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Chart of the day: 2012 sovereign risk compression

Global Macro Monitor — Wed, 08 Feb 2012 02:00:35 +0000

Great data from Bespoke. Looks like Portugal is the odd man out as the only government in which its CDS spreads have widened this year

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An Update on Italian Sovereign Outperformance

Marc Chandler — Mon, 06 Feb 2012 17:40:32 +0000

Ahead of the next LTRO at the end of the month, Spanish and Italian bonds may begin consolidating after the large moves seen over the past month. The scope for Italian out performance in the month ahead appears somewhat more limited than over the past month. Indeed, the 5.5% yield level on the Italy's 10-year generic bond may prove a bit sticky. It also corresponds to trend line on the weekly charts, drawn off the yield low of 3.7% in mid-Oct 2010. Spain's 10-year yield decline is slowing as it slips through the 5% threshold

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Jobs data highlight huge potential for capital loss in Treasuries

Marshall Auerback — Fri, 03 Feb 2012 20:45:36 +0000

I have been making a big deal about strength in the household series of employment and the trend in IUCs. These are statistical series that do not get revised out of recognition. They often tell the tale at turning points. Given that past household survey employment and IUC trends have persisted, the current bond market rally will be even more insane and the stock market will probably continue to work higher, even though the favorable seasonable window has closed. I expect the recent trend of large outflows from stocks to bonds over the last year (and last five years) to be reversed in 2012. Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note

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Dollar Mixed as Spain raises 4.5 bn euros in bond auction

BBH — Thu, 02 Feb 2012 12:30:28 +0000

The dollar is currently mixed against the majors and EMs as asset markets consolidate near recent highs. Spain raised 4.5 bn euros in a bond auction the upper end of their desired range. On the data front, Australia’s December trade surplus exceeded expectations increasing to A$1.71bln in December from a revised A$1.34 bln in November (was A$1.38 bln). Chinese markets outperformed the region closing nearly 2% higher, but the news flow was mixed, and even slightly contradictory

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The European Sovereign Debt Crisis, the US Savings and Loan Crisis and Regulatory Forbearance

Edward Harrison — Wed, 01 Feb 2012 13:48:21 +0000

This is me thinking out loud about how regulatory forbearance in the S&L crisis mirrors today's policy path

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European Sovereign Supply and LTRO

Marc Chandler — Wed, 01 Feb 2012 03:00:00 +0000

The headline story in the Financial Times today is that "Banks set to double crisis loans from the ECB". The report says that "several" large banks from the euro zone told the FT that they "could double or triple" their takes at the

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Market Tone Remains Upbeat after Euro Zone Auctions

BBH — Thu, 19 Jan 2012 12:30:56 +0000

Dollar continues to trade on the back foot as markets maintain upbeat tone; strong EZ auction results. Soft Australian December employment reports supports Feb rate cut; BoC likely to remain on hold in H1. SELIC rates likely to fall but the government may act to stem BRL appreciation; Philippines CB cuts by 25bp

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Correction Tuesday?

Marc Chandler — Tue, 17 Jan 2012 12:30:20 +0000

China's slew of economic data came in better than expected this coupled with successful bill auctions by Spain, Greece and Belgium and a very strong German ZEW (-21 v -53.8) is rekindling the appetite for risk today. The euro is up over a cent and is running into resistance near $1.28. More generally, major and emerging market currencies are trading broadly higher against the greenback. Equities and commodities are higher

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The S&P cuts were expected, a disorderly default by Greece won’t be

Win Thin — Mon, 16 Jan 2012 00:49:03 +0000

With the long-awaited euro zone downgrades by S&P now out of the way, we thought it would be useful to assess just how close current ratings are now to our own sovereign ratings model

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Successful Auctions Boost Tone in Europe

BBH — Thu, 12 Jan 2012 12:30:04 +0000

Better than expected reception to Spain and Italy’s debt auctions have spurred risk on; dollar softer. BoE, as expected, left policy unchanged, ECB expected to do the same; Japan’s current account shrinks. US advanced retail sales expected to rise to 0.3% from 0.2%; thoughts on the EM central bank outlook

