiscal tightening. Bond issuance will be focus point in that context. The US is scheduled to issue $66bn worth of Treasuries in maturities ranging from 3-30 years. Portugal will tap the market with a small issuance despite the fact that last week the national railway company failed to raise government guaranteed debt. Merkel and Schaeuble are scheduled to speak towards the end of the week ahead of important regional elections in Germany. On Friday, Eurogroup leaders meet for another summit, trying to agree on measures to finally put the sovereign crisis behind.

"This NFP will not influence Bernanke as it is not about data now, it is about funding the deficit and thus more spending from Obama will need more bond purchases by Bernanke as they have to take up the slack as foreign buyers continue to diversify and few seem to see this. The Feds balance sheet is ringing alarm bells to me and M2 is exploding higher. How is it that the Fed is allowed to be the biggest holder of US debt? Who authorises this extremely dangerous situation and how does he get out of it? Printing more Dollars I guess. Good Lord the Dollar is in deep, long-term trouble in my book as history confirms that printing money ends in disaster. ALWAYS. ZIRP will continue to see money evade paper assets and look for stores of value and commodities will continue to rise until Bernanke changes his stance but I am afraid he is trapped in a “Catch 22” situation now. US real wages are falling fast and the US needs the consumer spending now to get the recovery going. That is not going to happen." Strategic Alpha

It seems there is just one market which the Fed is either unable, or unwilling to manipulate: that of Portuguese (and generally peripheral European) debt. And for good reason. As the WSJ reports, Portugal started the year with about €4 billion in cash: "Fresh borrowing and other public transactions suggest Portugal has this
year likely increased that number to around €4 billion. The official
said in an email that the figure had risen but didn't elaborate." There is one small problem: the country has a €4 billion outflow on April 15... and has to pay down €20 billion worth of debt maturities and budget deficits through the end of this year! Where the country will get this money... nobody knows. Just BTFD. But not in Portuguese bonds. As the charts below show that is still the only asset that can't find a greater idiot.

Markets positive this morning as the rise in oil simmered and emerging markets posted gains. World food prices met a new high in the latest U.N. report as it seems that the U.S. continues to export inflation. The Fed’s Beige Book released yesterday was optimistic and similar to January’s, with nearly all of the reporting regional banks citing growth in retail and manufacturing despite evidence of rising pressure on prices. Initial jobless claims data today 395K Expected and given last week’s large drop and fairly consistent weather, the release should be on par with last week’s 391K. Fed Chairman Bernanke spoke to House of Representatives yesterday in day two of his Humphrey Hawkins speech, again expressing dissatisfaction with the labor market, confidence in the battle against inflation and concern for America’s fiscal policy. Bernanke’s two days of speeches to Congress showed a conviction to keep short term interest rates low until unemployment levels recovered. Although recent releases show a modest rebound in labor, it may not be enough to push interest rates up as current estimates for 2012 unemployment reach 7.5 to 8.0%.

Markets mixed this morning with the U.S. up and Europe in negative territory as oil prices rose dramatically and Middle Eastern turmoil raged on. Bernanke spoke yesterday in the semi-annual Humphrey Hawkins speech to Congress, continuing to push Congress to tighten fiscally and to not raise the short term debt limit. While expressing concern for inflation risks, he remained confident that the outlook remains stable for the country. Monetary policy is likely not to tighten until unemployment is subverted and inflation stabilizes toward 2%. Bernanke’s presentation to Congress continues today. Data yesterday showed that manufacturing grew at its fastest pace since 2004, as the ISM Manufacturing Index rose to 61.4 in February v 60.8 prior, putting the U.S. in the head of the pack in the recent manufacturing upswing and causing a sell-off in treasuries. While we do not necessarily believe that a rapidly rising ISM will drive GDP growth above 3%, we do believe that Friday’s payrolls numbers will not echo the prior months disappointment and should print close to the consensus forecasts. Today’s ADP, however, is anyone's guess since the tracking error flipped late last year. The Fed’s release of its Beige Book to this afternoon will provide a more narrative outlook on the current economy.