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 12 September 2012

12 Sep 2012 – “ Yes Sir, I Can Boogie " (Baccara, 1977)

12 Sep 2012 – “  Yes Sir, I Can Boogie " (Baccara, 1977)

Positive, albeit tight US close with the Dow on 2007 levels now. Grinding. Up. Waiting for QE confirmation. Asia, after a sluggish end of week and start finally joining in the worldwide relief. Japan up over 1.5% as well on higher than expected Machinery Orders (+4.6% MoM vs +2% fcst after +5.6%). Still, all eyes on Germany Constitutional Court’s verdict due at 10 CET.
Barroso’s “State of the Union address” mellowing a slightly positive start, as well as leaks that Court approval could be tied to conditions. Spain still “considering” options, as usual. Note the irony of yesterday’s the Catalan rally for independence in response to austerity calls. Mirroring the state of the EU / EZ zone. Had ECB’s Asmussen stress the conditionality aspect again yesterday evening, not excluding per se sales of bonds bought from later non-conforming borrowers. Seems very theoretical, but a huge bazooka. Re-selling a couple of hundred billions of such bonds would de facto mean kill those countries' market access and push them into default and out of the EZ. Seems very unlikely. At least at this stage.
Barroso pushing for a more federalist and integrated approach, unsurprising. Does the statement that Greece can stay in the EZ, subject to abiding to the push for reforms, mean that it is otherwise asked to leave??? Of course, as already widely announced, Banking Union supervision is pushed to the ECB. And the ECB, of course, is independent and works within its mandate.

No real noteworthy macro data on the slate. Final French CPI a tick higher than expected at 2.1% (preliminary was +2.% after +1.9% YoY). Italian IP a bit better than expected, albeit still low at -7.3% (fcst -7.6% after -8.2% revised -7.9%).  EZ IP in Jul better then expected, too, with a 0.6% MoM increase (fcst +0.1% after -0.6%), but remains unchanged at -2.1% YoY.

Softer EGBs again (roughly +3) with the far end about unchanged. Periphery maybe a tick better. Curves unchanged. Equities eventually down a little, after initial slightly positive opening quotes (then again yesterday’s 1% surge mainly took place in the last hour of the trading session). Credit still grinding tighter a couple of ticks.  EUR trading water just below the 29-handle and commodities flat. All half an hour ahead of the Karlsruhe call.

Eventually, as leaked and hoped / expected, the German Constitutional Court’s decision allowed ESM ratification, albeit with conditions including a EUR 190bn cap and approval of both German parliamentary chambers. ECB buying appeal simply rejected. It’s up to the democratically and constitutionally elected politicians to do their job within their given mandate. Given Germany’s integration within the EU / EZ, it has to play (within limits and in such manner that contingent risks don’t become uncontrollable budget-wise). The ESM banking licence was shelved from an European constitutional point of view at the same time. Decision link.
Had some wobbly back and forth in the markets during the initial reading, but eventually in the immediate aftermath weighted heavily on Bunds (+9 in 10s), kept the Periphery just a couple of bp tighter to the close and pushed EStoxx up 1%. EUR eventually just unchanged.
Question is whether the cap of Germany’s participation will limit the final ESM amount, as countries under duress can opt out, For the moment, in such situations, the remaining members do pick up the slack. While this was actually raised in the reading, I’m not totally certain whether my interpretation of the Court’s reading is right that, as the capital is not yet paid-in, Germany has an ongoing possibility to raise conditions to remain sure its risks remain under control (additional conditions, security or collateral), knowing that the voting right of non-paying countries diminishes. Here, again, it’s up to Parliament’s control duty to watch out for the right use of means. Ok, EUR 190bn alone remains quite a sizeable amount…Awful lot of “Ja, aber…” and conditions that should allowed quite some control by the German parliament. Any top-up needs, in case members were to pull out of ESM commitments (GIIPS + Cyprus and Slovenia hold 37.4% of the ESM capital), seem pretty much under Bundestag control, too.
Whatever, allows for final sign off by the German president and a start-up session announced by Juncker for 08 Oct.
Yes, Sir, I Can Boogie.

