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 20 November 2012

20 Nov 2012 – “ A Tout Le Monde (Set Me Free) ” (Megadeth, 1995)

20 Nov 2012 – “ A Tout Le Monde (Set Me Free) ” (Megadeth, 1995)

Uh…  Very uncomfortable French downgrade. Not surprising per se, but uncomfortable. Ask the EFSF… Brings back the question of “Who’s Next”? European Risk (Equities & Credit), however, oblivious and taking rising yields as a sure sign for Risk On. I’d see the risk of France (and everyone else) starting to count contingent costs.
"A Tout Le Monde" (Bunds 1,41% +6; Spain 5,79% -9; Stoxx 2509 +0,6%; EUR 1,281 unch)
The Monday (European squeeze) kept its stamina into the remaining US session yesterday with indices adding a further 0.3% into the close. Apple finally closed on a really positive note with a 7.2% rebound (after an over 3% in opening gap), up over 12% from Friday afternoon’s low. Not much else. Good enough.
Fri low to Mon Hi / close: INDU close +2.6, S&P +3.3%, NASDAQ +3.7%. EStoxx +3.1%, DAX +2.8%, CAC +3.2%, MIB +3.4%, IBEX +2.7%. To complete: Nikkei (Thu low to high) +6% and to today’s close +5.3%. Shanghai Mon low to Today’s close +0.6%. Feeling there’s anything odd out there? Yeah. Me, too.
Asian session mixed, flattish to (slightly) negative after the Moody’s downgrade of France to Aa1 neg (on negative watch since mid Feb and after S&P’s downgrade to AA+ mid Jan).
Trigger factors: Economic growth affected by structural challenges (loss of competitiveness, labour market rigidities); uncertain fiscal outlook; France’s disproportionally high exposure to the Periphery through trade and banks.

Bit of a dampener, that Moody’s downgrade. European equities down 0.3% in pre-market.10 YRS OATs, which just yesterday had brushed (but not touched) their all-time low again at 2.055%, before widening a little in the equity rally, out to 2.10% to start the day. Limited initial fall-out, though. Equity cash open a bit harsher, though, but fast settling on earlier levels (-0.3%). Bunds tighter by 1 to the now-accustomed 1.34% level, USTs like-wise -1 to 1.61%.France to Spain +2 (5.90%). Credit by and large flat. Commodities a touch weaker, noting the late US pick up in CRB (+1.4%).
EUR 1.278 – as in “couldn’t really care”.
Let’ see, if we’ll get the usual end of day comments of politicians that the rating downgrade and the markets’ shoulder shrug is a proof of their lack of credibility. But then again, what was Cassandra’s credibility? And people seriously disliked her, too.

German PPI a tick under consensus at flat MoM (fcst +0.1% after +0.3%) / +1.5% YoY (after +1.7%). Nothing else on the macro slate.

French bonds confirmed as being kicked out of the BofA/ML AAA index. Need to check that fall out. As well as further trickle down effects on French and related entities (for instance the Supras).

Spain sold more than its targeted EUR 4.5bn of bills with EUR 4.2bn of 12m at 2.797% (after 2.823%) and a slice of EUR 713m of 18m at 3.034% (after 3.022% last month). Bid-to-cover in 12m unimpressive at 2.12 (after 2.71). Given the small longer allocation, BC stood at 5.7 after 3.0. This will be followed by EUR 3.5bn in 3, 5 & 9 YRS BONOs on Thursday.
Just shy of EUR 2bn EFSF 6m at -0.005% (last -0.024%).
10 YRS Bund increase tomorrow (COB 1.415%. Last 1.56% and 1.52% end of Oct and Sep, before that 1.42% early Sep and Aug and an all-time low at 1.31% mid-July)) next to EUR 2bn Portuguese bills (3,6 and 18m, last 1.37%, 1.84% and 2.97%).
The syndicated EFSF 3 YRS that was due to pop out today with initial pricing thoughts around swap to swaps / MS-2 was postponed, given the rating implications. Seemed like rather reasonable levels, though.

Market moving into some Risk On spirit by mid-morning with equities recovering some colour (to tick closing levels), the Periphery back to unchanged after the Spanish auction and EGBs softer (fear of domino effect) with Bunds and France adding 4bp (to 1.39% and 2.11% respectively, and unchanged spread).

