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

23 February 2012 – “Fall Behind Me” (The Donnas, 2004)

Same uneven start as over the last days. US and Asian sessions slightly lower to a tick higher at best, worried by growth outlook, rising oil and lack of other factors, news or figures to push markets one way or another. German IFO good news of the morning, clocking in at 109.6, the highest since Aug 2011 and 5th rise in a row since the through of Oct 11 at 106.5. Then again, limited impact as Germany’s (and to some extend France’s) decoupling from the rest of the EZ over the last month is a reckoned fact. Credit mixed with main stable, financials rather stable, despite worst then expected results, but sovereigns again on the slightly weaker side.
EU commission forecast revisions are not exactly upbeat with the EZ outlook negative and especially the outlook on the periphery markedly lower (Spain -1%, from previous 0.7%, last year 0.7%; Italy -1.3%, from 0.1%, 0.2% in 2011; Portugal -3.3%, from -3% and -1.5% in 2011 and Greece at -4.4%, from previously expected -2.8%, after -6.8% in 2011). France and Germany outlook revised 0.2% lower to +0.4% and 0.6% respectively, after 2011 rates of 1.7% and 3%. Austerity bites – and it won’t be the Franco-German tandem, which will pull the periphery. CPI outlook at +2.1% for the EZ as a whole, and not even much lower for the periphery, meaning you get a good case of getting less goods for money worth less. Ah. Stagflation…
Low volatility morning and lunch session. US open pushing equities 1% lower, though. US job figures about unchanged. Not much on Greece, outside the vote of the PSI swap and CAC activation. Greek FinMin unconcerned, whether CDS are triggered or not. It’s not like this is news, but then again, if that’s the case, why have waited so long??? IMF said to be not overly hot on increasing its share. Not helping afternoon mood. Credit holding better than equities on last day’s bizarre divergence pattern, knowing that by decorrelating every second day, the result remains the same. Final sentiment lifted by US equities ticking up on secondary figures in late afternoon. EUR at 1.33 at close. Life on its own.

No sovereign supply today, but a chuck of bills out of Italy tomorrow.

On the next LTRO size competition (Given reigning austerity, no prize, but a pad on the shoulder for who’s nearest):
Unless checking those 523 banks, which participated the last time, as well as those who didn’t (Some were very vocal about wanting to avoid any stigma), one by one, and actually getting honest answers, there’s no way to get any objective number on the  next LTRO’s size. There are some very educated and/or academic papers out there, but guess work is guess work (range EUR 300 to EUR 1.000bn).
So, I’ll add my guess: The previous LTRO had some EUR 291bn 7-days repo expiring the day before the LTRO, so let’s say a quarter was lengthened to 3 YRS (which already sounds aggressive), so the pure LTRO trade was EUR 489bn minus EUR 73bn, EUR 416 bn. Starting the next day after the first 3 YRS LTRO settlement, ECB deposits surged about EUR 200bn. So let’s pretend this was pre-empted liquidity and the rest really needed and cut this number by 2. Thus, the “Sarko trade” size was about a good EUR 300bn.
Draghi has been pushing this deal as being totally no-stigma laden. This time, some banks who didn’t participate last time will  do . Some will already be full and lacking imagination where the next collateral ought to come from. Finally, some will just take some again, just a little more this time. How much more?
Let’s try a low-fi psychological and totally non-academic approach: You’re invited by your in-laws and are offered seriously good cake. As you obviously enjoyed it, there will be another one for you, slightly bigger, the next time – and you know you’re actually supposed to indulge some more, and you will do so, yet you don’t want to look too voracious or, worse, desperate. So, a quarter more…
EUR 300bn +25% = EUR 400bn. This time we have the following repos maturing around the LTRO date: EUR 166bn 7 days, EUR 39bn 3 months and EUR 50bn 6 months. Let’s assume none of 7 days (as this time predicable), but the whole of the 3m and the 6m get rolled into 3 YRS, so that’s EUR 89bn. Add that to the EUR 400bn. That’s EUR 489bn. Hey, same number as last time! Cool…
Caveat 1: Available collateral and price thereof is certainly different now from December’s situation. Spanish 3 YRS govies at 3.16% are certainly less exciting then end of December, when they were at 3.70%, coming from about 5% when the 3-year LTRO was announced. Same goes for 3 YRS BTPs, now at 3.45%, at 5.50% for the first LTRO and at 6.60%, when announced.
Caveat 2: Wasn’t general consensus that banks should deleverage at some time?
Silly guesswork, but probably no worse than others’. But I may be wrong…Whatever, me too wanted to give a number: so EUR 489bn. And having EUR 978bn expiring within 3 months in 3 years sounds less threatening that EUR 1,000bn and more…

New issues starting the day on back foot. Still, another BBB (Danish) corporate done at tight levels. One other issue from a Danish Bank. Danish day in EUR markets.
Lack of traction and fantasy here. Won’t see much until next week. Waiting for the LTRO result might be a good excuse to sit on one’s hands. Witnessing recurrent “anti-new issues” in form of daily buy-backs and tender offers. LTRO related.

ECB deposits back to Tuesday levels at EUR 466bn, up EUR 17bn, with the LTRO in sight.
VIX closed again at 18.2, again down from 18.5 in the afternoon. Volatility remaining unvolatile these days. 17.6 at European close. Yawn!
Oil still pushing and ticking higher with Brent 123.3 / WTI 106.3, both up 50 cts in the morning and closing unchanged 123 / 106. Brent in EUR at 92 within one EUR of the July 2008 all-time high (USD 145, but wit the EUR 1.57).
Gold profiting from general unease, trading at out a new 2011 high at 1785, and counting, ready to tackle the 1800 Q4/ 2011 highs. Next stop would then be the 1900 all-time high traded in Sep 2011.
Baltic Dry back 706 from 704 after 706. My canary is regaining some colours, but still looks pretty pale.

Spreads to Germany about static. 10 YRS swaps +42 (0), Finland +44 (), Netherlands +47 (), Austria +111 (-1) France +117 (+1), EFSF +133 (+3), Belgium +177 (+6), Spain+317 (+1) and Italy +365 (+5). DBR 2022 1.88%, down 2bp. Spain 10s @5.05%.

Tomorrow: Raft of German Q4 figures (backwards looking), French Feb consumers (chronically depressed), IT retail sales. US Michigan, Home Sales. EUR 8.75bn Italian 6m bills and EUR 3.5bn 12m, plus EUR 2-3bn 2 YRS CTZ, plus EUR 11.5bn 5 & 7 YRS ILBs.

Uneasy, static market. Wouldn’t know where the good news were to come from.
Something’s gonna fall. Soon.

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