Daily Musings and Music of a Euromarket Professional

Uncomfortable as it may be, being aware of sitting on a time bomb shouldn't keep us from being able to laugh about it - and to listen to some music!

Daily musings of a euromarket professional

Friday, 9 March 2012

09 March 2012 – “Moonage Daydream” (David Bowie, 1971)

After a 2-week break, things don’t look much changed out there, do they? Taken aside the whiplash experience earlier this week and yesterday’s upside correction, all on Greek default / non-default talks, of course, checking out screens doesn’t really reveal major changes.
Having been under the surface of the Indian Ocean, I do think I saw markets tanking earlier this week during a deep dive, but they resurfaced as well as I did. Looking for it, I did not see my friend the Baltic Dry any day under water during my stay, the latter having traded up every single day since 24 Feb (+13%). EUR off 200 ticks. Rest more or less same.
Talking of changes, on a personal worrisome note, Maldivian corals are reaaallly suffering massive bleaching compared to 10 years ago, as they are very sensitive to the increase in average water temperature. A stark reminder of global warming discussions, and possible impact on (soft) commodities, especially for other much bigger nations living off the Indian Ocean / Chinese See / Pacific rim.
What did strike me from a distance were questions of growth, or lack thereof, as reminded yesterday by the ECB’s now clearly negative growth outlook for 2012, China’s “modest” 2012 targets or Brazil’s 2011 reality, as well as Spain’s deficit case. Secondly, inflation is edging higher, pretty much everywhere (but in China), mainly commodity-induced. As 90s BuBa ueber-hawk Karl-Otto Pöhl used to say “Inflation is like tooth paste, once it’s out of the tube, it’s difficult to get it back in there…”
Of course, with a third of the EZ countries in recession, but with divergent Germany and France, a combined 51% of EZ GDP weight (GIIPS 32%, other Core EZ 12% + Belgium 4%) moving on, charting the course might be not be easy going forward. Likewise, had new ECB board member Coeuré speaking out against the risk of persistently too low interest rates for the second time in 2 weeks.

Equities opened flattish, as was credit, as Tue & Wed over-anxiety over Greece was followed by over-relief already yesterday.
Early Friday morning inaction, as markets come to grasp with this record-breaking “non-default”. Ok, Greece, after counting in CACs, will be relieved of some EUR 105bn of debt (and holders of the same amount of assets) (…) with voluntary PSI + CAC for EUR 197bn. General sentiment is that those resisting on foreign-law bonds (PSI extended to 23 Mar) might have a hard (or in any case very long) time getting much on their assets. Markets still awaiting ISDA decision (rather matter of fact-ly)(nothing yet by 17:30 CET), as the Eurogroup already saw Greece having met commitments.
It might be a very obvious remark, and without wanting to sound unduly gloomy, but the fact that the new Greek post-PSI bonds are quoted in the mid 10s to 20% yield area, is NOT comforting. So disorderly default has been avoided, and with it immediate contagion to the rest of the periphery, mainly Portugal (2 -10 YRS around 14-15%), but this will end up as triple-dip bail-out. Certainly unique?

Sovereign supply and New Issues in general taking Friday off. Had the BuBa announce a 6m bill auction for Monday. Comes in handy, as German 6m bills, risk on after the Greek outcome, or not, rather the later, or ueber-liquidity or not, trade again at barely 0%, if not slightly negatively

On the LTRO2 size competition (EUR 529.5bn with 800 banks), I was obviously slightly off, as most were (11% off my median, 8% of my max estimate). So that cake was really good. It seems that Draghi’s pep talk eventually went down with some initial, vocal opponents and in Germany by and large (400 banks, knowing that Germany hosts thousands of independent, small, saving as well mutual banks).
In any case, and seeing the jump in overnight ECB deposits (despite repeated assertions that depositors are different from the takers), there’s not immediate worry about liquidity in the system. It might be the collateral that might be more difficult to find. While no immediate increase from the 1% is in the card, as taken from yesterday’s ECB news conference, any increase here would make carry less interesting, while the 75cts negative carry on deposits versus repo costs ought to remain constant. No biggy right now, but a thought to keep stashed away somewhere, should rates tense at some time.

ECB deposits at EUR 801bn (after EUR 807bn) still slightly diminishing on a daily basis after having shot up immediately by over EUR 300bn after LTRO2 (from EUR 475 to EUR 777bn, then adding up to hit a new record of EUR 827,5bn this Monday) .
Obviously, next to the EUR 300bn spare change the very next day, keep in mind that the current maintenance period ends 13 Mar and that reserves do build up towards the end of each period.
VIX back to 18 at US Thu close, down from Wed 21.2 spike and fading back to 16.8 at European close.
Brent / WTI about stable at 125.0 / 106.9 in the morning. +$1 later. Slightly off this week’s peak, but having clearly traded a new historical high in EUR at 94.50 (from previously EUR 92.80 a barrel in Jul 2008). As reminder WTI summer ’08 high was $ 145.30.
Gold stable just a tick below $ 1.700 in the morning, recovering from its last 2 weeks 7% slide from 1791 down to 1663. Tick higher in Fri mood. 1790 area definitively hard to break for the moment, bit of confirmation of a triple top here. Need inflation to the rescue here. For oil and gold, a (slightly) quieter Middle-East situation calmed tensions.

On the (last 2 weeks) week, compared to my last read Fri 24 Feb  :
-          Higher volatility and excitement, fear and relief.
-          10 YRS spreads: 10 YRS swaps +44 (+2), Finland +44 (unch), Netherlands +50 (+3), Austria +105 (-4), France +110 (-6), EFSF +132 (unch), Belgium +160 (-15), Italy +303 (-52), Spain+319 (+6).
-          Yield-wise: Germany 1.79% (-10 bp), Finland 2.23% (-11 bp), Swaps 2.25% (-6 bp), Netherlands 2.29% (-8 bp), Austria 2.84% (-14 bp), France 2.89% (-6 bp), EFSF 3.11% (-10 bp), Belgium 3.39% (-26 bp), Italy 4.82% (-63 bp), Spain 4.98% (-5 bp)
-          Italy clearly the great winner of these last 2 weeks in terms of post-LTRO feeling, as well from the (en)lightened atmosphere.
-          Credit 133 (from 130 or -2.3%), Financials 211 (from 214 or +1.4%) and Sovereigns 353 (from 344 or -2.6%).
-          European equities +0.1% (from 2522) and the S&P +0.8% (from 1363). Slightly out of sync with credit.
-          EUR 1.311 from 1.341 (-2.2%)
-          Baltic Dry 824 from 718 (+15%. Steadily coming back from hiding at the tune of 1.5% per day ). VIX 16.7 from 16.8 (got itchy, went back to sleep). Brent from 125.9 from 123.5 (+1.9%).

So was the past 2 week’s action just some kind of daydream? Probably not, if you ask Greek debt holders, but for the rest?

Inspiration factors for the coming week: Greece, certainly. Eurogroup, too. IMF Greece package 15 Mar. ZEW. FED meeting. European inflation. US retail sales, inventories. Quite dense sovereign auction calendar.
Monday: DE Wholesale prices, IT GDP, JP Machine orders &  consumer conf. GE EUR 4bn 6m bills (Yes, those trading at a negative yield).

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