Wednesday, May 23, 2012

Euro Basis Swap Flashing Coordinated Liquidity Intervention Red Light

As we noted last week, the EURUSD cross-currency basis-swap - or European bank's most desperate way to fund itself in the absence of any further ECB aid, a lack of collateral, and no interbank-lending (trust #fail) - is flashing a warning light. Today that light went ultraviolet. For maturities beyond the LTRO (greater than 3Y or so) the current level of stress is greater than at the end of November last year which was the trigger for the globally coordinated central bank response. 3Y basis swaps are now back above 70bps (below -70bps) and near record lows - signaling a real desperation for term funding among European banks - as we explained here.

 

An $8bn Loss Or Was JPMorgan 'Unhedged, Long-And-Wrong' Post-LTRO2?

The full set of DTCC data is in (that is the repository for reporting CDS data) and reading between the lines provides us with some significant color on what was occurring at JPM's CIO office. First things first, JPM has derisked some/all of the tranche position but remains (we suspect) long IG9 credit hedged by a plethora of liquid on-the-run credit hedges. There appears to have been a delta-neutral HY short credit unwind (in mid-Feb) but no HY9 tranche positioning and nothing since then. However, when we look into IG9 gross and net notionals between tranched (the tail-risk hedge we believe they put on originally) and UnTranched (the index market where the whale managed to delta of the tail-risk hedge) the story becomes both confirming of our hunches and also very concerning. The charts below tell the story of an early unwind of the Fed-induced-failure tail-risk hedge but an arrogant momentum chaser that left the massive long credit index position (hedge of a hedge) that had been the cause of dislocations in the Index-arb business (that other media entities have focused on) flapping into and after LTRO2 into around early-to-mid April (when we are sure Jamie got the call). The changes in gross notional suggest a $120bn tranche position - which adjusted for leverage and the unhedged 'hedge' left on through March adds up to a $2.5bn loss. Add to this the guesstimate cost of 10% of notional (based on mezz price moves) to unwind the remaining tranche position ($5.5bn further losses) and the total could be around $8bn loss on this mess. However, there has been huge 'technical flow' in almost every liquid credit index (IG18, HY18, HYG, and JNK for example) which would have reduced the loss - though left considerable basis risk (hedging the loss with an imperfect hedge). Perhaps given the tranche unwind last week (and the skew compression), the rally in credit indices this week reflects some more unwinds of the tail-risk's hedge and a slowing of the technicals in the market - leaving just weak fundamentals - though we note IG9 index notionals did not shift much meaning they will likely try and unwind this position against the random market hedges they picked up in the last month (leaving huge basis risks for anyone who cares to press).

 

EURUSD Plunges To 22 Month Lows


UPDATE: EURUSD at 1.2578 - back to July 2010 levels
EURUSD just broke back below 1.2600 (1.2597 lows) which takes it back to August 2010 lows and well on its way to the 1.20 levels that the current Fed and ECB balance sheets would imply - as we pointed out just two weeks ago. EURUSD remains notably below the swap-spread implied valuation as once again liquidity and credit risks get priced into the cross.






Today’s Items:

First…
Austria Joins Germany In Opposing Euro Bonds
http://www.zerohedge.com
While France has gone socialist and will most likely support Euro-bonds, Merkel, of Germany, has found an ally in Maria Fekter, of Austria, for its opposition. In short, the AAA-rated countries refuse to bail out the non AAA-rated countries and if push comes to shove, Germany, and perhaps Austria, will be looking for the exit out of the euro ghetto.

John Williams of Shadowstats.com produces his own statistics based on government data. Most of what he does is merely adjust government data to make it consistent with prior methodology. With that in mind, the real GDP is below where it was in 2000. That’s right, 2000. 9-11 had not happened yet and our national debt was $5.67 Trillion. In short, get ready folks because it is coming closer to paying the piper.

Next…
Swiss Parliament Examines ‘Gold Franc’ Currency Today
http://www.goldcore.com
http://www.zerohedge.com
A panel of the Swiss parliament is discussing the introduction of the parallel ‘Gold franc’ currency. So, if the phony Swiss Franc, that is tied to the euro, goes to zero, the nation will have a backup currency that is gold. The question is… Where are they going to get the gold since there allocated gold is missing? Oh yes, they will get back from the Federal Reserve. What they will most likely get instead of gold, is some pretty pieces of paper saying Federal Reserve Notes on them.

