Dec 21. ECB’s Long Term Repo Op bigger than expected…but already priced?
Risk assets continued to rally yesterday in front of today’s LTRO from the ECB, which indeed was better than expected with EU489 bln lent of 3 year funding. The question is whether the carry trade will truly allow time for gov’ts to make structural fiscal adjustments. Certainly bank balance sheets will improve due to ECB largesse. As of yesterday Spain’s 2 year yield had already fallen a couple of hundred basis points, back to where it was prior to the recent rate flare-up…has the bulk of the market move already occurred? Short term funding scares have likely been tabled for now, a necessary improvement for peripheral budgets but not a panacea.
–Regarding funding, 3 month LIBOR setting continues to rise, now around 57 bps and well through the high spike from June 2010 (when SPX was more like 1020 as opposed to 1250 now). So this rate is now more than twice the 2 year treasury yield (25 bps), which should spur lending into the real economy as opposed to treasuries…but it seems like the addiction to govt subsidized rates will be hard to break.
–India’s Sensex index made a new low yesterday…lowest level in 2 years. Shanghai composite has also been sinking, as has most of Asia. Nikkei is near the spike low of the earthquake and tsunami. So, Asia might not be the engine for the world.. However, declines in many major world stock indices over this year are unlikely to be repeated next year (though I think it will be a rocky first half).
–Existing Home Sales and US 7-yr auction today.
Dec 20.
Quiet session Monday with flatter curve. Ten year yield fell 4 bps to 1.81. I marked 2/10 treasury spread at only 158 bps, a recent new low, and would have been a new low for the year if not for the ‘operation twist’ announcement in Sept when the spread briefly traded 152. Treasury auctions 5 yr notes today and 7’s on Wednesday.
–News on the equity side was BofA’s break of the $5 barrier. But all financials were weak. For example Citi is around 25, only half the value of the 10 to 1 reverse split which had priced the stock at 50 as opposed to 5. It’s an eye opener to look at a longer dated chart of Citi, which had a high over 500 in 2007 (backdating the reverse split)…now a flatline. Yesterday, UK Chancellor of the exchequer George Osborne was advising banks to shed risk and put firewalls around retail ops, perhaps adding to weakness in US financials at the margin. RBS also nearly at a new low.
–One notable change in pricing yesterday concerns back month Fed Fund contracts. FFF’14 was up 5 bps to 99.705, (only 29.5 bp yield). Every contract up the that point trades below 30 bps, and the net change in prices subsequent to Jan ’14 was even greater than 5 bps. There was very little volume associated with this change…it’s simply an extension of the idea of low rates…forever.
Dec 5, 2011. Send lawyers guns and money….
–Employment report showed a large drop in the rate to 8.6% though NFP up only 120k. Though the report on its surface was heartening, internals, like the labor force participation rate, were suspect. US bonds don’t seem to buy into the economic strength story at present. 2/10 and red/gold actually closed lower than on Wednesday. Tens fell 7 bps to 2.04 yield. Stocks faded from a strong open to close unchanged to lower.
–Italy pushing through a big austerity package. I saw references this morning to slowing in Spain, China (service PMI), India, and further austerity in Ireland. There was an item about Germany possibly nationalizing Commerz. I have to think that the ECB is going to become the buyer of FIRST resort of all troubled debt and the IMF will get involved as well. Might be good for risk assets in the short term and will almost certainly boost oil, which has the added kicker of increased mideast tensions as Iran said it shot down a US drone. The Fed will clearly stay easy in support of europe, though it’s unlikely that they can keep the curve as flat as it currently is.
–Today’s news includes non-mfg ISM expected 53.9 and Factory Orders +0.3%.
–Send lawyers guns and money, the new global anthem, and here’s an interesting investment play on that theme by Cerberus:
Mystery company buying up U.S. gun manufacturers
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/12/04/BUJ91M4HL0.DTL&tsp=1
While at the same time…
‘President Barack Obama will travel to Osawatomie, Kansas on Tuesday to emphasize the need for Americans to pay their “fair share.” ‘
Dec 2. Employment report; Actual NFP +120k, rate plunge to 8.6%
POST DATA COMMENTS AT BOTTOM
–Employment report today with NFP expected 125k and the rate unchanged at 9.0%. Interest rates are pushing higher in front of today’s report. Ten year yield rose 5 bps to 2.11. New highs in a few of the one-yr euro$ calendars. For example EDM2/EDM3 spread (which is the lowest one-yr spread) was up 2.5 bps to a new high of 10.5. I recall when the Fed first cut rates to the then unheard of low of 3% in the early 1990’s that one year spreads traded a bit over 200 bps at the highs. The first time down to 1%, I think one year spreads traded over 260 bps. The market sentiment was that such stimulative rate posture couldn’t possibly last for long, and would have to be dramatically reversed. Now with rates at zero, even the one year forward spread of EDZ12/EDZ13 is less than 1/4%.