Italian bill sales raised the targeted EUR 12bn with EUR3bn 3m at 0.70% (after 0.87%) and a (chunky) EUR 9bn 1.69% (after 2.77% in Aug), the lowest since Mar 2012. Stable bid to cover ratios. The size of this auction (EUR 9bn is the highest amount auctioned in 12m bills in the last 10 years) does hark back to last week’s question at the ECB, whether the OMT wouldn’t entice borrowers in need to increase their short term debt. This is less the case for tomorrow’s 3-year auction, although EUR 4bn is sizeable. 10 YRS average is EUR 2.9bn, but ranging between EUR 2.5bn and EUR 4bn with peaks up to EUR 5bn seen several times.
Will need to check this EUR 4bn 3YRS BTP auction tomorrow (+ additional EUR 2.5bn in 5 YRS and 2026s) to assess the “Draghi put” after one week (COB levels 2.79%, 3.77% and 5.35%, respectively). Those 3s were closing 3.08% one week ago, 3.75% 2 weeks ago and spiked past 5.60% end of July. 3 YRS were last auctioned in Jul at 4.49% and 5 YRS in Aug at 4.73%.
Tough to go for a German auction is such a flight OUT of quality movement (as the GCC was already speaking). New 5 YRS were quoted 0.63% (old 0.52%, both +5 bp to COB) just ahead of the auction.
EUR 4bn sold at 0.61%, pretty much fully allotted. Total bids of EUR 5.5bn not exactly roaring (B/C 1.4) and 1bp tail. Still better than last week’s 10 YRS auction. Prior levels for 5 YRS were 0.31% in Aug and 0.52% in July. Allows for screaming headline that fundig costs have double of late… April levels were 0.80%. DE0001141646

Newest Spanish aid comments “not urgent, given actual market levels”… Liars’ Poker square. No Boogie?
Merkel on ticker, but with not much news. ESM ruling positive, ECB plan positive (as strictly conditional), need for further political / economical union, but against debt union. Supportive to everyone’s efforts to become thrifty. And the ECB can’t be expected to oversee everyone (especially not the smaller German banks…). And to make the message clear, Schaueble reiterating that the ECB should mainly concentrate on systemic banks. NIMBY!

Risk On picture by midday with Bund futures trashed nearly 100 ticks. Germany very soft, as confirmed as everyone’s paymaster. Periphery relieved, although not frantically either. Short end eventually down 10bp. Italian 10s on hold and Spanish 10s down in sync with the short end.
Pretty much all non-Periphery EGB 10 YRS at their tightest spread to Bunds in a year with the Hard Cores nearing +25, Austria through and France nearing +50 and Belgium now through the symbolic 100 over.
European equities up 0.5-0.75%, a bit more in Italy and Spain. Credit again outperforming with Financials now through the 200-mark, for the first time since the end of March 2012, taking leads from banking union and end of sovereign-banking loop. Crossover well through 500 and the 2012 low and back to early Aug 2011 levels. EUR holding above 1.29. Commodities up 0.5-1%.
Bunds 1,63% (+9), OBLs 0,64% (+6), BKOs 0,063% (+2).
Spanish 2s 2,78% (-8), 10s 5,59% (-7). Italian 2s 2.20% (-8) 10s 5.13% (-1). Spanish 2-10s 281bp (+1). Italian 293bp (+7).
Stoxx Futures +0,7% . Main 124 from 127 (-2,4%); Financials at 198 after 208 (-4,8%). Cross at 484 from 502.
Oil 97/116. Gold 1744 Copper 373. EUR 1,292

US import prices on the tame side, up 0.7% MoM /-2.2% YoY (fcst +1.5% after -0.7% MoM / -3.2% YoY).

Afternoon trading drifting off Risk highs in search for follow-up impetus.

Afternoon titbits: Has some Chinese pep cooperation talk, supportive of ESM / EFSF.
In an effort not to let the government-banking loop ease too much, Spain is raising about EUR 8bn in syndicated loans (collaterized by government bonds) from domestic banks to close the EUR 18bn regional rescue fund (Additional EUR 6bn will be provided by the lottery).
Talking of Spanish regions and Europe in general: Yesterday’s 1.5m taking the streets in Catalonia to protest the Spanish central government’s austerity measures and calling for independence represents 20% of a 7.5m regional population. Compare this with the Netherlands’ 16.7m (just as an example) or Belgium’s 11m inhabitants and imagine 10% of these countries’ population doing the same against EU budgets or measures to support GIPPS borrowers… Scary on a EU-integration basis. Robert Schuman wouldn’t appreciate.
US inventories rising 0.7M% MoM on falling sales (-0.1%). Fcst was +0.3% after -0.2%. Stockpiling.
Final leaks of the day on Greece / Troika on-going haggling and possible decision postponements to Nov.

