As expected earlier, the next domino in the European contagion
cascade, has just tumbled after the local government has collapsed
following loss of parliamentary confidence vote.
This means that the pan-European EFSF vote, originally scheduled to be complete by the end of
,
will likely be delayed until 2012 which means at least 4 more months
of SMP bond purchases and more anger at direct ECB monetization of
Peripheral debt.
Uncertainty. That has become the key word of the day, the month, and
of 2011 in general. And while broad uncertainty has manifested itself
most notably in the capital markets, it has a far more practical
representation in labor markets, where the main reason why employers are
not hiring more people, arguably the primary scourge of the Obama
administration's record low approval rating, is due to corporate
uncertainty about the future: about taxes, about government demanding
its pound of flesh when the time comes, and about the economy in
general. Ironically, as PIMCO speculates in its daily note authored by
Tony Crescenzi, probably the primary driver of global uncertainty is the
increasingly uncoordinated response by monetary policy authorities
(read Central Banks) in which where before all had cooperated in the
global game theory, now increasingly it is every printer for himself, as
the default response turns to one of defection. And as everyone who
has studied Game Theory knows, it is only the first defection that
provides the biggest return, with each subsequent act generating far
less benefits to the uncooperative actor, forcing even more
uncooperative irrationality, and so on in a toxic spiral until outright
belligerent action develops. For now said belligerence has begun to
manifest itself in plain vanilla trade wars, such as that pointed out
last night with the Chinese response to Europe's lack of response to
its "bailout" overtures, and following up with the just announced
complaint filed by the US against China on chicken prices. Naturally
this is just the beginning. The real concern is that where trade wars
end (which in turn begin when FX wars end), real ones start. When a
year ago we first branded the Chairsatan as "genocidal" we were mostly
joking. Perhaps it is time to reevaluate our definition, as it is far
less comical under the current environment. Here is what Pimco has to
say on the issue.
On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock.
.
It all happened in just over one second of trading, the evidence buried
under an avalanche of about 19,000 quotations and 3,000 individual
trade executions. The facts of the matter are indisputable. Based on
official exchange timestamps, there is unmistakable proof that YHOO
trades were executed on quotes that didn't exist until 190 milliseconds
later!
Eurozone Charts to keep track of.
We
have been pointing to the incessant rise in the risk of the Financial
Stability Board's most systemically important entities for weeks now.
It appears the
European Systemic Risk Board has, according to Dow Jones,
issued its first warning to governments, urging them to prepare capital injections for some European banks.
It looks like the Slovenian Government may collapse today. It is one
of the smallest EU members, but an EU member nonetheless. Slovenia
accounts for about 0.5% of EFSF and is Aa2/AA Looks like Greece won't
default today, though it seems that more and more people think it is the
likely outcome, and actually think it is the best outcome from Europe.
Stocks continue to rally on every bit of good news related to Greece,
but there is a growing consensus that Greece should default sooner than
later, and that it would be easier for Europe to deal with that, than
the eventual default. Still waiting for the "private sector initiative"
results on Greece. I really am not sure how much of a benefit Greece
gets, but the banks transfer about 40% of their Greek exposure to EFSF
exposure. Not a bad deal for banks considering where Greek bonds trade.
That didn't take long. After touching a ridiculous price of $304.79
back on July 13, the collapse in the stock price of Netflix in the 2
short months since to fresh 52 week lows has been nothing short of
breathtaking, and demonstrates just how effectively one can destroy
their company (and also confirms that "value investors" with zero
conviction in their calls are not even worth the entrance fee of their
periodic soiree gatherings). Below we demonstrate who the biggest losers
are in the past 10 weeks, based on the top 25 holders as disclosed in
their 13F filings as of June 30. Our advice to Apple longs: take
particular note of what happens when the hedge fund groupthink hotel
decides to exit a burning theater stock in less than orderly fashion.
And of particular insult to injury note, UBS Global Asset Management has
lost $115 million in NFLX since the stock highs just over 2 months
ago. Which Gamma 2 or Vega 666 trader will get blamed for that
particular debacle?
