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

Saturday 24 November 2012

Shuffle Rewind 19-23 Nov " The Only Way Is Up " (Yazz, 1988)

Shuffle Rewind 19-23 Nov " The Only Way Is Up " (Yazz, 1988)

This week in review (compared to Fri 16 Nov COB):
Click on day for related post, on title for song.

If the prior week was marked by some kind of awakening (essentially on the Fiscal Cliff), The week ending 16 Nov was more about finding a direction, which was mostly downwards, but always in jumps, marked by tentative rebounds. Europe seemed lost, so unused not to be the focal point anymore, waiting for US input. In absence of Fiscal Cliff discussions, and in absence of further news out of the Periphery, we seemed to have
"No Direction" (Bunds 1,32% -2; Spain 5,86% +5; Stoxx 2429% -2,1%; EUR 1,27 -10). But we were to find one…
Friday 16 Nov was eventually mostly boring, but it ended reaaally trashy with a dismal European close."That's The Way (I Like It)" (Bunds 1,32% -2; Spain 5,86% -3; Stoxx 2429 -1,2%; EUR 1,27 -90). 5 minutes after EU close, the US market was spun around 180 degrees by some Boehner comments, interpreted as ways could be found on the Fiscal Cliff issue. A huge Bear Trap. Last time we heard about Fiscal Cliff for a couple of days as well.

Monday had European equities ripping away and squeezed after Friday’s dismal close. Credit the same and, as more often than not lately, overdoing the equity move. EGBs remained rather muted with the Core pretty much where it stood throughout the prior week – with exception of Friday afternoon. Spain came back on the radar. Europe remained under US influence direction-wise. A huge relief. From what and why exactly remains unclear. In the meantime: "Rip And Tear" (Bunds 1,35% +3; Spain 5,88% +2; Stoxx 2495 +2,7%; EUR 1,281 +110). Shocker on Tuesday morning: France downgraded overnight to Aa1 by Moody’s. Uh… Very uncomfortable. This would have been a killer a year ago. Not so anymore. Not surprising per se, but uncomfortable. Hurt ALL EGBs, but the Periphery. As everyone else’s contingent costs seemed now to be counted, too. European Risk (Equities & Credit), however, oblivious and taking rising yields as a sure sign for Risk On. "A Tout Le Monde" (Bunds 1,41% +6; Spain 5,79% -9; Stoxx 2509 +0,6%; EUR 1,281 unch). And the week kept a detached tone from harsh realities, as yet another Help Greece summit ended with no conclusion, sending light shivers through Asia on Wednesday morning. But Europe went: Greece? Sorry, what’s with Greece? French downgrade. Unexpected, but then again not that much. So what? Fiscal Cliff? As no one speaks about it, it can be ignored. Risk? If it doesn’t fall, it has to rise. "Rise To The Occasion" (Bunds 1,43% +2; Spain 5,7% -9; Stoxx 2518 +0,4%; EUR 1,282 +10).The US were sent into an extended fooding and shopping weekend and closed fine. Having done so, and with Asia closing ok as well, Thursday started in line. PMI numbers came all a tick better than expected. Fine. Spanish auction fine. Greek bonds fine. All fine and light Risk On. Fine. Fine, fine, fine… All was good. Could have been the right opportunity to show some mercy: "Free Bird" (Bunds 1,43% +0; Spain 5,64% -6; Stoxx 2534 +0,6%; EUR 1,288 +60). Closing a strong Risk On week on Friday with markets opening unchanged (US and Japan closed, EU budget a fail, but Greece problem about to be solved) and staying put, despite yet again better German IFO numbers. Finally, yet another light ROn close of the day, crowning a ROn of a week. Worries put aside on Greece (and Cyprus) and the Periphery (and the Fiscal Cliff). Sentiment data all for the better. Last week’s nightmare obviously obliterated. It’s not like things have really changed, though. Those “Free Bird” who escaped the 46m annual Thanksgiving slaughter could now "Fly Like An Eagle" (Bunds 1,44% +1; Spain 5,6% -4; Stoxx 2552 +0,7%; EUR 1,296 +80). US markets kept the drive and added a quarter point higher than European COB at +1.3% on the day. UST unchanged at 1.69%.