Equities running out of steam during the afternoon and trailing back to yesterday’s closing levels. Sole really outperforming index of the day is Financial Credit (4.3% tighter).
SP & IT in close tango these days, but the movements are neither explosive nor dramatic anymore.
Bunds closed at 1,62% (+8), New OBLs at 0,64% (+6) and BKOs 0,076% (+3,3).
Spanish 2s closed at 2,75% (-11) and 10 YRS BONOs at 5,60% (-6). Spanish 2-10s 285bp (+5). Italian 2-10s 292bp (+6). 
Totally Quiet commodity front

Primary markets on hold. No Boogie.

Closing levels:
10 YRS Yields: Germany 1,62% (+8); Luxembourg 1,72% (+7); Swaps 1,89% (+7); Finland 1,88% (+4); Netherlands 1,88% (+2); EU 2,02% (+7), Austria 2,10% (+4); France 2,20% (+3); EIB 2,28% (+7); EFSF 2,52% (+6); Belgium 2,56% (-1); Italy 5,08% (-6); Spain 5,60% (-6).

10 YRS Spreads: Luxembourg 10bp (-1); Swaps 27bp (-1); Finland 26bp (-4); Netherlands 26bp (-6); EU 40bp (-1); Austria 48bp (-4); France 58bp (-5); EIB 66bp (-1); EFSF 90bp (-2); Belgium 94bp (-9); Italy 346bp (-14); Spain 398bp (-14).

EUR swap curve 2-5 YRS 52bp (+2,0); 5-10 YRS 83bp (+1,0) 10-30 YRS 59bp (+2,0).
2 YRS German BKOs closed 0,076% (+3,3) and 5 YRS OBLs 0,64% (+6).

Main at 125 from 127 (1,6% tighter); Financials at 199 after 208 (4,3% tighter). SovX at 182 from 190. Cross at 491 from 502.
Financials now through the 200-mark, for the first time since the end of March 2012, next level in the low 180s, the low point seen early March 2012 and breached to the upside in August 2011 to hit 358 end of Nov 2011. Highs for 2012 were some kind of triple-top around +300.
Stoxx Futures at 2567 / +0,3% (from 2560) with S&P minis at 1437 (+0,1% from 1436, at European close).
VIX index at 16,2 after 15,9 yesterday same time.

Oil 97,3/116,0 (WTI/Brent) from 96,9/114,9 (+0,4%/+1,0%). Gold at 1733 after 1734 (-0,1%). Copper at 371 (unch). CRB at EU COB 315,0 from 314,0 (+0,3%).
Baltic Dry down 1 tick to 661 0 662. Another 2.1% until hitting the Feb low at 647.

EUR 1,290 from 1,287

Greek bonds guesstimates: Down 100bp with 2023s at 20.50% and 2042s at 17.50%, highest since early May!

Will stop mentioning ECB deposits, as this has become a rather meaningless marker. Will monitor, if changes in pattern reappear.

All levels COB 17:30 CET

Rest of the Week:
EZ: Fri EZ Aug CPI fcst +2.6% after +2.4%
Italy: Thu final CPI +3.5%, Gov Debt
Spain: Fri Q2 House prices prior -12.6% YoY
US: Wed Imp Prices, Jul Inventories fcst +0.3% after -0.2%; Thu PPI fcst +1.7% after +0.5% YoY; Claims fcst +370k after 365k; Fri Aug CPI fcst +1.6% after +1.4%, Retail Sales fcst +0.6% after +0.8%; IP +0.2% after +0.6%, Mich Conf 74 after 74.3

Click link on title or below for today’s musical support:
What? Hasn’t the party started yet??? Thought all was set and ready?

And, because I think they’re quite cool, the Ukulele Orchestra of Great Britain’s take of it

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