EUR Rebounds From Multi Year Lows On Merkozy Meeting, Short Covering; ECB Deposits Soar To Record
Europe
has opened a new week with a modestly schizophrenic session: after
hitting a multi year low against the USD and an 11 year low against the
Yen, the Euro has seen a constant rise and traded nearly 100 pips
higher last at 1.2770 on renewed hopes that today's Merkozy meeting
would finally yield success. While that is clearly an utter delusion,
with the abosolute record of shorts in the EUR as we pointed out last
Friday, the smallest move higher can generate an avalanche of covering,
and as we said previously a "potential" margin hike by the CME at any
point in Euro contracts would leads to a QE-like surge higher in the
EUR. If only briefly. Elsewhere, bond yields were mostly unchanged with
the 10-yr Italian yield -3bps to 7.1% after rising as much as 4bps to
7.17% earlier; the 10-yr Spanish yield -5bps to 5.66%; was +1bp to
5.72% earlier; the 10-yr bund yield +2bps to 1.88%, first rise in 3
days. Most importantly, but no longer surprisingly, the ECB Deposit
Facility usage soared to a new all time high of €464 billion, an
increase of €199 billion since the LTRO hit the bank balance sheets on
December 21, which accounts for virtually all the non-rolled cash.
Simply said, Europe remains in suspended animation with hopes that a
deus ex (now that the aliens have been downgraded from "possible" to
"interference") will materalize preventing an allout spread collapse.Germany Issues Bills With Negative Yields As Economists Agree Country Is In Recession
Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before. As per the FT: "German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas...The German auction marks the start of another busy week of debt sales across Europe. France and Slovakia are also selling bills on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany will auction five-year bonds on Wednesday, while Thursday sees sales of Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds on Friday." Still the fact that the ECB deposit facility, already at a new record as pointed out previously, is not enough for banks to parks cash is grounds for alarm bells going off: the solvency crisis in Europe is not getting any easier, confirmed by the implosion of UniCredit which is down now another 11% this morning and down nearly 50% since the atrocious rights offering announced last week. On this background Germany continues to be a beacon of stability, yet even here the consensus is that recession has arrived. As Bild writes, according to a bank economist survey, Germany's economy is expected to shrink in Q1, with wage increases remaining below 3%. And as deflation grips the nation, potentially unleashing the possibility for direct ECB monetization, look for core yields to continue sliding lower, at least on the LTRO-covered short end.
Covering Gold Shorts From A Position Of Control Or Relinquishment?
Connected money’s moderate short position has prevented a second bullish
spike in gold's long/short concentration index (see chart 1). An upward
spike or spike cluster in the long/short concentration often precedes major
trend inflections. Will connected money's moderate short position be
reduced from a position of control or relinquishment? That is, will they be
able to cover this short...
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Hidden Mortgage Tax Gives Congress Another Way to Pick Your Pocket
A temporary extension of the payroll tax, spun as life saving for the average American, contains a hidden tax that will increase the borrowing costs of a 30-year mortgage. The hidden tax, adding over $6,000 to $300,000 30-year loan, goes into effect April 12. The new, hidden tax could very well give new meaning to the old saying "you ain't seen nothing yet" since real estate loan creation is bad... [[ This is a content summary only. Visit my website for full links, other content, and more! ]]
Italian Banks Plunge On Capital Raise Concerns
While headlines are reeling with the almost-50% drop (and 8 halts today alone!)
in UniCredit's stock price since the start of the year (as it tried
and 'succeeded' to raise capital from clearly risk-averse investors),
the rest of the Italian banking sector is now 'crashing'. With bank stocks down 12-20% year to date
across the board, the clear fear is that the cost of raising real
equity capital (not finding some short-term funding crisis solution)
remains extremely high and as we tweeted last week, if
the EUR7.5bn capital raise caused a 40% sell-off in UniCredit, how is
the market going to cope with the EUR115bn more that is needed? Good Luck.Italian Bonds Surge To Early November Wides
10Y Italian bonds (BTPs) ended the day at their second-widest closing spread to Bunds ever (at 533bps). Only November 9th saw a wider closing print and of course we saw margin hikes at LCH CC&G. 10Y yields are at 7.16%,
their highest since just after Thanksgiving but we do note that 2Y
yields have stabilized at around 5.00% yields (having peaked near 8%
during thin Thanksgiving trading). It seems apparent that perhaps
traders front-running LTRO's impact have compressed the 2s10s term
structure but much clearer to us is Mr. Market's obvious desire for more money-printing now as BTPs are pushed to unsustainable levels once again - and the banking-to-sovereign vicious circle transmission of insolvency cranks up.European Companies Are Now Funding European Banks And The ECB - Is "Investment Grade" Cash Really Just Italian Treasurys?
