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

Thursday 14 June 2012

14 Jun 2012 – " In A Broken Dream " (Edwin Collins & Bernard Butler, 2001)

14 Jun 2012 – " In A Broken Dream " (Edwin Collins & Bernard Butler, 2001)

Weak last hour US close, which corrected the previous day’s gains to end on Monday levels. Spailout back with a vengeance with Moody’s fiercely downgrading Spain by 3 notches to Baa3 (from A3) and Cyprus down to Ba3 (, who seems to be already shopping a EUR 4bn bail-out).
The guys at Moody’s were behind their peers’ curve anyway (see 11 Jun post “Unfinished Sympathy”), but have now taken the lead by putting the Kingdom right away on junk outlook. ECB Haircut increase from 4 to 9 % in 10 YRS and probably worse from 1.5 to 6.5% in LTRO-laden 3 YRS paper (ECB link p.73) is thus now hinging on DBRS’ views (Eurosystem credit assessment framework ECAF link).
Asian close softer, but here again, the middle way strategy not to get carried away is worthwhile and reduces volatility.
Relatively tame European reaction with still shell-shocked and traumatized Bunds edging up just a little, despite Spain widening right away hitting 6.85% all-time highs and knocking on Italy to 6.25%. Equities about unchanged. EUR about unchanged. Commodities a little weaker, having been pushed lower in the US session.
Asian strategy? Don’t move, don’t get carried away? Or just markets going catatonic? PTSD (, as most symptoms seem fitting the actual market behaviour)?

German wholesale prices dipping to 1.7% from 2.4% YoY in May. Spanish house prices for Q1 further down 12.6% YoY, -5% QoQ, a record drop. Price graph looks similar to Bund yield blotter... Dutch Apr retail sales tanking 8.7% lower from revised 2.4% in Mar. Austerity, when you hit... Dutch economy diving. If this goes on, we’ll have DSLs moving into the AF(&B) bracket in the coming months. EZ CPI unchanged at 2.4% YoY.

Danish, Dutch and Swedish pension funds regulation changes on liability management said to be behind some of the Bund sell-off and movement on the long end, as they could be subject to more lenient valuations on their liability side, given historic low yields. If that were really the case, the fuse to yet another time-bomb might have been lit there, as gaping holes might just pop up years from now with totally under-funded pensions.
Ok, let’s procrastinate on these for the moment and shift those bail-outs to further away in time.

Had Spanish 10s hitting the 7%-mark ahead of the Italian auction, before retaking some colour after the results. Italy sold the targeted EUR 4.5bn with EUR 3bn 3 YRS sold at 5.30% (in line with yesterday’s close), of course a huge surge from last month’s 3.19%, as well as EUR 0.63bn 7 YRS at 6.10% and EUR 0.87bn 8 YRS at 6.13% (from prior 5.21% and 5.33%). Bid to covers about unchanged to a tick lower, probably courtesy of a disciplined primary dealer group.
As it happens, figures for the Italian general government debt for Apr were published today, growing 3.1% YoY to a record EUR 1.949bn (122.7% of expected 2012 GDP).
Talking of record, Greek Q1 unemployment grew further to 22.6% from 20.7% in Q4 (and 15.9% in Q1/201). Youth unemployment stood at 52.7%.

Diverse Spanish government officials on the tape, repeating (why?) that actual yields are not sustainable, but that there’s European support (still negotiating conditions…). Feels like over the weekend and ahead of the Greek elections results and G20 meeting, this will end into a “real” bail-out of the country, Ireland-style, as the whole bickering and formal fine print interpretations of how to channel what money into which bank is just wasting precious time.
As it happens, leaks of the future conditionality on the FROB credit line went to press, among which VAT hike, eliminating housing deductions or delaying the retirement age. So conditionality will follow.

Lunchtime recovery in the Periphery and in equities with Spain back to low 6.90s% and Italy just a little wider from COB, shy of 6.25%. Stoxx about 1% off its lows, +0.5% to close. Credit drifting sideways. Likewise for other asset classes. Then back lower, as there was no specific reason to stay higher, after all. US pre-open players slightly on the gloomy side, finally pushing EGB yields a couple of ticks lower and Spain back to low mid 6.90s.