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Thoughts Ahead of Spanish and Italian Bond Auctions

Marc Chandler — Wed, 11 Jan 2012 16:00:00 +0000

Spain and Italy begin this year's funding operations with bond auctions tomorrow and Friday. Although the euro is bouncing along its recent trough against not only the dollar, but against many of the other major currencies as well, there has been a modest improvement in some of the measures the market has focused on as metric of stress. Of course there are other signs that still show a high level of paralysis, including the fact that overnight deposits at the ECB continue to set record levels and are approaching 500 bln euros

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European Bond Supply and Greece’s Trojan Horse

Marc Chandler — Fri, 06 Jan 2012 20:00:52 +0000

European sovereigns return to the capital markets more substantially next week as 2012 issuance gets under way. Between bills and bonds, around 35-40 bln euros will be sold. Maturing issues and coupon payments will cover about three-quarters of the bond issuance

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Why Spain may be More Worrisome than Italy

Marc Chandler — Thu, 05 Jan 2012 18:54:18 +0000

At the end of last year, Italian 10-year yields were more than 200 bp on top of Spain. The spread has narrowed in recent days, but is still well beyond the euro era average of about 10 bp and the late 2008 extreme near 65 bp. There is more room for Italy to outperform Spain

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Refunding Fears Take Toll on Europe

Marc Chandler — Thu, 05 Jan 2012 12:30:32 +0000

One of the key factors behind the poor sentiment toward the euro, which was pressed to new 13 month lows in Europe today, is the challenge posed by the sovereign and bank refunding needed this year, while rating downgrades loom around the corner. Euro zone sovereigns have an estimated 800 bln euros of debt servicing and spending to fund this year, while the banks have a little bit more

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John Mauldin: The Matterhorn Interview

Guest Author — Mon, 02 Jan 2012 14:30:47 +0000

Investment advisor John Mauldin explains his attitude towards austerity measures; a return of the gold standard; the euro crisis; and the willingness to bailout everyone that makes capitalism and monetary systems stop working

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Euro Slump Extended, Mediocre Italian Bond Auction, Poor Hungarian Debt Sale

Marc Chandler — Thu, 29 Dec 2011 12:30:37 +0000

The euro extended yesterday's losses in Asia, falling to $1.2866, the lowest level since the start of the year. The euro's losses against the yen were also extended with new 10-year lows recorded just above JPY100.30. Italy wrapped up a difficult year by selling about 7 bln euros of a 5-8 bln target range. Yields were around 50-120 bp lower than the last auctions with similar bid-cover. The results did not help the Italian bond market stabilize and the 10-year yield continues to flirt with 7%

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Volatility Lurks

Frederick Sheehan — Wed, 28 Dec 2011 21:00:42 +0000

The S&P 500 volatility index - the VIX - is a measurement of volatility expectations. It has fallen 50% since the (latest) agreement to save the euro was announced. If the VIX falls to 18, call options are worth considering

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On the ECB’s Long-Term Refinancing Operation and 2012 macro ideas for investors

Edward Harrison — Wed, 21 Dec 2011 20:30:42 +0000

The end of year is usually a good time for markets. There was a lot of angst about the European situation a few weeks ago, but there is less of that now because we're hitting year-end (tape painting). Does that mean the credit crisis situation is stable? No, but it has stabilised somewhat. 2012 will be a different story though. I talked about the European sovereign debt crisis and my themes for 2012 with Howard Green of BNN and Ryan Avent of the Economist yesterday. The link to the video is below but let me say a bit more, particularly about today's LTRO by the ECB. I'll try to be brief

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On Liquidity: Watch What the ECB Does, Not What It Says

Marc Chandler — Wed, 21 Dec 2011 17:52:46 +0000

The key question remains what the banks will do with the newly acquired funds. We suspect that to the extent banks buy sovereign bonds, they will purchase their own sovereign's bonds rather than their neighbor's. More details of the nuances of the auction will likely be forthcoming over the next several days, but it is notable that several Italian banks, include the two largest Italian banks reportedly created bonds, which were guaranteed by the government, for apparently the sole purpose of creating collateral to borrow from the ECB today. Going forward, investors should pay more attention to what the ECB does than what it says. It says it will not backstop sovereigns, yet since it has renewed its bond purchases in August, its bond purchases have almost matched the new bond issuance of Italy and Spain. The ECB's rhetoric seems somewhat harsher than its actions. To be sure the liquidity provisions are not and cannot be the "bazooka" that so many want. It does not cure what ails Europe, but it treats it and will have to continue to do so in the months ahead