Well, as expected, the Chinese news finally filtered through to the
vacuum tubes. It took them a few hours... But it is finally there. BNP
is down 7.3% at last check and tumbling. Comments from the IMF, which is
always behind the curve, are not helping.
Some pure poetry from Art Cashin today which explains why future US generations may want to hold a referendum on being born...
With the expanded two-day FOMC meeting (which until
45 days ago was
supposed to be just one day) set to start shortly, here is chief
policy maker Goldman Sachs reiterating again how much futile loosening
to expect from the Fed. Nothing new here: Goldman repeats its call that
Twist will hit tomorrow (and in a following report MS reiterates its
call for Torque), sees IOER being cut from 0.25% to 0.1%, (sending the
money and repo markets into a tailspin), but stops short of demanding
another major round of LSAP. Basically, anything short of this will
crash the market; anything long of this (as
Rosenberg predicts) including several hundred billion in outright bond purchases, sends risk and gold soaring, and the dollar plunging.
Flurry of headlines following an
unscheduled IMF release:
- IMF CUTS GLOBAL GROWTH ESTIMATE, SAYS EUROPE MAY WORSEN OUTLOOK
- IMF SAYS DOWNSIDE RISKS ARE GROWING
- IMF SAYS ECB SHOULD CUT INTEREST RATES IF DEBT TENSIONS PERSIST
- IMF CUTS U.S. 2011 GROWTH ESTIMATE TO 1.5% VS 2.5% SEEN IN JUNE
- IMF CUTS U.S. 2012 GROWTH ESTIMATE TO 1.8% VS 2.7% SEEN IN JUNE
- IMF CUTS 2012 EURO-AREA GROWTH PREDICTION TO 1.1% VS 1.7%/JUNE
- IMF CUTS 2011 WORLD GROWTH FORECAST TO 4% FROM 4.3% IN JUNE
- IMF CUTS 2012 WORLD GROWTH FORECAST TO 4% FROM 4.5% IN JUNE
- IMF SAYS ECB MUST KEEP INTERVENING `STRONGLY' IN DEBT MARKETS
- IMF CUTS SPANISH GROWTH FORECAST FOR 2012 TO 1.1%
Judging by the futures one may be forgiven to assume that sovereign
default risk in Europe has moderated today. One would also be 100%
wrong. It's contract roll day and Italy downgrade day (first of many:
Moody's on deck) not to mention algo ES futures ramp up ignore day, and
as a result everything is wider across the board, and Italy 5 Year hit
520 earlier, a new all time record.
To anyone short the USD/EUR-CHF who just went to the bathroom a
minute ago, our condolences. The rumor is that the SNB will expand its
EURCHF peg to 1.25 tomorrow. Completely unfounded of course. It may
just as easily be another forceful intervention round. Or just plain
and simple central planner rumor mongering: as noted, Swiss August
exports plunged and Hildebrand will take any help he can get.
Gone are the days when rating agencies couched the big fat
inconvenient truth in big words and wordy phrases like "Selective
Default" (predicated upon 90% acceptances of effective bond tender
offers, which as has now become clear is not happening) when discussing
Greece. French-owned Fitch let the genie out of the bottle this
morning when it announced that it now expects Greece to "probably
default" (as in the
real deal, not some transitory paper
definition), "but not leave the Eurozone." In other words, we have
replaced one wishful thinking (partially default) with another (full
default, but partial implications). Because unfortunately as most know,
there is no charter precedent for keeping a bankrupt country in the EU
and currency union. Which means eurocrats are now scrambling to not
only lay the liquidity groundwork for a Greek bankruptcy (which they
did last week with the global USD liquidity lines, which also
conveniently lay out the timing for such an event) but also changing
the laws furiously behind the scenes to make sure a Greek default does
not violate some European clause, which it certainly will. All of this
ignores the fact that the financial aftermath of a Greek default will
hit the credibility of the ECB more than anything else. How bureaucracy
can provision for that we are not too clear.
