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

Tuesday 9 October 2012

09 Oct 2012 – “ Wall Of Denial ” (Stevie Ray Vaughan, 1989)

09 Oct 2012 – “ Wall Of Denial ” (Stevie Ray Vaughan, 1989)

And no, US equities never managed to see the light yesterday… Didn't get fooled again. While closing 0.10-0.20% off lows, the end of the session remained very much below the day’s highs and furthermore below Friday’s sluggish close. Asia mixed with China eventually catching up last week’s move (+2%), supported by merger law reform hopes. Japan loosing 1% (closed yesterday).
Overnight release of the updated IMF WEO quite chilling with downwards revisions for everyone (2012 global growth expected at 3.3% after 3.5%, 2013 at 3.6% after 3.9%) and his dog. 250 pages that don't really qualify for relaxing bed time reading link, but rather paints a picture that could have been a four-handed work by Hieronymus Bosch and Nouriel Roubini.
Moody’s spoiling the ESM launch party with a Aaa rating slapped right away with a negative outlook (Fitch AAA). Cyprus shot down to B3 neg from Ba3 by Moody’s, too. As not yet easy to find: ESM website http://www.esm.europa.eu/ and investor presentation.
Recurrent leaks of “strategy” Spain’s bail-out ought to be combined with Cyprus (and Slovenia?) (next to some Greek concessions?) in November, after Spanish regional elections, in order to pass German Parliament as some kind of block-trade.
Somehow reminiscent of Monti explaining that unelected technocrats governments should sometimes by-pass explain things better to Parliaments to speed up things.

Initial pre-opening quotes nevertheless rather biased for a slight rebound, but eventually as markets started to kick in the real opening picture was rather lacklustre and directionless, let’s call it “flattish soft”. Bunds ticking initially a little lower with 10s widening to just below 1.50%. Other EGBs, including the periphery about flat. Equities flattish minus after trying to play the Chinese rebound (, as a reminder closed last week and subject to belated ups & downs). Credit neutral. Commodities slightly in the plus.
Too many risk adverse news: The above-mentioned IMF forecasts. EcoM De Guindos quoting an agreement discussed last night that Spain’s fiscal consolidation should depend on its growth. While certainly a fundamentally sane approach, it shouts out “Back Pedalling!” to all sceptics. Still a merry-go-round on the SSM (single supervisor mechanism) everyone feels great about, but with a deep split running on the timing. Draghi at the EU Parliament.
Half an hour later, Europe back into Risk Off with equities down over half a percentage point, Bunds back to flat and the Periphery out by 3-5 bp. EUR down 60 pips in straight manner. UST tighter by 6bp to 1.68% (closed yesterday), in line with Bunds.

Long 5 YRS Dutch on tap quickly raising EUR 2.25bn at 0.861% (close 0.87%). Initially issued on 03 Jul at 1.305%. Absolute low at 0.73% hit early Aug. Late high was 1.03% early Sep). EUR 1bn 6m Greek bills (+EUR 300m in non-competitive bids) sold at 4.46% (last 4.54% in Oct).

Had a micro drama unfolding in the morning, as Bloomberg switched the Spanish 10 YRS reference in cross-market matrices from the 5.850% Jan 2022 (considered too short at 9.3 years) to the 4.800% Jan 2024 (11.3 years), which trades 32bp wider. Even had the Tesoro stating on screens that the 10 YRS was still the former one. Silly. Still, had people react to the sharp widening as a sign of major Risk Off in the morning with the headline yield above 6%.
It remains that should Spain keep on not issuing a more on-the–run 10 YRS, people will eventually make up their own reference, as I did for Finland for a while. Linear interpolation would give a 11bp pick-up by late morning (5.85% vs. 5.74% and 6.06%. 437 to Bunds) for those interested.