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Auerback: Solvency Starts with the ECB

Edward Harrison — Wed, 21 Dec 2011 17:00:09 +0000

I thought I should highlight that Marshall Auerback was on Fox Business yesterday since he writes here occasionally. I wish it were more often! Marshall was on message regarding the euro zone debt crisis. His point: Additional liquidity is not a long-term solution to what ails Europe. It is about national solvency and economic growth

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Bond vigilantes and the currency relief valve

Edward Harrison — Wed, 21 Dec 2011 15:49:20 +0000

The last post by Randall Wray below is an interesting one because it points out how the world has changed since the end of the gold standard and why the sovereign debt crisis is centered in the euro zone. While I have an Austrian bias overall, for me, MMT is the best way to think about nonconvertible floating exchange rate systems as distinct from fixed exchange rate, currency board, pegged and convertible systems. The difference is policy space and what I would call the bond vigilante relief valve

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It is Krugman who has shined the headlights on the difference between a currency issuer and a currency user

Randall Wray — Wed, 21 Dec 2011 15:00:39 +0000

It seems to have been none other than Paul Krugman who made it safe for others to adopt MMT. He shined his headlights on the obvious: the reason why interest rates on government debt are not exploding in countries like Japan, the US, and the UK is because they issue their own currencies. So, Krugman shined the headlights on the difference between a currency issuer and a currency user. It is now time for everyone to follow Dean Baker—to look for the car keys under those MMT headlights

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Government Spending with Self-Imposed Constraints

Randall Wray — Tue, 20 Dec 2011 21:24:52 +0000

Let’s see how it is really done in the US—where the Treasury really does hold accounts in both private banks and the Fed, but can write checks only on its account at the Fed. Further, the Fed is prohibited from buying Treasuries directly from the Treasury (and is not supposed to allow overdrafts on the Treasury’s account)

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ECB’s Long-Term Repo Operation

Marc Chandler — Tue, 20 Dec 2011 19:30:21 +0000

Following the 1-year repo in June 09, there had been market talk of the money going into the short-term Italian and Spanish bonds. Yet we don't expect as much of new carry trades some officials might wish. The lion's share of the funds LTRO taken we suspect will go to 1) replace current ECB funding, 2) build greater cash buffer and 3) reduce some liabilities

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Euro Squeezed Higher, Takes Others With It, Positive Newstream

Marc Chandler — Tue, 20 Dec 2011 12:30:23 +0000

Successful Spanish and Greek bill auctions and better than expected German IFO caught the market wrong-footed, if the record net speculative short at the IMM is anything to go by. The euro has shot up to almost $1.3090 and pulled up the other major currencies and emerging market currencies in its wake

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Is Finland Really A Closet Member Of The Eurozone Periphery?

Edward Hugh — Mon, 19 Dec 2011 02:36:20 +0000

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

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Europe’s Three No’s in Two Parts: Part II

Marc Chandler — Mon, 19 Dec 2011 01:49:19 +0000

The ECB is seen to be the key protagonist and the pressure is more acute on it to act. Yet it steadfastly refuses. The other solution that has been advocated is a joint European bond. It is not going to be forthcoming any time soon. Such bonds are not seeds but fruits of a fiscal union. Surveys suggest a little over half the market expects a country to no longer be in the euro zone by the end of 2012. Contrary to what some noted economists have argued, a Greek decision to drop out would be a tremendous policy blunder. Many economists and investors see a binary outcome of the European debt crisis: either the ECB backstops the sovereign/there is a European bond, or the euro zone breaks up. Instead, we think that the continuation of what can be called “muddling through” is the most likely scenario for the period ahead. It is the absence of a comprehensive solution that will shape the investment climate. It means that the crisis continues. The risks are asymmetrically distributed to the downside, yet the ECB’s massive provision of liquidity would seem to contain the extreme tail risks

