Big Miss In French GDP Puts Further Pressure On Its AAA Rating According To Analysts

Earlier today, Europe's fulcrum economy - France - whose AAA rating is all the matters for continued European solvency, as a downgrade would effectively derail the EFSF even before its launch as Zero Hedge has discussed extensively in the past, reported Q2 GDP which not only missed consensus estimates of 0.3% growth, but plunged from Q1's 0.9% down to unchanged or 0.0% for Q2. The worry here is that, as Market Watch observes, "France’s economy, the second largest in the euro zone after Germany, recorded no growth in the second quarter, heightening concerns about the nation’s ability to achieve its deficit-reduction plan. The consumption expenditure of households slumped 0.7% in the second quarter, hurting GDP growth, INSEE said. Imports fell 0.9%, while exports were flat after growing 1.8% in the first quarter." And as those who have been following it know, the only reason why the rating agencies have not touched France's hallowed AAA-rating is due to their expectation that France will have no problem implementing a deficit-reduction plan which will then cut French debt. Alas, following this number which post revision could mean that France has re-entered a recession, concerns about the AAA rating, which is what set off this week's avalanche of fears about SocGen and all other French banks, are set to spike once again. “The flat outturn will not fit well with the current debate we are seeing around France and its ability to retain its triple-A credit rating,” said analysts at FxPro in a note. He was not alone to speculate about the linkage between GDP and rating: "today’s disappointing 2Q GDP data may well reignite" concerns about France’s ability to implement fiscal austerity necessary to maintain AAA rating, also said Daiwa’s Grant Lewis. In this market, which is desperately looking for things to be paranoid about, we expect that this could well become the next big meme, especially with all of Europe slowly rolling back into re-recession once again.

 

 

Liquidity Options Running Out For European Banks - "Liquidity Crisis Scene Set"

One of the key catalysts for Wednesday's market rout which originated in Europe came following news that Chinese banks had cut down on their credit lines to Europe, which highlighted the key threat to the European banking system: access to liquidity. The Chinese reaction is merely a symptom of a much deeper underlying ailment: the increasing lack of counterparty confidence across various funding markets, both traditional and shadow, which has continued to accelerate over the past week, a development summarized effectively by the latest report in the International Financing Review which uses some powerful words (of the type that European bureaucrats hate) to explain where Europe stands right now: "credit taps run dry for European lenders, setting scene for liquidity crisis." For those strapped for time the take home message is that: "with bond markets shut and investors unwilling to buy asset-backed securities, the repo market – for some banks the sole remaining source of private funding – has become the most recent tap to run dry, with some investment banks pulling credit lines worth tens of billions of euros in recent weeks." This is very disturbing as with liquidity windows shut, Europe's bank have no recourse on how to roll the €4.8 trillion in wholesale and interbank funding which expires in the next two years. End result: the only recourse is the ECB, which unlike the Fed, is not suited to be a lender of last resort and has been morphing into that role over the past year kicking and screaming. And when that fails, there are the Fed's liquidity swap lines. Too bad that the liabilities in the European banking system are orders of magnitude bigger than in the US, and should this liquidity crisis transform into its next and more virulent phase, even the Fed will find it does not have enough capital to prevent a worldwide short squeeze on the world's carry trade funding currency (once known as the reserve currency).

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Lack Of Offshore Dollars Reflected In Widest Spread Between SocGen And JPM Libor Fixing Since Early 2009

Further to the previous post speculating that while central planners do all they can to mask the symptoms of the European-wide liquidity crunch, the underlying issue is still very much alive, comes from the observations that the past two days' Libor fixing spread between a stable, domestic provider of 3 Month USD Libor and a less than stable one, shall we say, SocGen, has surged to the widest since early 2009. Granted, everyone knows that LIEBOR is the most manipulated unsecured funding metric available as it comes directly from the BBA member banks themselves (a process which is currently being investigated by regulators), but the fact that even post all the massaging SocGen has been unable to collapse the spread is very notable, and confirms that its stock price is purely a kneejerk reaction to this morning's short selling ban, one which as we demonstrated envisions lots of pain once the first reaction is internalized.

 

 

Europe Relishing Short Covering Ban For Now With FTSE MIB Still Broken

A quick update on market metrics this morning indicates that Europe has so far refused to protest violently against the short covering ban, and is for the time being enjoying the eye of the hurricane. According to the Bloomberg cross asset dashboard there is a sense of modestly improved sentiment in Europe as CDS spreads have mostly tightened for sovereigns and banks, following the French, Italian, Spanish (and Belgian? - they have a stock market? Must be to go with that government of theirs) ban on short sales as evident in:

• Soc CDS for France -14.5 bps, Germany -6.7 bps, Italy -14.6 bps, SPain -14.9 bps, Greece -22.7 bps, Portugal -41.5 bps, and Belgium -27.1.
• French bank CDS: SocGen -3.8 bps (just barely tighted after blowing out), UniCredit -12.6 bps, BNP -6.7 bps, Credit Agricole -11.7 bps
• Bank funding pressures easing as Euribor, Libor/OIS spreads, 1 year euro basis swap moderately improved
• Equities up 1-1.5 standard deviations, led by Euro Stoxx +2.1% on the short-sale ban
• and most EU yield spreads to Germany moderately tighter