–After NFP tens sold off but snapped right back as internal components of the report, like labor participation rate, indicated continued weakness. As of 9:00 CST TYH2 is now unchanged at 129-04. SPZ1 is still 11.00 higher on the day. The biggest underlying news in the market concerns a WSJ (and others) report that ECB’s Draghi is opening the door to large scale sovereign bond purchases if gov’t can impose budget discipline. Sort of like when Greenspan told Clinton he would lean toward easier policy if Clinton held tough on the budget. In this case, I would think that large scale ECB purchases would be quite inflationary, but financial assets would certainly rally in the short term.
Dec 1. Fed language regarding coordinated CB action re swap lines same as 2008.
“Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.”
Sounds familiar? This statement was issued by the Fed on September 18, 2008!
Back then, after this announcement, the market rallied for two days before starting a very bad decline. Will it be different this time? Food for thought….
(thanks Bob Weiss)
Dec 1. Fed and other CB’s coordinate swap line rate cut
–Central banks (the Fed) cut dolllar swap lines in coordinated action sending risk assets higher and boosting the short end of the curve. The curve steepened with red euro$’s up nearly 11 bps while golds were actually down 7.5. Red/gold pack spread up 18 in one day! On the other hand 2/10 rose only 6-7 bps to 181. Implied vol fell in treasuries. Gold jumped over $30. –The question is whether this move will release enough pressure to give time for more structural changes. From BBG yest: “ECB Executive Board member Juergen Stark said the only way for the region to exit its debt crisis is for gov’ts to reduce budget deficits and embrace wage cuts and other structural changes.” In other words, because fx devaluation isn’t available, overt wage cuts are the answer. Doesn’t sit well with the public, which is why govts typically resort to less clear actions (like yesterday’s) when asking the public to subsidize over-levered banks and bloated govt spending. (Forbes reported that a large european bank was close to failing yesterday). –China PMI fell below 50 to 49; analysts expect further easing. Yesterday it was reported that growth in India has also slowed, to below 7%. News in US includes ISM expected 51.5 from 50.8. –Before Gen’ Motors latest reincarnation, it was often referred to as a pension fund with a car company attached. The old model was that when workers retired from the company, they died shortly thereafter, so pensions and benefits weren’t particularly onerous. As people started living longer, with expensive medical care and unions pushing for more of ‘the pie’, structural overhead became too much to bear. The company settled into a pattern of rebates, low financing rates, and price incentives, which trained the buying public to wait for those incentives. Those periods generated a sugar-rush of sales, only to be followed by a lull. The structural problems remained. GM went bankrupt and emerged as a smaller company; the stock is still on a one-way slide lower. Yesterday’s CB coordinated action fits the same pattern. Rather than structural reform, a blue light special to buy stocks.
Nov 30. Oil futures curve signals concern about supply….
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Crude oil Feb12 vs Feb 13
Gold Feb 12 vs Feb 13
–Fairly boring in US interest rates today. For the past two days tens began the day lower, but then rallied back. Ten yr yield closed up 4 bps to 2.00%. On the other hand, Japan (JGB) yield has gone from 94 bps to nearly 1.06% in a couple of weeks, which may seem like a small move but given Japan’s huge debt, even a small rise in rates adds heavily to the debt servicing burden. Europe is still teetering on the edge…a Telegraph article the other day notes that money supply is contracting, with the implication of slower growth going forward.
–A friend of mine pointed out that the Dec/Feb gold roll collapsed from around -$3 to -$6 yesterday. Not terribly surprising I suppose, as longs simply roll into the new contract rather than accept delivery. One might think that banks would simply step in and provide the bid for GCZ1 and take delivery…but perhaps that activity falls under the black cloud of prop trading and derivative manipulation, and the banks certainly don’t need a negative spotlight given recent stock performance. BAC touched 5.03, (yearly low), and GS, JPM look weak. After the close S&P downgraded BofA, Citi and Goldman.
