Overnight Sentiment Sours As Reality Returns

While these pages have been warning for about a month that a Greek default is precisely what Europe wants, a self-deluded market has been ignoring this reality. That is no longer the case as the default (pardon the pun) thought is now one of Greek default. As for the assumption that "it is all priced in"... that too is being scrapped as revisionist histories of Lehman come to mind. As a result the EURUSD is drifting ever lower, and has been trading with a 1.29 handle for the first time in weeks. Needless to say, Europe is on the verge of panic as the nearly 2-month impact of the LTRO is now truly gone, and with unmistakable stigma (sorry Jernej Omahen - read this) associated with LTRO banks, we shudder at the thought how many banks will voluntarily subject themselves to being seen as desperately needing European Discount Window access in two weeks. Moody's downgrade of key insurance companies and threat to cut most banks, has not helped. Finally, some unpleasant news out of China, where commerce ministry said that the trade outlook is "grim" while a research with the Chinese Academy of Sciences said that Chinese EFSF contribution should be capped at Spain's €92.6 billion, rounds out the rout. So while we wait patiently as reality in Europe truly seeps into risk prices, here is Bloomberg with a summary of overnight catalysts.

  • Bund yields moderately lower, 1.1 to 2.5bps; Treasury yields mixed, with 2-, 3-yr yields higher vs lower further out curve
  • A Greek default is inevitable and the chances of the country being pushed out of the euro are increasing, which could push U.S. 10-year yield to ~1.50%, according to Standard Bank
  • UBS, Credit Suisse and Morgan Stanley’s credit ratings may be cut by as many as three levels by Moody’s
  • Italian bonds fell, driving 10-year yields to 5.79%, a two-week high, as European officials struggled to reach agreement on a financial rescue for Greece
  • PPI probably rose 4.1% Y/y in January, economists estimated before today’s report; Bernanke speaks in Virginia
  • A record rally in European credit markets ground to a halt as the unraveling rescue plan for Greece fueled concern of a default triggering turmoil in the euro region