Overnight Sentiment: More Of The Same

Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly.

The two saving graces were a 5 Year French and 10 year German bond auctions which both priced at record low yield. From Reuters: "France sold its 5-year benchmark bond on Wednesday at a record low yield, Agence France Tresor said, in a sign of investors consider the country a safe haven amid renewed concerns about the euro zone's debt crisis... In the auction, France sold 3.651 billion euros of its February 2017 BTAN at a yield of 1.72 percent." and "Germany sold 4.1 billion euros of 10-year government bonds on Wednesday in an auction which met higher demand than at the bond's launch in April, when the sale was technically uncovered. Demand at the sale was above this year's average, with a bid/cover ratio of 1.5 compared with an average 1.36 at similar auctions so far this year. The Bundesbank retained 893 million euros of bonds. The average yield at the auction was 1.47 percent was the lowest on record for a sale of 10-year German bonds." So, as we noted, more of the same, with general fear and loathing in the periphery resulting in core strength for at least the time being, until the core itself tumbles under the tsunami of bad news. Finally, Europe will now have to operate in limbo for at least 1 month as Greece just announced the new elections will be held on June 17 with a temporary caretaker government ruling the country in the meantime. What can possibly go wrong.

Regarding bond internals, one country that is getting hit far worse than others is Portugal, whose bond yield have exploded, just as we predicted, the day after we realized that Dan Loeb is long and strong: the market has shifted away from IG9 being the pain trade, to forcing the HF consortium that bought up Portugese bonds on nothing but one big mechete catching operation, to puke blood until they are all forced to unwind their holdings.

As for the US: quiet session, which will likely see stocks ramp into the European close then tumble around 3 pm as the deja vu-ness extends to 9 days in a row.

From Bank of America:

Market action: Equity markets continue to sell-off

Given this negative macro backdrop, equity markets globally are coming under increasing selling pressure. In Asia, the Hang Seng dropped 3.2%, the cyclically-sensitive Kospi crumbled 3.1%, and the Nikkei fell 1.1%. Europe is down 0.6% in the aggregate. At home, things look "less bad" by comparison, equity futures are pointing to a modestly lower open. 

In bondland, the price action is somewhat choppy. While Portuguese 10-year debt is selling off sharply with yields up over 30bps, Spanish and Italian 10-year notes are holding steady. At home, the 10-year Treasury note yield is essentially flat close to rock bottom at 1.78%. Not surprisingly, the FX market continues to flag waning risk appetite with the DXY index rallying 0.2%, the highest since January. The euro is resuming its decline, with the EUR/USD cross down to 1.27. 

Commodities under pressure

As the market prices in a softer growth backdrop, commodities are down. WTI crude oil is down $1.50 to $92.50 per barrel, the lowest since early November. Industrial metals are taking another drubbing with copper down 1.5% and down roughly 10% over the course of the month. Finally, the yellow metal is losing some of its luster. Gold is off $7.50 to $1537 per ounce. 

Focusing on the good news, here is how strategists saw the record German 10 year bond issue.


"The bid/cover is a lot better than we saw last time, all the more remarkable for the fact that it was being sold almost 30 basis points lower. There was a bit of a concession being built for the last hour to ensure that it went. It's a lot better than the last time but not fantastic but that's going to be a feature for quite some time.

"The sense that things are going to look pretty ugly in the euro zone for a sustained period and therefore you want to be as safe as possible inevitably helps Bunds. There's not a lot of natural enthusiasm for it."


"It's well covered, with a tight tail and more encouragingly for Bund bulls is that it shows that there is very good demand for the paper below 1.50 percent in yield terms. Given how peripherals have sold off over the past week, it's no surprise to see the Bund well bid and the fact the paper was well received should allow the rally to continue."


"I don't think the market had expected such an auction - 6.2 billion of nominal bids is the highest amount since September 2011."

"There will be a strong tendency for lower yields until we get to the Greek elections in mid-June."


"In these days with sub-1.50 percent German yields the bid/cover ratio is pretty decent and the one cent tail is stronger than average. It all indicates a strong German auction and that the safety theme remains intact."