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 22 June 2012

22 Jun 2012 – " Shot Down in Flames" (AC/DC, 1979)

22 Jun 2012 – " Shot Down in Flames" (AC/DC, 1979)

What a Summertime bluesy evening session it was! First Twitter went down, which meant there were no means to complain online that something had gone down, especially Twitter. Then US equities, commodities and the euro came down crashing. Then Moody’s went medieval on 15 global banks, as rumoured throughout the day, but totally ignored by all. Bad start into the sunny season... In the light of the 2nd worst US close of the year, and US stocks closing below their 50d average, Asian ROff was about contained, knowing that Mainland China was closed for Dragon Boating, which was probably just as well.
No major data to kick off the end of the week, with mid-morning Germany’s IFO the only major set today in sight and with equally no US data to game on this afternoon.

Spain out with the first two audit results on banks, which one will chew on, while awaiting the Spanish call for bail-out (Mañana, mañana. Probably Monday), which in turn will probably depend from the results of further weekend talks with Germany, France and Spain meeting in Rome to haggle it out. Given the Irish experience, markets will take those audit results as being too optimistic anyway, while some of the adverse scenario stress inputs are already daily reality. Knowing that the EUR 50-60bn possible capital needs in an adverse scenario rely on recurrent equally high profit generation capacities, that number might still be up for interpretation. EZ politicians seemingly waking up to the subordination question yesterday, which happened to have been the one roiling the Spanish market off late (…). Never too late.

European equities down 1% plus at open, which, as for Asia, still seems decent, and still slightly up on the week, unlike the US or commodities. Uneasy ROff / rough market behaviour with the Periphery opening wider by 10 bp and the other EGBs only tighter by a tick or two. Players nevertheless still shaken by the Bund’s now shaky save haven status, as “if even the lifeboat starts to leak”, while Gold has suddenly become so passé

IFO figures just put in a nutshell what all sentiment indicators have shown this week: Yes, we’re past the high point this year and heading for trouble. Business Climate was a small miss at 105.3 (fcst 105.9 after 106.9) and the Current Assessment was rather better than expected at 113.9 (fcst 112 after 113.3, revised 113.2), but it’s the Expectations component that was a drag at 97.3 (fcst 99.9 after 100.9, revised 100.8). Feels like “Danke, we’ve just sent out the last shipments, but our order books are blank now...”. That’s Oct 2011 gloom. Before that Summer 2009. Thing is, in Summer 2009 these levels were attained coming out of the post-Lehman dip and heading higher. Last shipments back and forth might as well behind the late Baltic Dry recovery.
Unsurprisingly, Italian consumer confidence hit a fresh record low in June, down to 85 (fcst 86 after 86.5).

Morning session in ROff mode, but nothing panicky. Late morning comments that nothing would be decided at the Rome meeting, outside the dining menu.
On the positive side, DBRS maintained Spain’s rating (as well as Italy, Portugal and Ireland), albeit with a negative outlook, and will decide by late-August what to do. This will keep Spain out of the BBB ECB haircut bucket for the moment (Would have added 5%). Good for a 15 bp turn around in Spanish bonds, bringing the later back to 6.50% and helping Italy to stop widening.
Helped as well to ease ROff mode, flooring some of the equity losses at lunchtime. Credit by and large unchanged, including Financials, which had widened some 7-8 bp before cooling off, shrugging that the Moody’s move was totally discounted.
ROff morphing to RN (Risk Neutral).

Yesterday’s call on the commodities wasn’t that bad, timing-wise. Commodity charts look bleak: Support for Gold probably in the 1480-1500. 310 for Copper. 78 for WTI, then probably 72-area; 84, then 73-area for Brent. Broader CRB is sitting on a 265 support, then 240. Roughly, either it holds around here - or it looks like another 5-10% lower.

No government supply. Will have on Monday Belgium with EUR 2.8bn in 5, 10 & 20 YRS (last month had 2.38% & 3.45% for 5s and 10s), as well as EUR 3bn German 1 YR (last 0.026%) and French EUR 8.4bn 3,6 & 12m bills (last 0.058%, 0.094% & 0.19%).

No US data to close the week.

Afternoon titbits: Initially, announcement that no bond holder haircuts were due for Spanish banks, but then at least for junior bond holders, then again not. Unclear. Given what was visibly sold to Retail as safe investment, that one might need to be fine-tuned. Cash limits of EUR 2.500 in Spain to fight fraud, which doomsters will certainly interpret as an attempt to pre-empt any bank run, or worse, as preparation in case of any Spexit. Greek’s new PM to undergo eye surgery, sparing him from watching the match against Germany as well as reading the firm Nein on bailout terms amendment propositions. Followed a couple of hours later by the new Greek FinMin. Same strategy?