–Back to gold: I looked at Feb Gold one year spread GCG12/G13, which is somewhat volatile but had been in range from -$14 to -$10 before a plunge to -16.80 and back to -13.90 today. Negative values mean that near contracts are less expensive than deferred, the normal situation, reflecting cost of carry, storage, insurance. But what a difference in oil markets! Iran rhetoric is heating up, and protesters stormed the UK embassy in Tehran. Problems in Syria could also affect oil output, as could a multiple of other factors in that part of the world. And those concerns are very real…reflected in the curves of both Crude Oil (CL) on NYMEX and Brent (CO) on ICE. Feb12/Feb13 spread in both made NEW HIGHS, with near contracts much stronger and higher in price than deferred. CLG2/CLG3 to POSITIVE 3.66 and COG2/COG3 at 6.04. The difference in the shape of the gold curve versus oil highlights the juxtaposition of speculative jockeying versus true concern about obtaining critical energy supplies. The moves toward backwardation in oil have been trending…the point is that there are all sorts of market signals flashing red. My own guess is that nothing good happens in either european markets or in US stocks if an oil crisis is layered onto the quicksand of the current environment. And while european bond rates edge higher, the US treasury market provides the depth and liquidity for massive capital inflows.
Nov 29. MF Global writ large
–Monday started with substantial moves but ended little changed. For example, crude oil was north of $100 but settled below 98. Ten year note was as high as 2.07 but came back at the end of the futures session to 1.96. SPZ rallied but stalled around 38% retrace from Oct 14 high 1275 to Nov 25 low 1147.5 (1196.00). 50% is around 1211, which appears to be a target for today.
–Rating agency downgrade warnings are being greeted with a yawn. Fitch put the US on negative outlook. Every other day France is rumored to be facing a downgrade. Moody’s threatens to cut european banks.
–There’s a Bloomberg article today about MF Global, and Corzine’s bets on Spain, Italy…which were covered by shorter term hedges. http://www.bloomberg.com/news/2011-11-29/corzine-pushed-fatal-europe-bet-to-11-5-billion-as-mf-global-board-balked.html The article notes that if hedges couldn’t be rolled then risk exploded. It also mentions that the board of MF was uncomfortable but didn’t really do anything. “Directors believed that rejecting the trades would have been an affront to the veteran trader and would have been tantamount to firing him, said the person familiar with the board’s deliberations.”
–MF Global is a small model of europe as a whole. The rise in bond yields threatens to take down the entire structure. The IMF and ECB are sort of like Price Waterhouse, whose audits meant nothing. There are a series of short term “hedges” to buy time. The directors, or heads of state, are afraid to “fire” the euro, even though it isn’t working for every country.
Nov 28.
–Belgium was downgraded Friday but then agreed to a new budget over the weekend due to the seriousness of the situation. (BBG) “Belgium’s budget deficit will narrow to about 3.6 percent of gross domestic product this year from 4.1 percent in 2010, S&P said. It also forecast government debt will increase to about 97 percent of GDP from 96.1 percent last year after the administration paid 4 billion euros to nationalize Dexia.” Just for the sake of comparison note that US deficit is 8.7% GDP in 2011 and total debt is 100% of GDP. And Bloomberg reports this morning that “Dealers See Fed Buying $545B Mortgage Bonds”.
–One plan after another is being floated to save the euro. All involve low interest loans to try to buy time for budget improvement. The latest is $6-800 billion from the IMF to Italy and Spain with rates of 4-5%. And there’s a story in Reuters about the AAA countries, Germany, France, Finland, Netherlands, Luxembourg and Austria issuing “elite” bonds for 2-2.5%. Just who provides all these low interest loans isn’t exactly clear to me…I suppose they all go on the books of the ECB. For now the markets are cheered as disaster appears averted. But it seems that private capital is less and less generous in terms of providing funding. And even low rates doesn’t necessarily do anything besides dragging out the problem, as is evident in US housing which has only now stabilized, but at such anemic levels that the Fed still feels compelled to do more.
–Stocks and gold are rebounding this morning as is the euro. The curve is steeper, having flattened to new lows last week. Probably reasonable to look at gold vs stocks as a trade…a “bazooka” that saves the euro likely causes gold to outperform stocks though both would rally, a failure to find a solution would cause stocks to underperform.
Nov 24. Happy thanksgiving
–Bad German bund auction Wednesday sent 10 yr German yield well above US in a sign that faith is being lost throughout europe as a whole.
–Portugal was cut to junk, while interestingly S&P raised Iceland’s rating and outlook. There are still capital controls, but improvement seen 3-4 years after the crisis and the economy in Iceland is growing. There was also a warning that Japan may be downgraded, and of course with govt debt over 2x GDP there is massive vulnerability to any rise in rates.
–In eurodollars the curve again flattened as stocks sank. Red/gold pack spread only at 150 bps, a low for the year, and only half as much as the high for the year. In August as stocks swooned the spread was around 200 bps. After the Sept 22 FOMC twist announcement it briefly settled 164.5. New lows in this spread is in no way indicative of success by the Fed, it is more likely signaling extreme economic malaise going forward. Gold eurodollar pack represents the year 2016, and that forward one year rate ignoring compounding is only 2.35%. Same thing is apparent in the 10 year note which fell another 6 bps to 188.
In: Eurodollar Options
