While the market is ripping today on absolutely nothing (earlier we noted the rotation of muppet X with muppet Y - this changes nothing but who cares), BTPs are soaring, and confusion is prevalent, one thing is certain: we now know who is not buying Italian bonds. As IFR reports, "European banks are planning to dump more of the €300bn they own in Italian government debt, as they seek to pre-empt a worsening of the region’s debt crisis and avoid crippling writedowns – a move that could scupper the European Central Bank’s efforts to bring down soaring yields. Still reeling from heavy losses on money they lent to Greece, lenders are keen not to make the same mistake twice.Then, under the pressure of governments and a hope that credit default swaps would protect them against heavy losses, they held on until it was too late to sell." And for our European readers who may be wondering who the dumb money will be as this tsellnami unleashes, we have one word: you. "With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some of Europe’s largest bank say now is the time to accelerate disposals. Many are also reversing long-standing policies of buying into new Italian bond issues, denying Rome an important base of support." And there you have your explanation for today's action - yet another headfake to get the idiot money foaming at the mouths while the insolvent banks quietly dump everything, sending the EURUSD once again higher as EUR repatriation resumes, this time with feeling.
UPDATED: Full Statement added
Headlines via Bloomberg for now:
*MF GLOBAL'S 1,066 EMPLOYEES HAVE BEEN FIRED, TRUSTEE SAYS
*MF GLOBAL EMPLOYEES LOSE JOBS AS BROKER LIQUIDATES :MFGLQ US
*MF GLOBAL TRUSTEE TO HIRE UP TO 200 PEOPLE TO AID LIQUIDATION
With the buying frenzy resuming on the lack of "headlines" out of Europe, it bears reminding that while risk on and off will be the theme of the day for a while, the entire Eurozone rescue, with the ECB refusing to participate directly, continues to be predicated on the EFSF and its ability to purchase the hundreds of billions of bonds rolling in the next 12 months from PIIGS, but mostly Italy, and now France. Which is why we are surprised that the news that the EFSF has now officially been "haircut" has not been quite noted. As Reuters reports, "political turmoil in Italy and Greece is complicating efforts to increase the firepower of the euro zone's bailout vehicle to 1 trillion euros, an official at the European Financial Stability Facility said on Friday. Euro zone countries had hoped to increase the EFSF's lending capacity by December, combining bond insurance with investment vehicles. But after the government in Athens fell and bond markets pushed Rome to the brink of a bailout that the euro zone cannot afford to give, the Luxembourg-based EFSF thinks it may be more realistic to aim for less leverage." In other words: kiss the full capacity bailout goodbye. And as the chart below shows, kiss any hope that the EFSF will be able to participate meaningfully in any European "renaissance" - while BTPs and OATs have seen some modest tightening on this "risk on" day, the yield on the EFSF has done absolutely nothing and remaind glued to record wides.
Given the hoped-for money printing and European sovereign bond monetization from the ECB would tend to reduce the value of the EUR, today's belief that a new government in Greece and Italy will somehow fix all that ills this vast economic region seems to have won. The EURUSD pair has performed a miraculous 650 pip roundtrip in the last two days as Bund yields rise, EFSF spreads deteriorate, and European funding remains blatantly stressed. Perhaps it is Ben's willingness to print vs Stark's that is playing out (among many other things) in this battle to the bottom.
*STARK SAYS ECB WILL NEVER BECOME LENDER OF LAST RESORT: NZZ
The Missing Chapter - A Personal View of Russia - Twenty Years After & The Inflation Pulse Returns and Implications on the Fall Melt-Up of 2011
The near paralysis of oil dealings with Greece, which has four refineries, shows how trade in Europe could stall due to a breakdown in trust caused by the euro zone debt crisis, which is threatening to spread to further countries.
"Companies like us cannot deal with them. There is too much risk. Maybe independent traders are more geared up for that," said a trader with a major international oil company.
"Our finance department just refuses to deal with them. Not that they didn't pay. It is just a precaution," said a trader with a major trading house.
