Goldman's Francesco Garzarelli has just released a follow up to the "next steps" piece from yesterday (which so far has been woefully wrong in predicting a ceiling to Italian spread). So perhaps this time Goldman will be a little more accurate, which for those who may be buying Italian bunds on the dead cat bounce, will not be a good thing. Here's why: " Should Italian BTPs trade above 450bp relative to AAA-rated EMU sovereigns over a period of time, the initial margin would increase by a further 10%. Currently, the initial margin for repo on Italian securities on LCH ranges between around 4% and 20%, increasing along the maturity structure." The take away from the above - another 10% margin hike is coming. As for those who bought Italian bonds from Goldman yesterday on hope that the bottom is in, better luck next time - as Goldman says "In the meantime, the higher priced Italian government bonds will continue to be sold, as commercial banks raise liquidity buffers as higher margin requirements are applied. On our central case, intermediate to long-end bonds should continue to be supported relative to AAA-rated securities by the ECB." Considering the 5s10s is most inverted since 1994, this is not a very controversial call.
Last week we pointed out that the export miracle leg-of-the-global-growth stool had been kicked out. Today , the second leg of the stool of main GDP drivers appears to be splintering as Wholesale Inventories dropped MoM for the first time since Dec10 (-0.1% vs +0.5% expectations). We patiently await LaVorgna's GDP downgrade...
We repost this Monday article simply because it is now more topical than ever following today's 10-sigma cataclysm in Italian bonds, and again we ask: when will the market ask what Blackrock's gross or net Italian exposure is?
The FoF Chairman speaks.
UPDATE: and in case you thought it was just Italy, the contagion is truly rotten to the core as OATs crack over 17bps wider to Bunds - the largest single-day widening in history and over 8 standard deviations.
Presented with little comment as we note the record-breaking move in today's spread between BTPs and Bunds is almost unprecedented and at 10 standard deviations is likely to have risk managers tapping trader's shoulders across many trading rooms. 2s10s and 5s10s curve inversion and a CDS-Cash basis that is now widening once again after some early compression just adds to the running-at-the-cliff's-edge feeling.
When we were hitting 1100 the market was in deep fear mode. Investors were on the verge of panic. Default was on the tip of everyone's tongue. Now at 1250, we are all waiting patiently for some positive announcements. There is little (if any) fear out there. Up here, I would want to be much more credit, and even bond specific. Italian 5 year bonds at 7.5% yield more than HYG (7.1%) and certainly have a lot more people trying to help them. I'm not sure I would put that trade on, but it may crowd out some investment in the high yield space, especially as we see some defaults rise. It is a credit pickers market here, not a broad asset class decision (particularly from the long side).
Previously we showed what the sovereign gross level exposure to Italy is. Now, it is time to get granular and show the data at a discrete level. Below are the banks most exposed to Italy. Don't forget that courtesy of our wonderful fractional reserve financial system, with everyone's asset being someone else's liability, the question then becomes who has most exposure to these banks, and then most exposure to banks that have exposure to these banks, and so forth.
65% Chance of Banking Crisis in November: Think Tank