As most often lately, US jobless claims disappointed at 386k (fcst 375k after 377k, revised to 380k) with continuous claims on the rise, too, while, while CPI stood at 1.7% YoY / ex 2.3% (fcst 1.8% after 2.3% / fcst 2.2% after 2.3%). Sticky Core CPI.
Added a touch of pressure on risk and shaved another couple of basis points from EGBs, before reverting on risk turning flat again.

In absence of further and especially concrete news, people would probably just like to close books already for the weekend and see what happens thereafter (Greek elections, Spanish Audit, Ecofin, G20 etc.)
By and large a flat close with exception of Italy getting a little better and Spain a little worse (All things relative here, as one gets used to pain...It's just yet another historic high close...But off the 7% intra-day high...).

New Issues down to a trickle with Rentenbank offering EUR 250m 7 YRS flat to swaps and low IG German engine maker MTU Aero Engines’ maiden flight with EUR 250m 5 YRS at MS +165. Happen both to be German issuers.

Closing levels:
10 YRS Yields: Germany 1,49% (-1); Luxembourg 1,89% (unch); Finland 1,94% (-1); Swaps 1,92% (-3); Netherlands 2,00% (-3); Austria 2,44% (-5); EIB 2,61% (unch); France 2,68% (-4); EFSF 2,75% (+1); Belgium 3,17% (-4); Italy 6,15% (-5); Spain 6,89% (+17).

10 YRS Spreads: Luxembourg 40bp (+1); Finland 45bp (unch); Swaps 47bp (+1); Netherlands 51bp (-2); Austria 95bp (-4); EIB 112bp (+1); France 119bp (-4); EFSF 126bp (+1); Belgium 168bp (-4); Italy 466bp (-4); Spain 540bp (+18).

EUR swap curve 2-5 YRS 43bp (-0,5); 5-10 YRS 57bp (-0,5) 10-30 YRS 33bp (+3,0).
2 YRS German BKOs closed 0,090% (-4) and 5 YRS OBLs 0,56% (-4).

Main at 180 from 182 (1,1% tighter); Financials at 285 after 290 (1,7% tighter). SovX unch at 322. Cross at 702 from 709.

Stoxx Futures at 2152 / +0,6% (from 2139) with S&P minis at 1319 (+0,2% from 1317, at European close).
VIX index at 24,1 after 23,0 yesterday same time.

Oil 83,0/97,0 (WTI/Brent) from 83,5/97,5 (-0,6%/-0,5%). Gold at 1623 after 1621 (+0,1%). Copper at 335 from 334 (+0,4%). CRB at COB 271,0 (unch).
Baltic Dry up again 1.1% to 912 from 902.

EUR 1,261 from 1,259
ECB deposits at EUR 704bn after EUR 798bn.  Deposits only down EUR 94bn to start the new reserve maintenance period. While much less, it’s a far cry from the EUR 130-140bn drops of the past months. Looks like money is getting hoarded. Had ECB’s Nowotny thinking aloud about 0% rates and how this would keep parking that much at the ECB. Makes sense...

Greek bonds guesstimates: Trading better with 2023s at 28.25% from 29% and 2042s at 23.25% from 23.75%. Then again, Greek stocks up over 10% on the day on rumours of polls giving New Democracy the lead.
(20.25% and 16.75% before elections).

All levels COB 17:30 CET

Germany: nada / France: nada / pretty much nada elsewhere, too
US: Fri May IP fcst +0.1% after 1.1%, Capacity  Utilization fcst 79.2% unch, Jun Michigan confidence 77.5 after 79.3

Click link on title or below for today’s musical support:
(Couldn’t find any video material of the original by Rod Stewart & Python Lee Jackson, recorded 1968, which is just an awesome classic and had Rod Stewart as its best, before turning all pop and mushy audio)

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