Markets update: European Debt Crisis - EFSF and The Sum of All Fears

“ "Why, you may take the most gallant sailor, the most intrepid airman or the most audacious soldier, put them at a table together - what do you get? The sum of their fears." „

—Winston Churchill

"Worth noting the FT has reported that Merkel faces a revolt among her own coalition in Berlin over the EU/IIF deal agreed at the 21st July summit.

Some members of the CDU have apparently called for an emergency party conference to debate the government's euro zone strategy including the expanded powers of EFSF.

Belgium's Finance Minister said he aims to have the parliament's finance commission meet on the 5th September to present the text of the amended EU bailout agreement in part because Greece will need funding again in mid-September.

Back from his holidays, Dutch Finance Minister wrote in a letter to lawmakers that the EFSF is "no panacea" to solve the mounting troubles in the euro zone and "any significant increase of the EFSF can...have consequences on the creditworthiness of guarantor nations".

The launch of EFSF 2.0 is clearly a top priority when politicians return from summer holidays and continues to be a space that will probably bring us more volatility along the way."
(Source : Deutsche Bank)

Slithering to the wrong kind of union - Otmar Issing

A must read. Otmar Issing argues that Euro Bonds are the only way to alleviate funding issues of the failing peripherals and relieve the pressure which is still building up.

Markets udpate:

Equities - from BFTD to STFB...
CAC40 intraday move, another epic day:

DAX intraday move, I feel dizzy...

Rumours of issues with Societe Generale, stock getting slaughtered:

FX - Swiss National Bank - EUR/CHF a real issue for tourism when a Big Mac menu cost 17 USD in Zurich...

Credit - Same story as yesterday, except a tad wider...
Itraxx Sub Financial 5 year index breaking a new record.

Gold, well you know the score...

Risk indicators - still in the red and on DEFCON 1
VIX INDEX

OIS-Libor - Liquidity getting poor in the Euro area.

German 10 year Government bond aka DA BUND - can you spell Lufthansa flight to quality?

EFSF and The Sum of All Fears:
The European credit crisis is worsening. The Euro lost 1.3% today to 1.4188, while Gold hit 1800. The Euro Stoxx 600 crashed to a two year low and Paris based Societe Generale closed down 15%, after an intraday low of -22%.
The US 10 year bond reached a low of 2.13% after touching a record low of 2.03%. The US is turning like Japan and star analyst Meredith Withney even mentioned "zombie banks", a term I have already used in this blog in relation to Irish banks.
What the FOMC told us is that Ben Bernanke is well aware of the economic situation and has indicated to the market that the FED is going to stay accomodative for a while which according to me, means that long bond yields are going to fall much further:
UST 30 year yields:

France is next on the line and their were some nasty rumours of downgrade on France today leading to massive sell-off in French financial stocks today.
France is indeed in the crosshairs of the bonds vigilantes and the EFSF is definitely in jeopardy unless a very fast solution is find. France's five year Sovereign CDS reached 172 bps today. France's AAA rating has been affirmed by all three rating agencies, Moody's, S&P and Fitch. The market is very nervous and if France CDS is under attack it is not a good sign.
Not only France was under attack but French banks 5 year Credit Default Swaps were as well targeted.
Not only did Societe General stock tanked, its 5 year senior CDS reached 300 bps according to CDS data provider CMA.
Here is a run sent by a dealer regarding French banks CDS:

ACAFP being Credit Agricole, for your information.

Credit markets liquidity is drying up very fast, meaning new issues are being delayed and bank funding is under increasing pressure.

So what is happening now? Are we getting to the end game as mentioned previously in this blog?

As a reminder, this is what you have in a deflationary environment:

The "Beggar-thy-neighbor" policy induced by both the UK to some extent and by the FED is pushing us towards debt defaults for countries. For instance this policy is now crushing Swiss and Japanese exports and has taken a severe toll on European exports.
The fight between the Keynesian FED and the Austrian ECB is reaching fever pitch. Given the size of the bonds purchases needed to support Italy and Spain, the ECB doesn't have enough ammunition and a sizeable balance sheet to sterilise as it did previously its purchases of Portuguese, Irish and Greek bonds.
If the ECB start "printing", then the consequences will be a meteoric rise in the price of Gold, and we are, dear readers, getting very close to that point of no return for the ECB, unless Euro Bonds are set up, fiscal union reached, but given political uncertainties within the German CDU and Angela Merkel, the outlook is grim, given the very high fear of extending the size of the whale CDO, namely the EFSF. This is indeed The Sum of All Fears.

While I thought, I have been quite pessimistic recently in my outlook, so far, about the situation, Martin Sibileau in his latest post is even more scarier:

A View from the Trenches, August 9th, 2011: "The beginning of the end"

"The dam is broken and there is really no way to hold the fury back. The forces that will be unleashed here will surpass what anyone of us can imagine and the end game is a world’s reserve currency backed by gold. Within a fractionary reserve system? Unfortunately we think so, but backed by gold!"