If we lacked Direction last week, this week was a strong case for “The Only Way is Up!” with Risk assets soaring. Quite a cleansing process over the last weeks: weak longs stopped out, weak shorts stopped out. Volatility crushed nevertheless.
"The Only Way Is Up" (Bunds 1,44% +12; Spain 5,60% -26; Stoxx 2552 +4,8%; EUR 1,296 +260)

We felt EGBs to be on the lacklustre side after several weeks of strong performance and trading sideways throughout last week (with the exception of some reluctant tightening on Friday afternoon, as European equities fell out of bed). Market mood definitively changed tack this week. Exactly why and how seems unclear, but the trigger was actually France’s downgrade, for once, which shook investors less on French bonds as such, but triggered some realization that at the end of the day all European paymasters would end up paying for the Periphery’s contingent risks. So bye bye to last week’s historic lows for swaps and the Soft Core… Hard Core hit most (Bunds and Netherlands +12 & 11), but the move was pretty even throughout the EGB curve. France eventually tightened to Bunds. Belgium holding best (ex Periphery) and tightening further to Bunds (from 93 to 85) and ending the week 13 over France.
German Schätze back to around flat from last week’s excursion in negative territory.

In reversal, Spain (+2, -9,  -9, -6 & -4) and Italy (+3, -5, -1, -6 &  -3) fared really well, tightening by 26 and 12 bp on the week, pushing further away from last week’s brush with the symbolic 6 and 5%-levels. Spreads to Bunds compressed strongly to +416 (from 454) and +331 (from 355). Strong EGB-Periphery compression on Tuesday, following the French downgrade.
Strong performance of short Italians, now well through the 2%-mark, which had been quite a bit of a resistance (-24 to 1.82%). Italian 2-10 steepening to 292 (from 281) with Spain’s 2-10 YRS spread stable at 266 (from 264).
Spain’s auction on Thursday fared well, although one couldn’t shake off once more the impression that there’s some orchestrated sponsorship behind the latest results. Spain now pretending (The BoS is less certain than the government about numbers.) to pre-found for 2013, for which further details are still lacking (Spain itself, plus most probably the Spanish regions, locked out of the market, as well as further contingent capital consumers within the official scope).

We’ll note the compelling performance of Greek bonds, comforted by the “They will fix it and pay for it”-spirit reigning this week. This week’s can-kicking exercise being obviously on track with a rumoured buy-back Greek bond yields tanked to 16.25% for 2023s and 13.50% for 2042s from last week’s 17.25% and 14.50% (already 75bp tighter from the prior week’s close) and 25 bp off Thursday’s tightest levels.
There’s just one thing to keep in mind: daily turnover in Greek bonds is about EUR 1m. So things can move fast…
Need to see how that buy-back story pans out. Or if someone suddenly were to take offense at buying those off, realizing they’d come from hedge-funds…

EUR swap curve off last week’s historic lows. 2-10s back to 131 after 127, having flattened only in the last hours of the prior week. 10-30s unchanged at 61. It actually ought to tighten back, if Risk On is confirmed.

Credit totally over the top, still over-performing equities in either direction, but doubly supported by the Periphery tightening next to the equity rebound (+4.4%). While it had widened by some 5% last week (on equities off 2%), and with seemingly no own dynamic to boot, this week showed the Main tightening 13%, Financials over 14% and the Crossover 13%, as well, in line with the others and closing again through 500.