Next…
Uncle Sam bullying Brokers Over Silver?
http://www.youtube.com
SGT Report has come out with another video showing that brokers are getting bullied by federal regulators. Federal regulators do not want brokers to even discuss how to obtain physical silver. Well, folks, I am not a licensed broker and I am all to happy that I can safely give, as part of free speech for now, a few online places to buy physical silver; therefore, if you are prepared, keep stacking physical.

Next…
Gridlock Eases in Many Metro Areas
http://www.usatoday.com
Thanks to sustained high gas prices and the dismal economy, traffic congestion dropped 30% last year from 2010. This is the largest drop since the recession in December 2007. Of the 100 most populous metro areas, 70 saw declines in traffic congestion while just 30 had increases.

Next…
The Top 50 Excuses For Not Prepping
http://www.shtfplan.com
Here are a few…
1. ”Once Barack Obama Wins The Election Everything Will Be Better”
2. ”Once Mitt Romney Wins The Election Everything Will Be Better”
3. ”I Need To Save Up For Retirement Instead”
4. ”The United States Is The Greatest Nation On Earth – There Is No Way That It Could Collapse”
5. ”I Don’t Plan On Becoming A Card Carrying Member Of The Tin Foil Hat Brigade”

Next…
Shortfall at TSA
http://thehill.com
The U.S. Senate, lead by Senator Mary Landrieu, is seriously considering increasing airline fees; so that, the TSA can continue to feel up your pre-teen children and grandmothers as they are stealing valuables from your luggage. Remember this as you caste your manipulated vote this November.


Finally, Please prepare now for the escalating economic and social unrest. Good Day



Better Than Expected New Housing Data Is Not What The Doctor Ordered


For the past several months, worse was better. Today, better is worse, after the release of April new home sales, which printed at a seasonally adjusted 343K annual rate, on expectations of a 335K print, or an increase from the April print of 328K, since revised to 332K. The mean and median price rose by 5.1% and 4.9% respectively. In non SAAR terms, this represented a total of 33K units sold in April, even as the units Under Construction and Completed were flat or declined, respectively. Sadly, this better than expected number, only meant that just as the market was getting quite gung ho on more QE in the aftermath of the ongoing European collapse, the good news pulled the rug from under the market, and the result was a plunge in virtually all risk assets. As for the big picture, and how much of the 11K increase really matters as the actual series continues to plumb all time lows, we leave it to readers to decide.




S&P 500 Technical Review

Eric De Groot at Eric De Groot - 7 minutes ago
The red dots on the NYSE composite illustrate statistical spiks in the TRIN (chart 1). These readings almost always precede tradable bottoms in the S&P 500 by several days/weeks. The quality of these signals can be improved when combined with trend force and concentration readings. Chart 1: NYSE Composite and Trin 2011 The NYSE has yet to record a red dot (chart 2). This... [[ This is a content summary only. Visit my website for full links, other content, and more! ]]

  more »

Tricks Of The Trade

Admin at Jim Rogers Blog - 1 hour ago
I don`t like to sell something short unless it`s unbelievably expensive. -*in Hot Commodities * *Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.*



more »

Many Individual Investors Are So Influenced By The News That Many Get Lost In The Maze

Admin at Marc Faber Blog - 1 hour ago
Many individual investors are so influenced by the news that many get lost in the maze, unable to see what the smart money is doing. News is of little value as it misleads more often than it guides. - *in Forbes* *Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.*


  more »

Chicago Fed National Activity Index (CFNAI) And S&P 500

Eric De Groot at Eric De Groot - 2 hours ago

Negative divergences tend to setup equity declines. No divergences yet. Chart: Chicago Fed National Activity Index (CFNAI) and S&P 500 AVG ------------------------------------- Insights is intended to reflect excellence in effort and content. Donations will help maintain this goal and defray the operational costs. Paypal, a leading provider of secure online money... [[ This is a content summary only. Visit my website for full links, other content, and more! ]]




Live Greek Election Poll Tracker

Courtesy of Reuters, we now have a handy, bookmarkable interactive chart for everyone's convenience to keep track of this data. And while we still believe the actual result will be meaningless, as a coalition government, either pro or against bailout, will be unformable, we are certain that the second we read that Syriza support is waning (one day, only to surge the next), the EUR, courtesy of its record short interest, and all related risk assets will soar. Keep a close eye on this chart.





