Wednesday, November 9, 2011

Worldwide Markets Collapse Following Italian Bond Margin Hike

The much dreaded LCH margin hike came and went and while initially the market participants thought it was just a joke as nothing bad is ever allowed to happen anymore in these neverneverland markets, a few hours later the realization that this is all too real has finally dawned. The result is an epic bloodbath everywhere, but nowhere more so than in Europe, where one can kiss Italian bonds goodbye, and shortly French too, as the bond vigilantes demand that the ECB print now or else. Visually this is presented as follows: a 30 point drop in the ES, an unseen collapse in Italian bonds, and an explosion in the French-Bund spread. And since nobody can demonize CDS any more, we expect Europe to make selling sovereign bonds illegal next.

And Now: France

French Bund spreads have just crossed 147 bps as the "cash bond long yet unable to hedge with CDS" crowd realizes that the Italian contagion is about to hit Paris. And unable to hedge using creative modern financial instruments, said crowd has reverted to the good old fashioned version thereof. We call it selling. Expect the spread to hit 150 bps momentarily.

Market Stalls As LCH Announces Margin Hikes On Italian Debt

UPDATE: BTPs just opened modestly lower (for now)
According the note below from the LCH website, deposit charges on Italian bonds will almost double effective close today (Wednesday November 9th). The details can be found here.

LCH Raises Deposit Charge on 10-Yr Bonds to 11.65% From 6.65%
Initial reaction is -5pts in ES and 35pips in EURUSD (breaking back below 1.38).

Where To Invest Now? Goldman Cautiously 'Un'-Optimistic

We have discussed at length the slowing forward expectations for the next 12 months EPS of the S&P 500 and while every long-only equity strategist enjoys the same talking points of record profits, margins, global growth, and cash-on-the-sidelines, it seems Goldman is increasingly skewing back to a sense of reality (following last month's initial concerns). At cycle turns, analysts are always the 'most' wrong with their Birinyi-like extrapolations but a cautious outlook with expectations of a de minimus equity market over the next 12 months leaves Goldman rightly concerned that margins are peaking as consensus sees them growing and multiples will drop as policies remain volatile.
An S&P 500 target of 1200 for Dec11 and 1300 for Dec12 and a focus on quality, dividends, and defensives doesn't sound like the high beta momo double-bogey performance-chasing we have seen in the last few weeks is sustainable. Furthermore, their perspective on the October rally is it reflects a drop in the cost of equity as opposed to better fundamentals.

Frontrunning: November 9

  • LCH.Clearnet lifts margin on Italian debt (FT)
  • Chinese Banks May Issue $102 Billion In New Yuan Loans (China Securities Journal)
  • Greece Extends Suspense on Choice of Premier (WSJ)
  • IMF's Lagarde: Some Asian Countries Can Loosen Money (WSJ)
  • Berlusconi’s Resignation Shifts Focus to Forming Government (Bloomberg)
  • Merkel Advisers See German Growth Slowing (Bloomberg)
  • Fannie Mae taps $7.8 billion from Treasury, loss widens (Reuters)
  • Fed up! McCain predicts rise of third political party (Reuters)

Goldman Exposure To European Banks And Governments: $56 Billion

Since it has become fashionable to expose one's dirty laundry, we would like to simply bring it to our readers' attention that as per the just released Goldman Sachs 10-Q, the bank has revealed that it has $56 billion in pure exposure to European banks and governments, of which the most is to France, followed by Germany and the UK. We have excluded the "other" category as there is absolutely no clarity what "assets" are contained here.

Gold Over EUR 1,300 - On Way to ‘Infinity’ on Eurozone Contagion?

So far, gold has not managed to rise above the psychologically important $1,800 level. However, the real risk of contagion in the eurozone and the breakup of the European monetary union means that gold’s safe haven properties will be increasingly appreciated in the coming months. While much of the media attention has been on the political ‘punch and judy’ show in Athens, Rome and in the European Union there continues to be a failure to soberly analyse the ramifications of the crisis for consumers, investors and savers. The unprecedented scale of the debt crisis means that inflation and currency devaluations will almost certainly result from the crisis. Savers and those on fixed incomes will be very vulnerable as they were in the stagflation of the 1970’s and in the economic meltdowns seen in Argentina, Russia and in Belarus as we speak. Ron Paul gave another perceptive interview to CNBC yesterday and warned of hyperinflation and the possibility that the dollar could become worthless

Tokyo Starts Burning Radioactive Waste from Other Areas … Tokyo Governor Tells Residents to “Shut Up” and Stop Complaining
George Washington
11/09/2011 - 00:04
“Burning Radioactive Debris Will Only Serve To Further Randomly Spread Radiation Across Japan, As Well As The Rest Of The World” 

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