An interesting interview in Frankfurter Rundschau with German
government advisor Lars Feld shares Germany's latest perspective on
Greece, which is, as many expect, that the country at the heart of the
Eurozone is merely setting the liquidity framework and backup
preparations for the inevitable. To wit: "
Restructuring
Greece’s debt would cause “limited” reaction in financial markets
because they have been expecting a Greek default for some time."
Alas, that was the hubris that drove the decision to send Lehman over
the cliff. But the world has never learned from history, why should it
now? When asked if Greece is broke, Feld cuts to the chase "I fear that
Greece has a solvency problem" translation - yes. Not that we needed
to get confirmation with 1 Year yields in the mid 100s, mind you. Yet
despite recognition of the inevitable, when asked whether Greece will
leave the Eurozone, his response: "That would be a disaster - for
Greece and for the euro-zone... Greece's economy and its financial
system would sink into chaos, at least for a brief period time.
And the speculative floodgate against the euro and its member states would open. Those who believe a Greek ouster is possible is at best naive." And therein lies the rub.
- S&P downgraded the sovereign rating for Italy to A from A+, with a negative outlook
- According to Kathimerini, the Greek PM is considering calling for a
referendum on whether Greece should continue to tackle its debt crisis
within the Eurozone or by exiting the single currency. However, a
Greek government spokesman denied this report
- According to FT, Siemens withdrew more than EUR 500mln in cash
deposits from a large French bank two weeks ago and transferred it to
the ECB. However, Siemens denied the FT article and termed it as
factually incorrect
- According to two sources, a big market-making state bank in China's
onshore foreign exchange market has stopped foreign exchange forwards
and swaps trading with several European banks
- A Greek government source commented that the country has fully paid
EUR 769mln in bond coupons due on September 20th. Meanwhile, the Greek
13-week T-Bill auction observed a healthy bid
Following up on the previous story of a gold referendum push driven
by the SNB's last ditch choice to peg the CHF to the EUR and
potentially pay for this by selling gold, we next learn that when it
comes to its currency, the Swiss National Bank really has no options,
following a long overdue collapse in exports in August when the CHF
soared on global risk aversion and just before Hildebrand started
loading up the "asset" side of his balance sheet with Euros.
Unfortunately, just like last year when the SNB intervened and loaded
up on dollars only to end its intervention following massive paper
losses, this time will be no different and we expect that the Swiss
people will see the trade off between keeping a viable currency and a
sound export sector as one that will ultimately benefit the former. As
to what happens to the latter, here is Goldman with a discussion of the
huge collapse in Swiss August exports, which is a harbinger of things
to come when the SNB's latest intervention attempt is overruled in
several months, and reality reasserts itself.
According to an article in Swiss newspaper NZZ (
Neue Zuercher Zeitung)
the SVP party (Swiss People’s Party) launched a referendum to
“protect” the 1,000 tonnes of gold owned by the Swiss National Bank
(SNB). Their aim is to:
- make it unconstitutional to sell gold
- force the SNB to hold 20% of its assets in gold (currently 16%)
The SVP said the sale of 1,500 of the SNB’s 2,500 tonnes of gold was
regrettable, especially given the Swiss population had no say in this.
Anyone who may have gone to bed last night assuming some version of
long-termist reality would finally creep back into the market following
rumblings of all out trade war between China and Europe will be sorely
disappointed as instead stocks are once again focused on the purely
superficial, such as that Greece did not go bankrupt last night and did
make its €770 million payment this time, although what will happen in
the future depends entirely on the Troica. As for the Troica, their
animosity toward Greece will hopefully be moderated after Greece denied a
report from Kathimerini, which
as we expected had
about zero percent chance of any credibility to it, that it would go
ahead with a eurozone participation referendum, which obviously would
have ended the Euro as the majority of people in Greece (and all of
Europe) are well over the monetary experiment. Lastly, Siemens scrambled
overnight to clarify the FT news that it had pulled money from a
French bank, SocGen as it turns out, but says that this happened back
in July, and had nothing to do with the current troubles at the French
bank. Lastly, two bond auctions by Spain and Greece came at around
previous result, and hence much better than the collapse expected
further adding to the short covering pressure.
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