UBS Cranks Up The European M.A.D.

Building on yesterday's discussion of the lack of an integrated banking system and credible lender of last resort in Europe, UBS appears to have gone thermonuclear this morning. Their lengthy article 'What If Greece Goes?' outlines the contagion risk from an 'orderly' exit as markets, international trading companies, and bank depositors will all anticipate the consequences likely resulting in economic disorder. Their remains a great deal of complacency about the ability of firewalls to prevent this - but as they note - should bank runs begin, even a pan-European deposit guarantee scheme will not stop rational depositors extending bank runs instead of gambling on the probability of policy-maker actions. Laying out Greece's options (renegotiate austerity or default), UBS summarizes the situation more profoundly: "Integrate Or Die" as without a Euro confederation (in their eyes), continental Europe will cry 'havoc' once again.




Europe's Game Of Chicken Enters The Twilight Zone

Europe's game of chicken, all of which is geared to one simple thing - to spook the Greeks into voting for pro-bailout powers, and against Syriza - has now officially entered the Twilight Zone. In the latest episode of what can now simply be described as the world's most entertaining yet terrifying mutual assured destruction showdown, because should Greece leave, the destruction, at least in the short-term, will impact both Europe and Greece, although Greece will recover far, far faster as the standard of living there has already been crushed (which incidentally is the primary reason why Europe has lost control over the situation: without the carrot of welfare state promises, a Ponzi regime is meaningless), we learn that on Monday a Eurogroup Working Group held a teleconference in which officials "agreed to prepare for individual contingency plans if and when Greece exits." Here is the problem - the contingency plan can be summarized in one word: panic. Because absent a full blown coordinated monetary intervention, Europe's individual states are completely powerless, and they know it. Sadly, and this is where the farce and charade are complete, the Greek people know it too. As a result, this little adventure, leaked subsequently to Reuters, loses all utility. But we expect many more such escalations from Europe: after all we have nearly a full month before June 17: plenty of time to crush the market in order to get a reaction out of the Greek voters, European politicians and ECB bankers, just as Citigroup suggested. Only issue is, the more Greek voters are prodded into a corner, the more likely they are to simply snap.




Greek Election Aftermath In 1000 Years Of Context

We have already posted this fantastic timelapse in the past on various occasions, but it is always worth putting things in Europe in their proper context, such as this 1000 years of "Old World" history summarized in 3 minutes. Many say the European experiment will end if Greece votes the 'wrong' way on June 17. Somehow, after watching the below, we doubt it.




Sitting At The Edge Of The World

Whether it is the EU running to the G-20, nations in Asia, the IMF or Spain and Italy and their brethren calling for Eurobonds the distinction is easily made; you pay or you pay or you pay because I cannot. That is the cry in the wilderness as politely, very politely, quite politely everyone says, “No thank you.” The curtain is going down on the show and the normal pleas are being made to keep the spectacle in operation but the pocketbooks are closed and Germany and the rest are not going to bet the family farm when the final act draws nigh. The Elves in the boulders cackle and the “invisible people” move on and sigh as the ending of one more chapter is inscribed in the Book of Life.




Daily US Opening News And Market Re-Cap: May 23

Following the morning in Europe, a generally risk-off tone is observed, with stock futures sitting just above session lows and the German Schatz auction resulting in record low yields. Some of the risk-averse moves were noted following unconfirmed market talk that a troubled Dutch housing association may be pressed towards bankruptcy, however this seems to be linked towards an article concerning the Dutch central bank probing into the sale of derivatives to the housing group Vestia. Nonetheless, the long end of the Dutch curve remains well-bid and European 10-yr government bond yield spreads are seen generally wider across the board. Releases from the UK have come under particular focus; the BoE minutes showed an alongside-expectations vote of 8-1 to keep QE on hold. With some analysts estimating more of a lean towards further asset purchases, the initial reaction was strength in the GBP currency, but countering this effect was the parallel release of UK retail sales, with the monthly reading showing the sharpest decline since January 2010. Additionally, it was noted that several members of the board saw further QE as a finely balanced decision, placing GBP/USD back on a downward trajectory and briefly below 1.5700. Elsewhere in foreign exchange, current sentiment is reflected in EUR/USD, printing multi-month lows earlier in the session of 1.2615, with the USD index at 20-month highs which in turn has weighed on commodities.




