Flight To Safety, Liquidations Resume On Fresh European Stability Concerns

Yesterday's last minute short covering rally has been all but eliminated and then some, on fresh European concerns following a Deutsche Bank report that the agreed writedown of 21% from the July 21 second Greek bailout agreement could be executed, and that instead an orderly default with an up to 50% haircut is being considered. Generally, broad concerns that Greece can and will go bankrupt any minute once again dominate and have undone any favorable market sentiment from yesterday's G20, also known as the Full Tilt Ponzi Group, announcement, which was also followed up by an ECB statement that the central bank would do everything to prevent further contagion. Judging by the risk waterfall this morning, and the liquidations in gold (driven by a vague but ever stronger rumor of a winddown at a GLD-heavy hedge fund that is now down 50% YTD), virtually nobody believes anything coming out of any European institution. Alas, this is what two years of relentless accrued lying will do to your reputation. Adding fuel to the fire is a report from Credit Suisse that the chance of a "general European break up" is about 10% and that European banks would fall by about 40% on a disorderly Euro breakup and that peripheral European banks' net foreign liabilities would rise by €800 billion. In other words, European banks would blow up, which is nothing really new. Next, we hear from Dexia which yesterday got annihilated and today is down another 2.5% despite promises from the Belgian central bank governor Luc Coene that the bank is not in trouble and has not sought dollars from the ECB in a long time: obviously an attempt to prevent an all out attack on the insolvent bank, which as is well known bypasses the ECB and goes straight to the Fed for emergency funding. Overall, there is a very distinct sense that it's the end of the world as we know it, and the market does not feel all that fine anymore.

A summary of the market conditions from Bloomberg's TJ Marta is as follows:

  • 3-mo Euribor/OIS spread wider to 0.8870%, level exceeded only during worst of 2008-9 crisis
  • 1-yr euro basis swap -1.325bps to -76.75; on a closing basis, exceeded only in Sep. to Dec. 2008 period
  • 3M USD Libor rises to fresh year high at 0.360% from 0.358%, probably a second straight month of consecutive rises, even as banks are not able to borrow in the interbank market and have to pay the ECB 1% for direct USD loans.
  • All major equity indexes lower, led by Nikkei -2.0%, OMX (Nordic) -1.4%; US futures mixed in narrow range
  • Most sovereign 5-yr CDS wider; Germany’s +5.3bps to record 108bps, Portugal’s +24bps to 1162bps, near record 1178bps
  • Gold, silver lower, could be profit taking as market participants pare risk, liquidate positions to account for losing stock trades
  • German, US yields mixed as markets stall, likely as traders hesitate near record lows
  • FX mixed in moderate ranges, with growth/risk currencies both outperforming (Mexican peso, A$) and underperforming (C$, Swedish krona)