While hardly news to those who have been following our coverage of the shadow banking system over the past two years, today Reuters has a curious angle on the European "repo" problem: namely, it appears that over the past several months the primary marginal source of cash in the ultra-short term secured market in Europe are not banks, the traditional "lender" of cash (for which banks receive a nominal interest payment in exchange for haircut, hopefully, collateral) but the companies themselves, which have inverted the flow of money and are now lending cash out to banks (with assorted collateral as a pledge - probably such as Italian and Greek bonds), cash which in turn makes its way to none other than the ECB (recall that as of today a record amount of cash was deposited by European "banks" with Mario Draghi). From Reuters: "Blue-chip names like Johnson & Johnson, Pfizer and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders. One source with knowledge of the so-called repo deals or short-term secured lending, said the two U.S. pharmaceutical groups and French carmaker were the latest to sign up for them." Which intuitively makes sense: as has been well known for years, companies are stuck holding on to record amounts of cash, although what has not been clear is why? Now we know, and it is precisely for this reason: corporate treasurers have known very well that sooner or later the deleveraging wave will leave banks cashless, and corporates themselves will have to become lenders of last resort, especially in a continent in which the central bank is still rather concerned about sparking inflationary concerns.SocGen On Hildebrand Departure Next Steps: "Will SNB Have To Make A Move?"
As many have been suspecting all along, the political game involving the ouster of now former SNB president Philipp Hildebrand has been nothing more than a game of "pin the tail on the scapegoat" for bad monetary policy by the SNB, read the EURCHF 1.20 peg. In other words, it is quite likely that alongside the burgeoning SNB balance sheet, the bank had also accumulated quite a few losses, which the Swiss public will not be too happy with, and a change at the top was required. So what happens next: will the SNB relent and allow the peg to expire as the scramble for a (now much more diluted) CHF resumes ahead of the European D-Day in March, or will the peg be forced to be pushed even higher, at the expense of even greater balance sheet losses? Here is what SocGen thinks will be the next steps.
ECB Resumes Buying Bonds With Gusto As Italian Yields Remain Well Wide Of 7%
The ECB released its update of SMP purchases in the week ended January 6 (so with settlement through Wednesday): following two weeks of barely any acquisitions (€19MM and €462MM in the two weeks prior), the most recent number was €1.1 billion so gradually we are getting back to normal. The total amount of gross purchases is now €218.4 billion and €213 billion net of maturities. This will also be the amount the ECB will have to sterilize, hopefully without hiccups. Naturally, the more money is parked with the ECB, the less is available for sterilization. And since the total under the SMP will only keep rising, very soon the ECB will likely hit a plateau beyond which it will become increasingly difficult to successfully sterilize the entire weekly rolling amount. And the worst news is that despite the hundreds of billions in "sterilized" (when the banks are kept alive by the central bank, is it really sterilized?) monetizations, Italian yields are once again well over 7%, and the spread of Bunds is now back to a nosebleed inducing 522 bps: how long until LCH wakes up again and hikes margins sending the entire European bond complex a step function lower?
Long-Term Chart Caveats For Equity Bulls
While
relying on technical analysis and chart patterns may lack the academic
rigor that fundamental analysts (such as Bill Miller) and economists
(such as Joe LaVorgna) assume, it seems that relying on the reality of
what is actually going on within businesses is a fool's errand
currently. Furthermore, the just-around-the-corner nominal price action
impact of a Fed-driven QE3 expansion is on every long-only manager's
mind as good is bad and bad is great. As an antidote to this
enthusiasm, Dolmen Securities note two longer-dated chart analogs that should provide some food for thought for the more bullish equity investors (which now represents the massive majority of individual investors).
The 115 year Dow chart points to sideways price action in a broad
range to an 80 year trend at best while the analog to the wave
structure from the 2011 peak in the S&P 500 is echoing 2007/8's
pre-crash levels rather accurately. While neither chart portends or
guarantees an imminent precipice, given earnings downgrades and the box
Bernanke appears to be increasingly squeezed in, perhaps they signal the flush that the market needs as an excuse to ramp up the printing press one more time.Gold vs Gold Stocks - Goldman Releases "2012: A Gold Odyssey? The Year Ahead..."
As
one can glean from the title, in this comprehensive report by
Goldman's Paul Hissey, the appropriately named firm deconstructs the
divergence between gold stocks and spot gold in recent years, a topic
covered previously yet one which still generates much confusion among
investor ranks. As Goldman, which continues to be bullish on gold, says,
"There is little doubt that gold stocks in general have suffered a
derating; initially with the introduction of gold ETFs (free from
operational risk), and more recently with the onset of global market
insecurity through the second half of 2011. However, gold remains high
in the top tier of our preferred commodities for 2012, simply because of
the extremely uncertain macroeconomic outlook currently faced in many
parts of the world. The official sector also turned net buyer of gold
in 2010 for the first time since 1988, and has expanded its net
purchases in 2011." And so on. Yet the irony is, as pointed out before,
that synthetic paper CDO, continue to be the target of significant
capital flows, despite repeated warnings that when push comes to shove,
investors would be left with nothing to show for their capital (aside
from interim price moves of course), as opposed to holding actual
physical (which however has additional implied costs making it
prohibitive for most to invest). Naturally, this is also harming gold
stocks. Goldman explains. And for all those who have been requesting the
global gold cash cost curve, here it is...SNB Head Hildebrand Resigns Over Insider Trading Scandal, EURCHF Floor To Go Next?
Just one headline from Bloomberg, which says it all:- HILDEBRAND RESIGNS
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