Not much else happening. Draghi going on and on and on at the EU Parliament hearing, but with not much in terms of news. OMT conditionality repeated. OMT to buy from the market, not from the states (Ah…). ECB is NOT a printing machine. Strong support for Banking Union, but expects at least a year for the ECB to assume the supervision role. Won’t replace national supervisors. Shared deposit insurance a finality, not a starting point. Inflation (Arghhhhhhhh!) increased the new ECB headquarter costs by EUR 300m (…). Seems like a catalogue of recent themes with some give-and-take for everyone. Everyone’s a winner!
No special mention of the announcement / confirmation of yesterday evening that the ECB was shelving its covered bond buying programme, as planned, starting November, one year after inception (CBPP 2 is at EUR 16.334m, out of possible EUR 40bn, as of settlement yesterday. CBPP 1 closed at EUR 54bn). The CB market has yielded to the long LTROs anyway.
Mario IS a smooth operator. Once his ECB mandate over, he should be a good candidate to replace Barroso and HVR in one shot. Would keep EU budget lower, too.

Mid-day bottoming out levels, once more: EGB curve wobbly from Hard to Soft, about +/-1 from COB. Spanish 10s (the real one, as stated by the Tesoro) 4 wider. Credit a tick wider. Equities down about 0.50%.
Bunds 1,49% (+2), OBLs 0,54% (+1), BKOs 0,044% (+0,5). UST at 1,70% (-4, from Friday)
Spanish 2s 3,19% (+7), 10s 5,74% (+4). Spanish 2-10s 254bp (-4).
Italian 2s 2,27% (+4), 10s 5,07% (+1). Italian 2-10s 280bp (-3).
Commodities about flat. EUR 1.293, having bounced back from 1.291, but unable to keep the ball rolling.

First reactions to Merkel arriving in Greece were to point out her jacket was the one she wore when Germany beat Greece on the soccer field. This will be a constructive visit. Eventually more case of diplomacy and courtesy, as no freebies outside compassionate words. The road is long, the mountain steep, austerity bites…

No direct reaction to the Italian treasury’s plan to increase 2012 funding goals by EUR 20bn to EUR 460-465bn.

Minor US pre-open data with Small Biz Optimism down to 92.8 (fcst 93.5 after 92.9). Bit of an upwind in Risk Sentiment with equities ticking up 0.25%-0.30% over lunch, up 0.75% from the morning lows to kick-start the US session pretty much on unchanged levels to yesterday’s close. Oil getting some traction too.
Tons of political post-ECOFIN speeches criss-crossing. Difficult to filter out. Everyone’s, of course, very upbeat. And the Greeks are expected to do their bit by 18 Oct… Slovenia and Spain do NOT need bail-outs. Legacy assets are NOT covered by the ESM, dixit Schaueble. All is good. And Geithner feels the US are growing close to potential (…) and there’s NO fiscal cliff.
Hmmm… Denial day, after the overnight attempt by the IMF wanted to stage a day of reckoning.

Once more slightly negative US cash open and the EUR trailing European equities retracing the post-lunch rebound, or vice-versa, darkening the mood again Especially with Spain starting to slip for good this time, out by over 10. All so correlated than distinguishing chicken from egg becomes difficult. Just one single huge omelette…

French Assembly passing EU Fiscal Treaty by a large majority.
Apple victim of gravity, US stocks victims of Apple, seemingly US stocks victims of another algo gone wild, too…
Alcoa opening Q3 earnings ball tonight.

Risk Off close, especially in equities. Last week’s equity move now fully erased. Credit rather muted, at this stage.
Soft Core France and Austria actually outperforming with Austria on the symbolic 2%-mark in 10s.
Bunds closed at 1,47% (unch), OBLs at 0,53% (unch) and BKOs 0,037% (-0,3) with UST at 1,69% (-5)
Spanish 2s at 3,20% (+8), 10s at 5,80% (+10). Spanish 2-10s 260bp (+2).
Italian 2s at 2,33% (+10), 10s at 5,10% (+4). Italian 2-10s 277bp (-6).
Oil still up over 1%. Other commodities drifting lower. EUR back through 1.29.