CDS Rerack

• BUNGA BUNGA: -25
• SIESTA: -20
• PORT: -90
• YOGURT: unch
• WAFFLES: -36
• RIOTS: -11
• GUINNESS: -45
• F. FRIED: -21
• ANSTALT: -10
• GERM: -11.5

Today's Economic Data Docket - Retail Sales And Consumer Sentiment

Today's economic docket includes retail sales and consumer sentiment and business inventories. Bill Dudley makes more remarks on iPad edibility although he may provide some critical insight as to what we may expect two weeks from now at Jackson Hole.

Daily US Opening News And Market Re-Cap: August 12

Volatility continued across European equities in early trade supported by a short-selling ban imposed by countries including France, Italy, Spain and Belgium. However, prices came under pressure following news that Chancellor Merkel may not be able to keep her promise of getting changes to the EFSF before end-September, together with lower than expected GDP data from France. As the session progressed, appetite for risk emerged as the dominant theme as equities moved higher, led by financials, whereas the Eurozone 10-year government bond yield spreads tightened across the board, with aggressive narrowing witnessed in the French/German spread. This was supported by market talk of the ECB buying in the Italian and Spanish government debts, with the 10-year yield in Italy falling below 5% and France below the 3% level. Elsewhere, CHF weakened across the board partly on the back of market talk that the SNB was conducting currency swap operations via small Swiss corporate banks. Also, a weakening USD-Index supported EUR/USD and GBP/USD, whereas the latter received further boost following an upward revision to the UK's construction output data, which is said to add 0.1% to country's Q2 GDP. The release of Project Merlin data showing an enhanced lending by UK banks in Q2 as compared to Q1 helped the GBP currency further. Moving into the North American open, markets look ahead to key economic data from the US in the form of retail sales, business inventories, and University of Michigan confidence report. Fed's Dudley and President Obama are also scheduled to speak later in the session.

Gold Surges In Tumultuous Week - XAU/CHF Up 5.5% WTD On Intervention And Euro Peg Concerns

UBS confirm this morning what we have been experiencing in terms of increased customer demand for gold and an increasing preference for allocated gold. UBS note that “the move to real assets such as gold in physical form signifies the heightened state of risk aversion at present.” “The gold market remains underpinned by the movement to physical gold, which has persisted all week    . . .  European demand for small bars particularly, but also coins, remains very strong. As the week has progressed Asian physical demand, outside India, has been noticeably higher.” The Swiss franc has fallen by another 0.4% against gold today and is down 5.7% week to date against gold.  Pegging the franc to the euro would take time and would face steep legal and political hurdles – a change to the Swiss constitution would be necessary to begin with.

July Retail Sales In Line With Expectations At 0.5%, Ex Autos At 0.5% On 0.3% Consensus

July retail sales came in line with expectations at 0.5%, which is to be expected: after all, as Bank of America most recent implosion demonstrates all too vividly suddenly, there is a favorable trade off to millions of Americans not paying their mortgage, and also maxing out their credit cards a unprecedented rates. Naturally, the negative one is that BAC and all other mortgage lenders will need to resort to TARP 2 soon but that's in the unforeseeable future. For now: buy, buy, buy. As expected, futures surge because the ex-cars numbers rose from a revised 0.2% to 0.5%, on expectations of 0.3%. Somehow this minute beat is enough for stocks which blatantly ignored yesterday's trade data which indicates that Q2 GDP will be revised to about 0.6% from 1.3%. But this is the kind of robotic myopia we have all grown to know and love that dominates what was once a carbon-lifeform dominated stock market.

Minneapolis Fed's Kocherlakota Explains Why He Disagrees With Bernanke's ZIRP4EVA Policy

Following the historic 3 dissenting votes from this week's FOMC decision announcing a pseudo Operation Twist, here is the first explanation by one of the dissenters, Minneapolis Fed's Narayana Kocherlakota, as to why he thought the Chairsatan's policy to continue to annihilation of all US savers (i.e., retirees) for another 2 years was a horrendous idea. Granted, he is more politically correct: " I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November. I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy."

Jefferson County Commissioner Says 80% Chance Of Chapter 9 Bankruptcy Filing

With ES trading at 45% below average volume for this time of the day (read: massive explosion on vapor volume as is de rigeur), we doubt anyone is actually trading or will notice this, but for any carbon based forms out there, the latest news on Jefferson county may be just a little notable: There is an 80% chance that Jefferson County, Alabama, officials will vote to file for Chapter 9 bankruptcy today, Commissioner Sandra Little Brown said before the panel was set to meet to consider the option. Is this just posturing to force the creditors to agree to the debtor's terms, or an actual reflection of the truth, we shall fund out this afternoon, when the meeting ends and the standstill expires.