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

Saturday 25 February 2012

09 February 2012 – “Banana Boat Song” (Harry Belafonte, 1956)

09 February 2012 – “Banana Boat Song” (Harry Belafonte, 1956)

Daylight come and me wan' go home… Nothing neither crisp nor new overnight with markets in the US and Asia holding up on news that the Greek situation will come to a positive end. The fact that talks broke down during the night and that the Greek FinMin flew out to Brussels with an unfinished packet didn’t bother either. It seems to be market consensus that it will take whatever necessary, but that’ll go through. Still, timing’s getting really tight and there are still plenty of puzzle pieces that still need to find a home. China CPI on the high side, maybe too high to have the POBC move soon. Markets on positive footing nevertheless, while waiting for central bank news. BoE announced a widely expected GBP 50bn increase in QE. Duh. ECB rates unchanged. Duh.
Not much to chew on, while waiting for some Greek updates (eventually the inner Greek agreement was announced later by Draghi). Ireland, btw, is looking forward to the answer as well, in understandably “Then me, to” fashion. Portugal IMF review starting next week, as well. Moral hazard questions always coming back to haunt, as soon as you move anything. If for the Greeks, then what for the others? Already had that on ESM loan levels. Eurogroup and IMF responses to the Greek agreement (amongst themselves) to the Troika demands at this stage more polite and supportive, if not fresh, rather than really thrilled. Some AAA country barrage on any hasty final decision.

Once more, a very limited volatility. Bunds weak into close. Credit mostly in line with equities with Financials still on the heavier side, giving back some late gains, still over the 200 index mark. Closing where we started where we closed with nothing decided at this stage.

Draghi meeting to pass time. Not especially enticing, subdued outlook on economy, expected to bring down inflation over time. ECB stressing that all gimmicks are of temporary nature (Wink Bundesbank), so don’t expect much more. Short speech, as it is. Trichet was entertaining longer on that part. Q&A of course on ECB Greek holdings (Can’t take a cent loss here…). Credit crunch concerns seriously stressed, explaining new loan collateral windows. Obviously, money is NOT filtering down into the real economy. LTRO money acknowledged to be used for (sub) debt buy-backs (had a flurry of these lately) and to honestly make money out of it. It’s an honest to God biz decision, man! Reminder that EZ average deficit figures better than the rest of the World (Ciao to the USUKJapan…). Refreshingly clear. However, Draghi very clear that the whole gimmick stuff is just there because European finance is stuck.

Smart closing move on its Greek holdings: the ECB can’t lose a cent on them, but if it gives up profit by selling them to the EFSF (i.e. the governments), than that’s permissible. Nice way to pitch the responsibility of the transfer union back to the member states. Just need to find someone now to willingly pick up the tab. Don’t think the idea would pass the Bundestag floor door.
ECB deposits about unchanged around EUR 495bn. Draghi joining in the “Guess LTRO2 size” competition and hitting for a similar sized package. Seems rather conservative. Especially after his product pep talk of there being no stigma to honestly indulge in a seriously good carry trade.

Baltic Dry rising again 2.8% to 695. End of the slump? Having at last found a floor, we can test some charts. Hmmm… next Fibonacci resistance at 1000 (+44%). That won’t do. Will need to have offer and demand balance that out. Charts useless.

Very subdued primary side, as everyone in wait and see mode. Westpac inaugural EUR 4 YRS covered bond drew much demand and priced much tighter than initially expected. Belgium to issue up to EUR 500m 10 YRS tomorrow on its reverse enquiry auction window, as it happens on the tightest level to Bunds since July last year (1 year high / low +360 in Nov 11, +80 April 2011. Both mean and average around 170).

I did send out yesterday’s message a couple of minutes too early, as Spain finally allocated EUR 4bn on its 2022 increase. Eventually people just wanna go home.

Spreads to Germany initially stable and then tightening on light risk on mood, which sent futures tanking: 10 YRS swaps +41 (-1), Finland +42 (), Netherlands +47 (), France +103 (), Austria +108 (-1), Belgium +159 (+3), Spain+322 (+15) and Italy+360 (-2). German 10s back to just over 2%. 2 YRS 0.22%. 5 YRS just under 1%.
Note France and Austria falling to double digit spreads to Bunds. Spain laggard, as probably digesting yesterday’s 10 YRS.
Italy coming back strongly on Spain lately. As a reminder, Italy traded some 50 bp below Spain, until things got awry last summer and BTPs declared bunga bunga: Italian 10s then widened to 150 over Spain in November, coming back nearly flat end of November before crashing to 200 over end of the year. Since then, the spread has been coming back neatly and regularly to now about 30 bp.

As yesterday: Greek solution seems overpriced, while geopolitical risk and tensions underpriced.

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