Having closed the prior 2 weeks down 2.4% in equities and then another 2.1% with a dismal Friday, the mood was turned around (after the US’s 180-degree shift, minutes after the European COB) starting Monday with a 2.7% rebound, which never let go as the following days added 0.6%, 0.4% and yet again 0.6% (with closed US markets) to end Friday on yet another +0.7%. +5.1% on the week and volatility crushed (VIX down from 18.3 to 15.1). Hefty 3-week cleansing process: Weak longs stopped, weak shorts squeezed. Vol crushed.
All is good!
European 50 & 100d averages: EStoxx 2511/2441, DAX 7277/7053, CAC 3449/3398, MIB 15628/15020, IBEX 7849/7441.
US 100 & 200d averages: INDU 13130/12992, S&P 1406/1383, NASDAQ 3017/2985 with AAPL 100/200d at 626/597.

After having already shaken off is function as Risk Off indicator last week, the EUR became full Risk On, up 260 pips on the week. Happily enjoying its new ROn indicator function, it is now back to 01 Nov levels, over the 50d average and Fibo retracement from Summer to Fall. Next stop 1.315-1.317 area.
EUR: 50d 1.291, 100d 1.266 & 200d 1.280. Fibo retracement (of May 2011 1.494 & Jul 2012 1.204 down-leg) at 1.273& 1.315, then 1.349 (50%). Jul 2012 to Sep rebound levels: 1.231 – 1.247 – 1.261 – 1.274 – 1.291 -1.317 .

Commodities were again not the most exciting thing on a weekly basis. Oil duly did reacted to the Middle-East situation, but not exactly in the wildest manner. Up 2, down 2 and back to bed. CRB is up 1.7% on the week with nothing especially standing out. Gold tackling the 1750-mark (+2.2%). Copper +2.6%.

The activity in New Issues was similar to last week with EUR 13.3bn in 17 trades, although with an axe tending to financials from last week’s corporates. Diversified EUR 3.5bn covered bond offers from Belfius (issuing the first-ever Belgian Pfandbriev), BPCE and especially Intesa. Senior issues added to nearly EUR 3.5bn, mainly by ING and BNPP in 2 YRS FRNs. Standard Chartered 12 YRS LT2 paper. Danone, Volvo, Statkraft in household name corporates. Italian utility A2A. Note another Irish borrower with Bord Gais Eireann (met with EUR 6.5bn orders for EUR 500m 5 YRS). SSA issuers were uninspiring with EIB next to the German Länder of Hamburg and Brandenburg for a total of EUR 1.5bn.
The big missing candidate was the EFSF, which had announced a 3 YRS deal, subsequently pulled after the French downgrade.
Tons of roadshow announcements (Air France, Lottomatica, Generali, Telenor, Bilfinger, KBC Pfanbriev, SNS, Eandis Rio Tinto), so the market will remain active.

Outlook: Need to check election results in Catalonia, although realistically independence seems a very far-away thing, if at all. Still, a strong support for Mas might just make life more difficult for the central government.
Greek buy-back details (if).
Light macro supply initially out of Europe: will mainly see if consumers are as upbeat (despite rising unemployment and austerity everywhere). Equities are seemingly en route to retest the post-Summer 2011 double-top about 2-2.5% away, as last week’s break to the downside didn’t materialize.
Still EGBs remained quite resilient given yet another ROn drag to the upside. Hard Core wider out, Soft Core tightening, pushed by the Periphery with Belgium getting nearer and nearer to France (+13), which in turn closed at 72 to Bunds from 75 last Friday (and shrugging off Moody’s downgrade spread-wise). Decompression.

On the week (compared to Fri 16 Nov COB):
10 YRS Yields: Germany 1,44% (+12); Luxembourg 1,55% (+8); Netherlands 1,69% (+11); Finland 1,69% (+9); Swaps 1,74% (+8); EU 1,78% (+8); Austria 1,84% (+7); EIB 1,94% (+8); EFSF 2,07% (+9); France 2,16% (+9); Belgium 2,29% (+4); Italy 4,75% (-12); Spain 5,60% (-26).