Overnight Sentiment: Europe Front And Center As BOJ Checks To Fed

With only new home sales (which we actually report as opposed to NAR goalseeked marketing materials) to hit the docket in the US, the only newsflow that matters again will be that coming out of Europe, which is holding an informal summit. As BofA reminds us, the summit was originally set up to discuss growth. Now, it is there for Grexit damage control. Today's discussions will focus on the use of existing tools for supporting short-term growth. Spain and Greece are likely to be on the agenda as well. On Greece, although discussions should focus on the pros and cons of a Greek exit, we believe there will be no communiqué other than to mention that Greece should stay in the euro area and implement the programme. On Spain, discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector, a step Germany opposed in the past. Overall, we do not expect many decisions from the summit. Rather, we expect a communiqué about what was officially discussed, and a date for a later rendezvous. In other words, "investors are likely to be let down by today's summit" (that was BofA's assessment). Also let down, were markets in the overnight session when the BOJ, contrary to some expectations, left its QE program unchanged. As usual keep an eye on headlines: record EUR interest means violent short covering squeezes if the algos sense a hint of optimism in any red flashing text (if only briefly, as the long-term outlook for the situation is quite hopeless).



 

Frontrunning: May 23

  • Rajoy to ask for ECB assistance, according to reports (Sharecast)
  • Bundesbank Suggests Greek Exit From Euro Would Be Manageable (Bloomberg)
  • Unemployed Burn as Fed Fiddles in Debate Over Natural Rate (Bloomberg)
  • Regulators, investors turn up heat over Facebook IPO (Reuters)
  • China to boost private energy investment to bolster economy (Reuters)
  • OECD fears euro woe to snap brittle world recovery (Reuters)
  • China slowdown threatens Australia - World Bank (Herald Sun)
  • Guessing game begins over next Treasury chief (Reuters)
  • Italians spurn main parties in local polls (FT)
  • A fragile Europe must change fast (FT)
  • Spain to outline Bankia plan, may announce bailout size (Reuters)
  • China Should Adjust Policy Early - Government Researcher (WSJ)





New Greek Bonds Crash To All Time Lows As "Negative Pledge" Fears Emerge; The Portugal Case?

A quick look at the Fresh-Start Greek Government Bond (GGB2) complex shows that as of this morning it has tumbled to fresh all time lows across the curve, and now trades at a more than 50% loss to the March PSI conversion price. The reason for this dump is not so much on fear of a Greek exit, but once again a reflection of precisely what we expected would happen, and as explained in our January Subordination 101 post. Last week, the fact that a PSI hold out, holding English-law bonds managed to get par recovery while all the other lemmings have so far eaten a nearly 90% loss, has sparked a realization among all the other hold outs that since they have covenant protection, they should all demand the same treatment. And indeed, another one has stepped up, only this time not a holder demanding par maturity paydown, but one who has read their bond indenture and was delighted to find the words "negative pledge." As Bloomberg reports "a holder of Greek bonds that weren’t settled in the biggest-ever debt restructuring said he’ll demand immediate payment unless the government posts collateral against his investment. Rolf Koch, a private investor who says he holds 500,000 Swiss francs ($528,000) of the notes due in July 2013, argued that he’s entitled to equal treatment with Finland, which made getting collateral a condition of contributing to Greece’s second bailout. He wrote to the paying agent, Credit Suisse Group AG, invoking the bonds’ so-called negative-pledge clause, according to the text of a letter seen by Bloomberg News."



  Please support our efforts to keep you informed...
Thank You




I'm PayPal Verified    more »






Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)