Europe Refuses To Be Fixed

It seems like it was only 24 hours ago that Europe bailed out Greece for the third time and everything was "fixed", with a resultant desperate attempt to validate this by pushing the EURUSD above 1.3000. Sadly, as always happens, Europe, and especially Greece, refuses to be fixed, because as we will not tire of saying: you can't fix debt with i) more debt, ii) hockeystick projections or iii) soothing words of platitude and an outright bankruptcy, just like that which Argentina is about to undergo, will be needed. If that means the end of the EUR and the delusion that the Eurozone is a viable monument to the egos of a few technocratic career politicians, so be it. As a result, this time around the halflife of the latest bailout was precisely zero, as was that of the latest Japanese QE episode, as the entire world is now habituated to the lies emanating from Europe, and demands details, which in turn are sorely lacking, especially as relates to the question of just where will Greece get the money desperately needed to fund the Greek bond buyback. But at least Kathimerini was kind enough to advise readers that said buyback must take place by December 7 in time for the euroarea finmins to approve the payment of the next Greek loan tranche at the December 13 meeting, something which will likely not happen, especially if Germany's SPD party delays the vote on the Greek bailout until the end of December as was reported yesterday. We can't wait to learn the details of the buyback package, which will come in the "next few days" per ANA, and especially where the buyback money will come from, especially with the FT reporting that various European countries will already lose money next year on the latest Greek bailout.

Aside for the lack of "Greece is fixed-er-est" details, the European Titanic continues to drive on autopilot, blissfully unaware it is headed straight into a unsustainable debt load Titanic, and as such Italy was able to sell EUR7.5 billion in 6 Month Bills at lower yield, pushing the 3 Year to the lowest yield since 2010, even as the next Greece, Spain, just reported a collapse in retail sales, which plunged 8.4% Y/Y. But at least it was "better" than lost month's -12.7%.

An update on European monetary developments showed that M3 soared at a 3 month rate of 3.1%, well above expectations of 2.8%, and the highest since October 2008, which means any possibility of further ECB rate cuts has been effectively taken off the table well into 2013. We do, however, eagerly look forward to the pundits' explanation how it is possible that Europe is getting progressively worse even as a near record amount of liquidity is sloshing around in the Eurosystem. 

But all of this is largely moot, as the reactionary market follows every update out of Washington, in hopes there will be a fiscal cliff resolution. Advance spoiler: there won't be, at least not until we have a replay of the 2008 TARP/2011 Debt Ceiling scenario, and the market plunges to get DC to act. Sorry, the recent brief downtick was certainly not enough to break the record deadlock in Congress, fondest wishes to the contrary notwithstanding.

Finally, the Shanghai Composite again showed what happens when a local central bank refuses to inject any new liquidity, and dropped 1%, breaching the 2009 lows, and closing at a level of 1973.

Expect little in terms of actual market moving macro news today as the fascination with the Fiscal Cliff persists.

More from Jim Reid:

“Reid moves markets”. I’ve always dreamed of reading such a headline and last night I got my wish. Unfortunately it was Senate Majority Leader Harry Reid who grabbed the headlines and took the shine off what was a mildly positive day for markets by suggesting that little progress had been made in fiscal cliff negotiations over the last week or so. He added that ‘we only have a couple weeks to get something done so we have to get away from the happy talk.’ This overshadowed a day of stronger US data with Durable Goods, Home Prices and Consumer confidence all ahead of expectations. The S&P closed 0.52% lower after being 0.2% higher earlier in the session and again close to the highs just before Reid’s comments hit newswires around 90 minutes before the close.

Yesterday marked only four weeks until Xmas so we do need some US political progress soon. It’s possible that Senator Reid was just reminding his colleagues of the relative urgency of the discussions. This is still the biggest story in global markets at the moment and has the capacity to move the S&P significantly into year end in either way.

Asian markets are trading firmly in negative territory following the weak lead from the US. Losses in equities are being paced by the Hang Seng (-0.83%), Nikkei (-1.0%) and the ASX200 (-0.21%). Chinese equities continue to break new post-crisis lows.

After closing below the symbolic 2,000 level yesterday, the Shanghai Composite is down a further 0.87% this morning. Interestingly the Shanghai index is down 2.5% since the country’s new leaders were unveiled in mid-November, during a period when risk assets have generally performed well. Also breaking new lows is the Japanese 10yr government bond yield which has reached its lowest level in at least 9 years (0.718%), helped by calls from the Japanese opposition leader Abe to pursue aggressive easing until inflation targets are met. Ironic really as if such a policy succeeds then JGBs will be a terrible investment in real terms. Elsewhere the AUD and EUR are virtually unchanged overnight against the greenback (1.0445 and 1.292 respectively) while the Australian iTraxx is 2bp wider at 133bp.

More on yesterday’s Greece deal, it was interesting to see the market’s relatively muted response to the Troika’s package – probably reflecting the fact that the package is conditional on a “positive” debt buyback scheduled to take place over the next few weeks and the approval of member state’s parliaments over what seems to be an aggressive timeline target of Dec 13th. As DB’s Mark Wall pointed out, what is meant by a “positive” outcome on the buyback is not officially defined, however in his view it would be a surprise for the Eurogroup to deny support to Greece on the back of low investor participation in a bond tender after having come this far in negotiations. Greek 10yr bond yields closed 26bp lower yesterday at 16.25%, while the Athex Composite (+0.29%) was denied further gains as Greek financials (-7.9%) reacted negatively to the prospect of dilutive bank recaps from the Troika’s package.
On the subject of European politics, DB’s Gilles Moec published a piece on France’s reform path yesterday, pointing out that since coming to power President Hollande’s stance has tilted towards a more reformist stance than expected, highlighted by the recent competitiveness pact and commitment to fiscal discipline.

Returning to the fiscal cliff, the WSJ reported that Morgan Stanley’s CEO James Gorman has called on the bank’s US employees to contact members of Congress in order to urge lawmakers to reach a deal on the fiscal cliff. According to the article, Mr. Gorman’s email doesn’t mention any particular person or parties, but does employ Obama’s rhetoric in calling for a “balanced solution”. The move follows a recent call to action by the CEO of Caterpillar who wrote to employees encouraging them to sign a “Fix the Debt” petition. On that note, Obama is meeting with business leaders and CEOs today as part of his public PR campaign pushing his solution to the fiscal cliff. Amongst those attending today’s White House session are a who’s who of the corporate world including the heads of Home Depot, Goldman Sachs, Deloitte, Merck, Coca-cola, Macy’s, Yahoo, Pfizer, Comcast, State Farm, AT&T, Archer Daniels Midland and Caterpillar (Bloomberg). John Boehner and other Republicans will be meeting with some members of the same group before today’s White House session.

Away from the cliff debate, Bloomberg news said that the Fed may require US units of foreign banks to comply with tougher capital rules by directing non-US firms to house all their businesses within a US holding company.

Given the lack of any major data releases, the likely focus today will be on Obama’s meeting and headlines around the fiscal cliff. Data-wise, Eurozone money supply, German CPI and Spanish retail sales are scheduled today. In the US, we get the new home sales report for October and the Fed’s Beige Book.