Midday picture showing Risk On, but not completely On. Equities down 0.3%. Credit still better bid, especially with financials ticking 6 tighter (3.5%).
EGBs 3-4 wider on average with France at 2.12% (+5), having nearly taken out the 2.055% all-time low yesterday morning. Pas de chance…
Bunds down 40 ticks (like yesterday for the whole day, despite equities surging 3%). Contingent rating risk to all exposed to helping out the weak hands. ESM & EFSF under Moody’s review, too. Might hit Supras, too. Hence, all weaker.
Periphery back a little tighter on the long end and especially in 2s for Spain (knowing that this the correction of yesterday’s +8 widening to 3.30% ahead of the auction).
Bunds 1,39% (+4), OBLs 0,40% (+3), BKOs -0,015% (+1). UST at 1,63% (+1).
Spanish 2s at 3,23% (-7), 10s at 5,87% (-1). Spanish 2-10s 264bp (+6).
Italian 2s at 2,03% (-4), 10s at 4,89% (-1). Italian 2-10s 286bp (+3).
EUR back to 1.281, where left at COB. Commodities eventually just right on COB level, too.
Eventually “Rather Not Really Risk On” than “Risk On” or “Risk Off” after lunch. On second thought.
And with Cyprus (Oh, yeah. Them…) having serious issues with the Troika (Go ask the Greeks how they feel about it…).
Plenty of stuff to chat about at the Eurogroup Inn tonight: Latest Greek protests on Troika measures, PSI / buy-back at 25% (which is market price solely from 20 RS on), interest moratorium (…).
On cue, Juncker doing some pep-talk about a conclusive evening, however “not entirely” certain (…).
HP going down in pre-open on impairment charges following its Autonomy acquisition.
America, America! Give us a lead!

US data to kick-off the afternoon and ahead of US cash open with Housing Starts at 894k/+3.6% MoM (fcst 840k after 872k, rev. 863k / -3.7% after +15%, rev. 15.1%) and Building Permits of 866k / -2.7% MoM (fcst 864k after 894k, rev. 890k / -2.9% after rev. +11.1%), after yesterday’s mixed Home Sales figures. Would tend to show an on-going recovery.

US cash open only slightly lower from yesterday, but near European Monday COB levels, giving European even more solace in being correctly priced (about unchanged).
Slight uptick a reason to test positive territory (+0.6%) with the CAC adding the luxury to test its highest levels in 2 weeks and the DAX adding 1% from Mon COB I the peak.
Odd world… Downgrade = ROn, because it didn’t matter in the past. Softer EGBs on credit issues taken as granted sign for Risk On?!

10 YRS OAT trading one-way since this morning and adding 8bp to 2.145%, the highest level since 09 Nov. No price rebound since this morning. Pretty even shift 5 YRS out, short end holding a tick better. But while giving French OATs a little plus (It’s their downgrade after all…), it’s the whole of EGBs (ex Periphery) that has been held hostage.
Periphery moving into “Risk On” – as obviously all EGBs are sold. Claro!
Equities closing HOD +0.6%, of course. Credit sill in tightening mode. Of course. It’s Risk On, dummy! The reason will simply be found at a later stage. There goes my mind.
Bunds closed at 1,41% (+6), OBLs at 0,42% (+5) and BKOs -0,002% (+2,2) with UST at 1,65% (+3).
Spanish 2s at 3,17% (-13), 10s at 5,79% (-9). Spanish 2-10s 262bp (+4).
Italian 2s at 1,99% (-8), 10s at 4,85% (-5). Italian 2-10s 286bp (+3).
Commodities now decorrelating, given a quieter Middle East. EUR unchanged. Odd. Odd. Odd.

Take-away: Uh…  Very uncomfortable French downgrade. Not surprising per se, but uncomfortable. Ask the EFSF… Brings back the question of “Who’s Next”? European Risk (Equities & Credit), however, oblivious and taking rising yields as a sure sign for Risk On. I’d see the risk of France (and everyone else) starting to count contingent costs.

Outlook: Toss a coin? EUR 4bn 10 YRS Bund auction (COB 1.415%). Some more rating changes? No hard European data. US data dump before Thanksgiving and then no more data until next Monday. PMI fcst 51 after 51.3, Claims fcst 410k after 439k, Michigan U fcst 84.5 after 8.9, Leading Indicators fcst 0.1% after 0.6%.