10 YRS Spreads: Luxembourg 11bp (-4); Netherlands 25bp (-1); Finland 25bp (-3); Swaps 30bp (-4); EU 34bp (-4); Austria 40bp (-5); EIB 50bp (-15); EFSF 63bp (-3); France 72bp (-3); Belgium 85bp (-8); Italy 331bp (-24); Spain 416bp (-38).

EUR swap curve 2-5 YRS 48bp (+2,0); 5-10 YRS 83bp (+2,0) 10-30 YRS 61bp (unch).
2 YRS German BKOs closed -0,002% (+4) and 5 YRS OBLs 0,44% (+10), on the week. UST, heavy too, at 1,69% (+13).
Swiss 2-YRS were somehow in line with Schätze, closing at -0.225% from -0.25%.

Main at 121 from 139 (-12,9% tighter); Financials at 161 after 188 (-14,4% tighter); Cross at 496 from 572 (-13,3% tighter).
Stoxx Futures at 2552 / +5,1% from 2429 with S&P minis at 1402 / +4,3% from 1344, at European COB last week.
VIX index at 15,1 after 18,3 last week.

Oil 88,2/111,0 (WTI/Brent) from 86,9/108,2 (+1,5%/+2,6%). Gold at 1748 after 1711 (+2,2%). Copper at 352 from 343 (+2,6%) . CRB closes 298,0 from 293,0 (+1,7%).
After rebounding 10.2% last week, the BDIY kept adding on a daily basis and closed the week at 1090, up 54 (+5.2%).
Intermediate 2012 high (post-Chinese New Year) was at 1165 early May after a 10-year low at 647 early Feb, before dipping to 872 in June, rising back to 1162, retesting lows at 661 mid-Sep, re-testing highs at 1109 before sliding back to 916 in the last down-leg.

EUR 1,296 after 1,270 last Friday

Greek guesstimate: Greek bonds near tightest levels of 16.25% for 2023s and 13.50% for 2042s, down 100bp on the week (after closing 75bp tighter last week), 25 bp off Thursday’s tightest levels.
Need to see how that buy-back story pans out. Or if someone suddenly were to take offense at buying those off, realizing they’d come from hedge-funds…

All levels Friday COB 17:30 CET

Fast-forward Macro and Events:
European end of month data drought.
Busy data Tuesday in the US. Need to see whether housing will really turn around the economy.
Govie supply: Mon Germany EUR 3bn 12m bills & France EUR 6.8bn 3 6 12m bills, final 2012 Belgium auction for up to EUR 3.2bn 2017 / 2019s / 2022. Tue EUR 3bn Dutch 3 YRS, Spanish 3 & 6m bills, Italian 2 YRS zeroes. Wed EUR 3bn OBLs in Germany & Italian bills. Thu Italian bonds.
US Tue $35bn 2 YRS, Wed $35bn 5 YRS and Thu $29bn 7 YRS

EC: Tue OECD outlook; Wed M3; Thu Biz Climate and Consumer Conf; Fri CPI
GE: Mon Consumer Conf fcst 6.2 after 6.3; Wed CPI fcst 2% after 2.1%; Thu Unemployment; Fri Retail Sales
FR: Tue Consumer Conf fcst 83 after 84; Wed Unemployment; Fri PPI and Consumer Spending
Italy: Mon Consumer Conf; Tue Wages; Thu Biz Conf; Fri Unemployment, CPI & PPI
Spain: Mon Mortgage; Tue Budget Balance; Wed Retail Sales fcst -10.7% after -10.9%; Thu Housing Permits; Fri CPI
US: Mon Dallas & Chicago FED; Tue Durable Goods, Case Schiller, House Px & Consumer Confidence; Wed New Home Sales & Beige Book; Thu Q3 GDP 2nd revision, Claims, Pending Home Sales; Fri Personal Income & Spending, NAPM and Chicago PM.

Click link under title or below for today’s musical support:
We been broken down
The lowest turn
And been on the bottom line
Sure ain't no fun
But if we should be evicted from our homes holdings
We'll just move somewhere else
And still carry on
Hold on, Hold on, Hold on

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