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

Wednesday 16 May 2012

16 May 2012 – "I Put A Spell On You " (Screamin Jay Hawkins, 1956)

16 May 2012 – "I Put A Spell On You " (Screamin Jay Hawkins, 1956)

Nothing like some self-satisfaction. Yesterday’s “Greased Lightnin’ “title of the wrap was just so prescient… Chosen before Hollande’s plane got stricken by lightning (Was it Zeus’ ire???). Whatever. Padding my own shoulder: Well done.

The first Merkollande meeting yielded the expected results (as in “No, there was no clash”) and some support for Greece staying in the euro-zone, but obviously that decision depends on other factors, namely the Greek people in the first place. Had Lagarde stating that one couldn’t exclude a Grexit, just another official statement of evidence. Evidence as well seems to show that Greeks withdrew EUR 700m of cash out of their banks lately…
US equities closed in the red, again, pretty much on the lows, after having trailed higher after European close and down over 1% from the day’s highs. Asia actually rather resilient (Well, down, but not out), but with losses speeding up once European futures started to trade, opening down another 1%. EUR joining the plunge and nearing lows traded in early 2012 (1.2675) with a 1.268 LOD.

Had a bloody European bond opening with Italy and Spain hit hard and trading out by up to 15 bp in 10s, hitting symbolic levels of 6% and just short of 6.50%, as well as 500bp to Bunds, for Spain. Gulps!
Still, once having traded out new lows for this year, and with no bad news striking, things somehow relaxed, especially after the French auction results.
No European figures with exception of EZ CPI for April with an expected +2.6%, down from the initial sticky 3% to 2.7% we had since Q4/2011.

Government bond supply with France with hitting the targeted EUR 8bn with all rates (exactly) 11bp lower than one month ago, which in itself is no real surprise, but reading it seems to have reassured markets. EUR 2.5Bn 2s at 0.74% (after 0.85%), EUR 0.9bn 3s at 0.95% (after 1.06%), EUR 0.9m 4s at 1.37% and finally EUR 3.7bn 5s at 1.72% (after 1.83%). Needless to stress that one month ago French 10s were trading 3.09% (compared to this morning’s 2.90%). Spread to Germany was then little changed from today at 139. But then again, French auctions are well orchestrated and don’t fail. Added about EUR 1.2bn in 10-15 YRS ILBs later. Higher rates though…170 bp to the curve for 10 YRS ILB seems cheap with regards to actual inflation. It’s a technical market, though. Maybe explained by the demand for a higher credit premium.
The other auction exercise of the day was the umpteenth attempt to see how low one could sell German Bunds and this happened to be at 1.47% today (EUR 5bn sold at 1.47%, of which about EUR 900m retained for market interventions). It’s worth noting that, unlike at the last sales, the auction was oversubscribed with EUR 6.1bn in bids, of which more than half were non-priced, meaning “at market”. 1cts of tail. All-time low were about 1.435% traded Monday morning and briefly during this morning’s bleak open. If that result is not a cry of desperation, what is???

Somehow, this result spoiled the mood somewhat. Having traded up a small 1% after the publication of the French auction results, and briefly dipped into positive territory, we had a bit of a slump with equities staying slightly in negative.

Once more equities so much more resilient and sanguine than credit, which just keeps trading like a damp mattress. Main opening more than 5 wider and sticking there. Financials nearly 10 wider, before recovering somewhat. Need equities to all turn positive over lunchtime to have both indices take back 2 ticks from their high print.
Eventually by noon, it was decided that the world was not gonna drown today and the periphery swung back with a vengeance, tightening by 5 to 10 from yesterday and hence by up to 25 bp from the opening highs.

Talking about the periphery, given late volatility and actual levels, don’t be surprised, if haircut increases rumours from the clearing houses pop up.
On this week’s auction menu, we actually still have Spain left with EUR 2.5bn 3 to 5s left to sell tomorrow. The unlucky thing is that tomorrow is a holiday in large parts of Europe. Then again, a lot as been said about how the LTROs have pushed the domestification of the periphery debt, so it will be up to the Spanish banks to step up to the plate. Getting into fado mood, when seeing Portuguese Q1 unemployment figures rising further to 14.9% (after 14%). Better than the neighbour, but hard nevertheless.

One lone (courageous) covered bond offering by Finnish OP Mortgage Bank for a well-received EUR 1.25bn of 5 YRS at MS+32 (after initial pricing thoughts of mid to high 30s). Managed to price through secondaries. Ah! Nordic covered bonds’ magic. Always works! Always puts investors under a spell.

US Mortgage applications on the rise (lower yields). Housing starts at 717k higher then expected (685k) with prior data revised upwards, too. Upwards revision of building permits as well. Ind Production printing higher than forecast at 1.1% (fcst 0.6%), but with prior data pretty similarly revised downwards, hence rather neutral. Pretty much same for capacity utilization. Oil stocks higher than expected, but compensated by higher draws of distillates and gasoline.