Afternoon morph into slight ROn, in absence of bad news, as well as positive +0.5% NY open. Some further support from the ECB, now taking A- rated ABS and CMBS issues with a 16% haircut, as well as and BBB ABS and RMBS at 26% and CMBS at 32% haircut as collateral on board. Football player contracts, too? Immediately followed by a piqué BuBa reaction, that was later pushed as far, as stating it would NOT participate in that.
EGB curve twist with the Core slowly, but surely shot down again (Bunds +7 to 1.60%), while Spain maintains itself well below 6.50% (-15 to 6.40%).

Had eventually a joint press-conference by GE FR IT & SP, disclosing a push for a 1% EZ GDP growth package (some EUR 125bn), supported by Merkel, but immediately repeating calls for tighter integration and oversight... and that direct bank funding was NOT possible. So back to Square 1 options: Liquidity into FROB, increasing Spain’s debt ratio by as much. There goes all the positive effect from that Panacotta as dessert. Short joyful EUR spike, and that was it then. EGBs firming back a little. Spain getting tighter by the hour, nevertheless, as probably no one wants to fight such move on a Friday afternoon.
New Issues ROff Friday morning action, hence nothing outside another EIB tap for EUR 250m of a 7-year FRN at 3mE +38.

Closing levels:
10 YRS Yields: Germany 1,58% (+5); Luxembourg 1,90% (+4); Swaps 1,98% (+3); Finland 2,03% (+4); Netherlands 2,09% (+5); EU 2,38% (+3), Austria 2,41% (-2); EIB 2,58% (+3); France 2,59% (-5); EFSF 2,72% (+2); Belgium 3,15% (-3); Italy 5,77% (+5); Spain 6,31% (-25).

10 YRS Spreads: Luxembourg 32bp (-3); Swaps 41bp (+1); Finland 38bp (-2); Netherlands 51bp (+1); EU 80bp (-3); Austria 83bp (+0); EIB 100bp (-3); France 101bp (-5); EFSF 115bp (-3); Belgium 157bp (-1); Italy 419bp (+6); Spain 473bp (-37).

EUR swap curve 2-5 YRS 48bp (+2,0); 5-10 YRS 64bp (+2,0) 10-30 YRS 26bp (-1,0). Curve is steepening.
2 YRS German BKOs closed 0,130% (+3,1) and 5 YRS OBLs 0,64% (+4). New BKO high.

Main at 170 from 169 (0,6% wider); Financials at 276 after 274 (0,7% wider). SovX at 295 from 300. Cross at 680 from 681.

Stoxx Futures at 2181 / -0,6% (from 2194) with S&P minis at 1324 (-1,1% from 1339, at European close).
VIX index at 19,2 after 17,0 yesterday same time. Still surprisingly low given yesterday’s bashing.

Oil 79,2/90,6 (WTI/Brent) from 79,4/90,6 (-0,2%/0,0%). Gold at 1562 after 1572 (-0,7%). Copper at 330 from 331 (-0,3%). CRB closes 268,0 from 270,0 (-0,7%). At best, stable on the lows...
Baltic Dry fixed unchanged at 978.

EUR 1,253 from 1,258

ECB deposits at EUR 769bn after EUR 780bn.

Greek bonds guesstimates: Greece stable with 2023s at 26.5% and 2042s at 22.25% after 22% 
(20.25% and 16.75% before the first election round).

All levels COB 17:30 CET

On the week (compared to Fri 15 Jun COB):
And another epic week to close the Spring session. We ended last week going “Hey Hey, My My (Into the Black)” (link) and headed into the weekend, unsure what Greek elections would yield and whether or not Spain was saved. As soon as it was clear that an immediate Grexit was off the table, the cursor came back to the Spanish woes, sending BONOs soaring past the 7% “tipping point” that used to be the “Rescue Me” (linktrigger and hitting 7.25%, as rumours the audit reports would show needs up to EUR 150bn. Still, the G20 was still going on and rumours all would be well managed to get things coolers, so cool that the Periphery tightened back and that the whole remaining EGB curve got trashed, as “If I Ever Lose My Faith In You“ (linkbrought fundamental doubts about who might end up paying the bills. Markets danced on Wednesday, together with Chairman Ben, but in a “Land of the 1000 Dances“ (link), despite a decent short end auction, the Core remained soft, quite Tote Hose (dead pants)  and only a short Twist came out. Spain, in the meanwhile, put in a grandiose Flamenco on the floor and tightened by about 30 basis points.  “Summertime Blues“ (link)) was all we got to start the Summer, while still muted in Europe. ROff wreaked havoc in the US.

On the week, we cannot but note the superb recovery of Spain, which has made back some of the lost ground the week before and especially from the all-out capitulation on Monday (closing the week at 6.31% after 6.86% last Friday and 7.25% this Monday). Core EGBs remain by and large fragile. Always good for some flight to quality, but the binary “ROff / Core yields down” pair doesn’t work anymore (for now). Worst performers of the week? Germany, Finland, the Netherlands. Best performer outside the Periphery? France.
One would add as well that the panicky flattening has stopped, too, and thus higher credit premia are paid along the curve.
Credit eventually treaded water, as did equities on a week-on-week vision. VIX, despite the ups and downs got trashed, given an underlying trust that, somehow, the CBU (Central Banks United) will fix things.
This sentiment is not shared by the commodity market, which is THE BIG LOOSER of the week.