European 50d & 100d: EStoxx 2513/2437 (50d/100d), DAX 7283/7041, CAC 3452/3394 , MIB 15667/15002, IBEX 7856/7429.
US 100d & 200d for INDU 13126/12992, SPX 1405/1382 and NASDAQ 3016/2985, as Apple-challenged (200d 596).
EUR: 100d 1.265& 200d 1.281. Fibo retracement (of May 2011 1.494 & Jul 2012 1.204 down-leg) at 1.273& 1.315. Jul 2012 to Sep rebound levels: 1.231 – 1.247 – 1.2611.274 – 1.291.

New Issue supply from Danone with EUR 750m 5 YRS at MS +30 (30bp over France) and Norwegian utility Statkraft with EUR 700m 10 YRS at MS+85. Standard Chartered with EUR 750m 10 YRS sub debt at MS +200.

Closing levels:
10 YRS Yields: Germany 1,41% (+6); Luxembourg 1,54% (+5); Netherlands 1,67% (+6); Finland 1,68% (+5); Swaps 1,72% (+4); EU 1,77% (+4), Austria 1,84% (+6); EIB 1,93% (+4); EFSF 2,06% (+5); France 2,15% (+8); Belgium 2,32% (+6); Italy 4,85% (-5); Spain 5,79% (-9).

10 YRS Spreads: Luxembourg 13bp (-1); Netherlands 26bp (unch); Finland 27bp (-1); Swaps 31bp (-2); EU 36bp (-2); Austria 43bp (unch); EIB 52bp (-2); EFSF 65bp (-1); France 74bp (+2); Belgium 91bp (unch); Italy 344bp (-11); Spain 438bp (-15).

EUR swap curve 2-5 YRS 48bp (+2,0); 5-10 YRS 83bp (+1,0) 10-30 YRS 61bp (unch).
2 YRS German BKOs closed -0,002% (+2,2) and 5 YRS OBLs 0,42% (+5).

Main -3 to 128 (-2,3% tighter); Financials -6 to 171 (-3,4% tighter); Cross -15 to 522 (-2,8% tighter).
Stoxx Futures at 2509 / +0,6% (from 2495) with S&P minis at 1384 (+0,4% from 1379, at European close).
VIX index at 15,4 after 15,9 yesterday same time.

Oil 87,4/110,2 (WTI/Brent) from 89,1/111,4 (-1,9%/-1,0%). Gold at 1731 after 1734 (-0,1%). Copper at 353 from 354 (-0,3%). CRB at EU COB 298,0 from 294,0 (+1,4%).
BDIY, up 12 to 1066 (+1.1). Up and up and higher. And higher… Target is now the 1162-high seen in July, post-Chinese New year slide.

EUR 1,281 from 1,281

Greek guesstimate: Greek bonds 17.00% (-25) for 2023s and 14.50% for 2042s. Positive outcome, certainly wished for, but far from certain…

All levels COB 17:30 CET

Fast-forward Macro and Events:
Not much in terms of European data until Thursday, which will be PMI day, generally seen juuust a little better everywhere.
Crowded data dump tomorrow ahead of Thursday’s Thanksgiving holiday and Black Friday.
Wed 10 YRS Bund increase and Portuguese bills; EUR 3.5bn 2015 2017 & 2021 BONOs on Thursday.
Talking of which, elections in Catalonia will take place coming Sunday.

EZ: Thu Comp / Manu / Services PMI last 45.7, fcst 45.5 after 45.4 and 46 unch, EZ Consumer Conf fcst -25.5 after -25.7
GE: Thu PMI Manu fcst 46 after 46 Services fcst 48.3 after  48.4; Fri 23 Final GDP, IFO Nov Biz Climate fcst 99.5 after last, Current fcst 106.3 after 107.3, Expectations fcst 93 after 93.2
FR: Thu PMI Manu fcst 44 after 43.7, Services fcst 45 after 44.6; Fri Biz Conffcst 87 after 85
Italy: Fri Retail Sales last +0.% MoM
Spain: Wed Trade; Fri PPI
US: Wed PMI fcst 51 after 51.3, Claims fcst 410k after 439k, Michigan U fcst 84.5 after 8.9, Leading Indicators fcst 0.1% after 0.6%. No more data until next Monday 26 Nov (Dallas and Chicago Fed indices) and then Durable Goods, Case Schiller, Consumer Confidence and Beige Book  on Tuesday 27 Nov.

Click link under title or below for today’s musical support:
A tout le monde / A tous mes amis
Je vous aime / Je dois partir (du BofA ML index)
These are the last words / I'll ever speak
And they'll set me free (from rating constraints)

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