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Europe’s Three No’s in Two Parts: Part I

Marc Chandler — Mon, 19 Dec 2011 01:23:25 +0000

Banks can borrow as much as they want from the central for three years at the refi rate. They are limited only by their desire and collateral. The ECB also liberalized further its definition of acceptable collateral. But expectations of large banks borrowing money from the ECB to buy sovereign bonds to use as collateral to borrow more money from the ECB does not appreciate the risks involved. The cost of hedging and insuring sovereign risk has risen. Also, if the collateral is a sovereign paper and the sovereign is downgraded, or if the collateral loses value for another reason, the bank will have to pony up more cash or collateral

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Forecasting misconceptions and the likelihood of European financial repression

Marc Chandler — Tue, 13 Dec 2011 15:16:28 +0000

Market participants, including economists and strategists are prone to confusing what they believe should be the case with what will be the case

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Nervous Calm over Currency Market

Marc Chandler — Tue, 13 Dec 2011 12:30:00 +0000

A good reception to a Spanish bill auction and a some what better than expected German ZEW investor survey helped stabilize the risk sentiment which had been battered yesterday. The major foreign currencies are mostly firmer on the day, but the modest gains have left the short-term momentum indicators a bit over-extended. This would seem to favor early North American participants selling into the currency bounce

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Nervous Calm over Currency Market originally appeared on Credit Writedowns

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A Deep Seated Hostility Towards European Construction?

Edward Hugh — Mon, 12 Dec 2011 13:30:00 +0000

The British decision to veto the proposed new EU treaty is not surprisingly provoking an avalanche of commentary this weekend. Among journalists, at least, there seems to be a consensus that David Cameron committed some kind of major diplomatic blunder. Possibly this is so, but given the difficulties presented by having to take this agreement forward outside the formal structure of the EU, it is hard to not reach the conclusion that both Angela Merkel and Nicolas Sarkozy have been guilty if not of a similar blunder, then at least a major error of judgment

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The EU’s Camouflaged Bazooka

Global Macro Monitor — Fri, 09 Dec 2011 22:25:39 +0000

Many were disappointed that the EU Summit didn’t conclude with a hard number backstop for the ‘zone’s sovereign debt rolling over next year. We believe if you scratch the surface the bazooka is there

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The only real solution to the European debt crisis is credit writedowns

Global Macro Monitor — Fri, 09 Dec 2011 06:00:10 +0000

Like many, we at the Global Macro Monitor believe the only solution to the European debt crisis is to write down bad debts, but we’re also realistic that it will take time because of the weak and highly levered balance sheets of many of the European banks holding the sovereign debt. Bridge solutions will have to do for now as banks bolster their capital. Germany seems to understand this as the sovereign debt crisis has created systemic problems in their own banking system

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Key Disagreements at Late Stage Weighs on Euro

Marc Chandler — Wed, 07 Dec 2011 16:52:37 +0000

Germany and France are pushing for treaty changes. Under normal conditions treaty changes are a long drawn out process, subject to horse trading and vulnerable to domestic political considerations and the outcome is far from guaranteed. There some voices, including Van Rompuy, who want to "fast-track" treaty changes without requiring parliament approvals or referenda. Others disagree. Recall there have been numerous reports suggesting the European national central banks and the Federal Reserve would make bilateral loans to the IMF for which they could finance enhanced lending to the euro zone countries. Although we have argued that the IMF is the backstop for sovereigns, not the ECB, we think the process is more complicated than can be resolved at this summit. There does seem to be a significant role for the IMF, but the details have not been worked out

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The European Troika to Watch

Global Macro Monitor — Tue, 06 Dec 2011 20:30:04 +0000

The “troika” – Italian, Spanish, and French bond yields - is acting pretty well even after the S&P downgrade. Italy is under 6 percent and that is what matters. We sense there will be tremendous pressure on the shorts and equity risk off crowd going into the EU Summit and believe the market moves higher even if it’s just a fig leaf to give the ECB cover. After that? All bets off going into 2012. Stay tuned

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