Eventually the key take-aways from today were: The IMF is gloomy, so is Draghi. Banking Union is months away from being done. ESM and OMT are ready to go, but no one wants that first dance. Spain is analyzing. Oh, and an iPhone is just that. A phone.  Nothing new, nowhere.

Diversified New Issue supply: Allianz hitting big with EUR 1.5bn sub debt 30YRSnc10 at MS +400. Periphery infra supply from Italian Terna with EUR 750m Feb 2018 at MS +193 (That’s Italy minus 100!) and Gas Natural for EUR 500m Apr 2017 at MS +335 (about Spain minus 30). Corporates rounded-up by French real estate Foncière des Régions with EUR 500m Jan 2018 at MS +295.
German SSA KfW on track for a new 7 YRS global EUR deal tomorrow.
Eventually yesterday’s UniCredit Austria 5 YRS and Banco Popolare 4.5 YRS were pulled / shelved / put back on the drawing board.

Closing levels:
10 YRS Yields: Germany 1,47% (unch); Luxembourg 1,58% (unch); Netherlands 1,74% (unch ); Swaps 1,75% (unch); Finland 1,76% (unch); EU 1,90% (unch), Austria 2,00% (-3); EIB 2,18% (unch); France 2,23% (-4); EFSF 2,33% (-1); Belgium 2,42% (-3); Italy 5,10% (+4); Spain 5,80% (+10).

10 YRS Spreads: Luxembourg 11bp (unch); Netherlands 27bp (unch); Swaps 28bp (unch); Finland 29bp (unch); EU 43bp (unch); Austria 53bp (-3); EIB 71bp (unch); France 76bp (-4); EFSF 86bp (-1); Belgium 95bp (-3); Italy 363bp (+4); Spain 433bp (+10).

EUR swap curve 2-5 YRS 47bp (-1,0); 5-10 YRS 82bp (-1,0) 10-30 YRS 60bp (+1,0).
2 YRS German BKOs closed 0,037% (-0,3) and 5 YRS OBLs 0,53% (unch).

Main at 131 from 129 (1,6% wider); Financials at 185 after 182 (1,6% wider). SovX at 135 (-1). Cross at 548 (+8).
Stoxx Futures at 2462 / -1,5% (from 2499) with S&P minis at 1439 (-0,8% from 1451, at European close).
VIX index at 16,1 after 15,1 yesterday same time.

Oil 90,7/113,1 (WTI/Brent) from 89,6/111,9 (+1,2%/+1,0%). Gold at 1763 after 1777 (-0,8%). Copper at 371 from 372 (-0,3%). CRB at EU COB 306,0 from 308,0 (-0,6%).
Baltic Dry down to 875 from 883, the same 8 ticks gained yesterday.

EUR 1,288 from 1,297

Greek bonds guesstimates: Greece 2023s static at 18%, same for 2042s at 16.5%.

All levels COB 17:30 CET

This Week:
This week will be once more appallingly empty on hard data. Minor US data, too.
Trading will remain rather technical, subject to Periphery rumours and jitters. Italian BTP auction Thu.

EZ: Thu 11 ECB monthly; Fri 12 EZ IP (last +0.6 MoM)
GE: Thu Final CPI 2.1%
FR: Wed IP fcst -0.3% (last +0.2% MoM), MfG fcst -0.7% (after +0.9%); Fri CPI 2.4%
Italy: Wed IP fcst -0.5% (last -0.2%); Fri Final CPI 3.4%
Spain: Fri Final CPI 3.5%
US: Wed Wholesale Inventories fcst +0.4% after +0.7%, Beige Book Thu Import Prices, Claims, Fri PPI, U Michigan Confidence
China : Mon Serv PMI (last 52)

Click link under title or below for today’s musical support:
Didn't get fooled again yesterday, but still facing denial today...

And because SRV rules: " Tin Pan Alley / Dirty Pool ", which will be difficult to squeeze into any market report…

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