10 YRS Yields: Germany 1,58% (+13); Luxembourg 1,90% (+7); Swaps 1,98% (+10); Finland 2,03% (+15); Netherlands 2,09% (+15); EU 2,38% (+4);Austria 2,41% (+8); EIB 2,58% (+6); France 2,59% (+1); EFSF 2,72% (+5); Belgium 3,15% (+7); Italy 5,77% (-15); Spain 6,31% (-55).

10 YRS Spreads: Luxembourg 32bp (-6); Swaps 41bp (-2); Finland 38bp (-5); Netherlands 51bp (+2); EU 80bp (-9); France 101bp (-12); EIB 100bp (-7); EFSF 115bp (-7); Belgium 157bp (-6); Italy 419bp (-28); Spain 473bp (-68).

Greek bonds guesstimates: A bit better on the week with 2023s down to 26.5% from 27% and 2042s at 22.25% from 22.75%. (20.25% and 16.75% before elections).

Swiss 2-years had a rough time mid-week and trade out to -0.28%, but at the end of the week, profiting from global mistrust for anything, closed about unchanged around -0.32%. 5 YRS didn’t fare that well and crashed from -0.03% out to +0.03%, back to 0% and recovered to -0.01% from a weak morning note at +0.02%...

EUR swap curve 2-5 YRS 48bp (+5,0); 5-10 YRS 64bp (+6,0) 10-30 YRS 26bp (-1,0).
2 YRS German BKOs closed 0,13% (+6) and 5 YRS OBLs 0,64% (+12), on the week.

Main at 170 from 175 (2,9% tighter ); Financials at 276 after 279 (1,1% tighter). SovX at 295 from 318. Cross at 680 from 678.

Stoxx Futures at 2181 / +0,6% from 2167 with S&P minis at 1324 / -0,5% from 1331, at European COB last week.
VIX index at 19,2 after 22,3 last week. Odd equities, US behaviour. Odd VIX. Odd equity traders hoping for CBU.

Oil 79,2/90,6 (WTI/Brent) from 84,0/98,0 (-5,7%/-7,6%). Gold at 1562 after 1627 (-4,0%). Copper at 330 from 340 (-2,9%) . CRB closes 268,0 from 273,0 (-1,8%). What a bashing!
Baltic Dry jumping to 978 from 924 (+5.8%), topping the previous week’s 5.4% rise. Back to life! Back to life! BUT, big caveat, for the last 10 years or so, there was quite some seasonality in that index, mostly peaking just before the summer break industrial lull. So, these might be the last cargoes booked, before trailing off at least until Fall. And who knows how things will look like in Fall? Or next week, as it stands?

EUR 1,253 after 1,264 last Friday

All levels Friday COB 17:30 CET

Next Week:
Summer starts for good. Q2 ends for good (all major global equity indices down 5 to 15%). EU Meeting at the end of the week.
Monday Belgian EUR 2.8bn auction in 5, 10 & 20 YRS (last 2.38% & 3.45% for 5s and 10s), as well as German 1 YR (last 0.026%) and French 3,6 & 12m bills (last 0.058%, 0.094% & 0.19%).

Germany: Mon Cons Conf fcst 5.6 after 5.7 Wed Imp Px fcst 2.3% unch YoY & CPI fcst 2.1% after 2.2 % YoY Thu Unemployment Fri Retails Sales fcst 2.3% after -3.8% YoY
France: Tue Cons Conf fcst 89 after 90 & Jobs Fri PPI fcst 2.7% unch YoY Cons Spending Fcst 0.1% after 0.4% YoY Final Q1 GDP 0.3%
EZ: Thu Biz Climate fcst -0.81 after -0.77, Final Cons Conf, M3 fcst 2.2% after 2.5% and CPI 2.4% unch YoY
Periphery: IT Tue Retail Sales Wed Biz Conf fcst 85.5 after 86.2 Thu PPI & CPI SP Mon PPI Tue Budget Wed Retail Sales fcst -7.9% after -9.8% Thu Housing permits & CPI
US: Mon New Homes fcst 346k after 343k Tue Case Shiller Cons Conf fcst 64 after 64.9 Wed Durable Goods fcst 0.5% after 
0% Thu GDP & Claims Fri Pers. Income & Spending Chicago PMI Michigan Conf
Asia: China leading indicators Japan Thu PMI & Retailers

Click link on title or below for today’s musical support:
(One of the best live show taping that ever existed: AC/DC “Let there be Rock, Paris Dec 1979”)

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