Presented with little comment - except a reminder that:
"every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year."
Time to sell the EURUSD with both hands and feet, not to mention with MF Global-type leverage: that uber-contrarian FX indicator, Goldman's Thomas Stolper, who has not had a notable call correct in the past 2 years, just came out with a long EURUSD call, calling for a 1.40 target and a 1.35 stop loss. Yes, this means Goldman is now selling EURUSD until 1.40 and will begin buying it at 1.35. As a reminder here is how Stolper's last EUR/$ recommendation ended.
The IMF has released the report it prepared for last week's futile G-20 session, which incidentally saw the IMF being shut out of bailing out the Eurozone: a development which was adverse at the time but now is largely irrelevant: after all Greece has a new parliament, if still no ink to print tax forms. So what did the IMF say? Here are some key soundbites.
With the market enjoying a 30% below average volume rally this morning, as European debt spreads pull back to where they were 2 days ago, the University of Michigan survey of Consumer Confidence Sentiment rose to 64.2 from 60.9 beating expectations of 61.5. The bond-less equity market managed a short-lived rally in this wonderful news until a few realities hit home. Contextually, this number remains 25% below its average of the last 33years, the 3 month change in the outlook (or 'hope') sub-index jumped the most since June 2009, and 5Y inflation expectations are as low as they were Q1 2009 (and the second lowest print ever). As always, regarding the headline figure is often misleading as the reality of these surveys is often far more interesting and realistic under the surface.
And there they go again with that word out of place. Just out of Reuters:
- SLOVAKIA'S PRIME MINISTER SAYS EURO ZONE SPLIT MAY BE NECESSARY, DE FACTO SPLIT ALREADY EXISTS
"We are all FX traders these days" - that is what we said yesterday, and unfortunately courtesy of record risk correlations to the EURUSD persisting, this is what will likely be the case until the end of the year and into 2012. As such, fundamentals go out of the window, and the only thing that matters is beta and the various FX pairs, with the EURUSD by far the most critical. Which brings us to what Goldman believes will be the key highlights in FX trading until the end of the year in 9 convenient bullets. As a word of caution: few have ever made money being across the table from Goldman; usually it is much wiser to be axed the same way Goldman's flow desk is position, i.e., doing the opposite of what the firm advises its clients.
It is not often that we see an official admission by a company to its regulators that oops, 'it just may have embezzled' hundreds of millions of dollars from its clients. Today, courtesy of the WSJ, we do, namely that of MF Global advising the SEC that it has "discovered a significant shortfall in its segregated funds account." Expect to see this revalation in countless investor lawsuits against the company. Also, expect to see all bonuses paid to MFG's employees the day before the company filed to be clawed back in the form of fraudulent conveyance lawsuits, so to any former MF workers: our advice is don't spend all that client money just yet. Incidentally, the primary SEC supervisor for MF Global is Michael Macchiaroli at firstname.lastname@example.org - let's all take a minute to personally thank him for being on top of this whole bankruptcy like a hawk.
Whatever the European experiment once was, it has morphed almost beyond recognition. The policy responses have made the problem worse, not better, and it is becoming more complex. The contagion is spreading because every policy is linking the countries more closely, not in a controlled and thoughtful way but in a haphazard poorly thought out way. Making things more complex primarily in reaction to previous moves with limited understanding of what you are getting into is a recipe for disaster, and Europe has followed this policy for years now, it is a shame they don't see it before it is too late to fix.
Guest Post: Austrian Central Bank Strikes Exotic Deal with PBoC While Entangled in Alleged Kickback ScandalAustria's central bank, Oesterreichische Nationalbank (OeNB) delivers headlines ranging from opaque to criminal these days.
Market observers scratch their heads about a secretive agreement between the OeNB and the People's Bank of China (PBoC) that makes Austria the first non-Asian country permitted to engage in Renminbi investments with its Chinese counterpart as the intermediary. Further media inquiries were stonewalled.