Afternoon session marked by divine interventions. After Zeus, we had Hermes, protector of commerce (certainly including traders) (and anecdotically although of thieves) (certainly including...euh... lots of folks) putting a spell on the mood. The official announcement / confirmation at 14:000 CET of another round of Greek elections on June 17 was just a blip on the screens and simply went widely ignored. Could have been some kind of Jedi mind trick, too.  (link). "This isn’t the crisis you’ve been looking for…" Especially when the ECB solely spells out a “strong preference for Greece not to Grexit”, but then again, can’t probably say much more.
Is it the less austere announcement of a pay increase of government ministers in Germany that had Bunds tanking about the same time? Had Italy and Spain trade up to 12 bp tighter, before giving back some into the close, as were equities, although by then credit had decided to come back. Understand who wants...
Eventually rumours into the close that the ECB was halting lending to Greek banks unless a recapitalization of the latter by the EFSF was sped up brought things back into reverse, with the EUR immediately loosing 50 pips before rebounding 25 and equities brought back to unchanged / negative territory. I hate COB rumours, as within 30 minutes what sounded sensible makes you look like a complete fool…

EUR slipping into levels unseen for a while. Had a low of 1.2675 early this year. Similar level in Q4/2010, then recovering from a 5-YRS low in the 1.20 area (Summer 2010)(Hey, wasn’t that already Greece???). Had before that 1.25 / 1.27 area as support after th post-Lehman crash from 2008.  Moved out from 1.27 to steadily rise to that 1.60 starting Summer 2006. So, presto, we are starting to get near to key levels. A breach of the 1.26 / 1.27 area would be real bad from a technical point of view. Knock-on effect on commodities will cease at some point, which brings us back to imported inflation (bad for all), but enhanced export possibilities (Good for Germany).

Greek bonds guestimates: 2023s probably worth 29.50% and 2042s 22.25%, from yesterday’s 29.0% and 23.25% (in yield), so a bit twisty. Talking about low double digits in price terms (14 and 12.50 cts on the EUR).
Quotes were 20.25% and 16.75% before the elections 10 days ago.

Closing levels:
10 YRS Yields: Germany 1,47% (+1); Luxembourg 1,94% (+2); Finland 1,92% (unch); Swaps 1,99% (+2); Netherlands 1,97% (unch); Austria 2,61% (+1); EIB 2,65% (+3); France 2,88% (-1); EFSF 2,84% (+2); Belgium 3,24% (-1); Italy 5,81% (-5); Spain 6,27% (-6).

10 YRS Spreads: Luxembourg 47bp (+1); Finland 45bp (-1); Swaps 52bp (+1); Netherlands 50bp (-1); Austria 114bp (unch); EIB 118bp (+1); France 141bp (-3); EFSF 137bp (+1); Belgium 177bp (-2); Italy 434bp (-6); Spain 480bp (-7).
Lacklustre hard core EZ, except into the close. Shouldn’t last. Too bad it loaded up on an auction near the lows.

EUR swap curve 2-5 YRS 38,8bp (+2,9); 5-10 YRS 62,2bp (+0,7) 10-30 YRS 24bp (+1,2).
2 YRS German BKOs closed 0,06% (unch) and 5 YRS OBLs 0,52% (+2). Are you kidding, no one loved BOBLs no more???

Main at 177 from 175 (1,4%); Financials at 289 after 289 (-0,2%). SovX at 302 from 298. Cross at 737 from 738.
Credit so heavy and static. Won’t tighten. Will bring equities down – or suddenly snap tighter. Sense the first option, though.

Stoxx Futures at 2155 / +0,0% (from 2154) with the S&P at 1337 (-0,2% from 1340, at European close).
VIX index unchanged at 21,2 from yesterday same time.

Oil 93,7/111,7 (WTI/Brent) from 94,6/111,9 (-1,0%/-0,2%). Gold at 1543 after 1554 (-0,7%). Copper at 350 from 352 (-0,7%). CRB closes 288,9 from 288,5 (+0,2%). Still bleeding.
Baltic Dry index stopping late slippage and adding 7 to 1137.

EUR 1,272 after 1,276
ECB deposits just about unchanged at EUR 788bn.
Given the speed of this piling up and the ambient mood, we’re bound to break the early March high of 828bn very soon. While at that time, it was spare LTRO #2 money that hadn’t yet found enough periphery bonds to sink its teeth into, where is that now coming from (outside the unwillingness to lend to anyone else???).
All levels European COB 17:30 CET

Rest of week:
Tomorrow will be Ascension Day in most of Continental Europe and will probably be bridged into an extended weekend by numerous players.

Germany: Fri PPI
Other EU: Ind orders Fri. SP GDP on Fri.
US: Thu claims & Leading Ind. Fri nada.

Click link on title or below for today’s musical support:
(Additional link because it was so cool when entertainers were entertaining http://youtu.be/a1AE_bCoPSI )


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