This article is a must read as, I believe can explain what is at stake if European politicians cannot reach an agreement relating to Euro Bonds and a EFSF increase very fast.

Markets update - Credit - Rates - Equities - The Fast and the Furious...and unintended consequences of the US downgrade.

The Fast and the Furious...

Markets update:

In the equity space, it has been volatile to say the least and given sometimes pictures are worth more than words, we'll go through some of the action today.

CAC40 intraday movement, welcome to Disneyland Magic Mountain!

Around 6.5% intraday movement.

But the German Dax index was even more volatile:

EUR/CHF - the trend is your friend and the Swiss National Bank might start printing soon, and join the debasing currency club because it must be starting to hurt exports:

In this "Risk Off" mode, Gold is continuing its uninterrupted rise, from new record to new record:

VIX index - Houston we've got a problem...

Some other risk indicators
Our friend Ted Spread is cooling off a bit:

But it isn't the case for OIS Libor spreads in Euro:

European Government Bonds update:
Shock and awe doctrine in full force on 10 year Italian and Government bonds!
Italian BTP 10 year bonds

But most of the action was on the Spanish 10 year bond!

Is it going to restore confidence in the markets? We still need long term solutions which have yet to be addressed by European politicians. The EFSF will have to be increased or spell the demise of the Euro.
Greece 2 year Government bonds - Zombie Zorba is staying put:

Since the ECB started buying Greek bonds, the 5 year Sovereign CDS for Greece went from 617 bps to 1690 bps according to Bloomberg.

In the credit is getting crushed and liquidity is extremely poor in the cash market.
CDS spreads continue to widen significantly, making everyone feeling extremely nervous. That Lehman feeling all over again...Not good.
Itraxx Crossover 5 year index, drifting wider and wider:

In the sovereign 5 year CDS space, France is widening still:

Australian Banks have also started widening in this sell-off:


Unintend consequences of the US dowgrade = global repricing of risk.

Since the downgrade, U.S. government bonds rallied, with
the yield on the benchmark 10-year note tumbling to an 18-month
low of 2.28 percent. Flight to what is still seen as a safe haven in this brutal environment.
S&P followed up with the downgrade of Fannie Mae and Freddie Mac, DTCC and others, and municipals bonds.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage-backed securities rose 0.14% point to 1.22% points more than 10-year U.S. government debt, according to Bloomberg. A gap of 0.87%, highest gap since April 2009.
Fannie and Freddie have so far received 170 billion USD in federal aid since being placed in conservatorship in September 2008.
AA+ has been assigned by S&P to municipal bonds, a market of 2.8 trillion USD.
The premium paid by European banks to borrow in dollars through the swap market has increased the most since January this year according to Bloomberg. The cost of converting euro-based payments into dollars as measured by the one year cross-currency basis swap fell to 43.6 bps below the euro interbank offered rate (EURIBOR) yesterday according to Bloomberg.

Banks are therefore affected the most by the US downgrade because of the implied support of the US government since 2008. Also given the economic slowdown, they are indeed more affected.

The Markit ABX index tied to subprime-mortgage bonds rated AAA when issued in 2006 fell 2.8 point to an equivalent cash price of 47. The biggest fall since May 2010 according to Markit.

Leveraged Loans, the S&P/LSTA US leveraged Loan index 100, declined by 1.77 cents to 90.66 cents on the dollar, the 11th consecutive fall and lowest level since October. The highest point was 96.48 cents to the dollar on February 14 according to Bloomberg.

Emerging Markets: The JP Morgan EMBI Global Index, mostly used benchmark for Emerging Markets bond funds jumped 34 bps to 354 bps, highest level since 2010.

Basel III is raising capital standards for banks, so quite a few banks need to raise capital. But, with the current market sell-off, the new issue market is essentially shut down, meaning down the line, it is going to be very crowded at some point when the markets cool-off and opens up again. Given countries, banks and others will be coming hard to the market to raise capital, it is going to cost more. Simple as that.

Companies are still hoarding cash and sitting on a hefty pile of 963.8 billion USD in the US according to S&P data. Companies are in great shape to weather the storm. They have paid down debt and are to some extent quite lean with healthy balance sheets.

Finally, unintended consequences on China - Bloomberg:
The Yuan and the Dollar index

Charts of the day - Bloomberg:
Portuguese citizens like Irish citizens, are leaving their countries for a new life, leaving behind their battered and bruised economy:

Migration might fall in negative territory in Portugal unless the government can end the exodus of workers seeking employment abroad. But it isn't only happening in Portugal, it is also happening in Greece and in Ireland.

And as a conclusion, Bank of America's market cap as of yesterday's close was 73 billion dollars, Apple has enough cash to buy it outright in cash with 76 billion USD in the bank account...
Bad news keep piling up for Bank of America since the very ill-fated acquisition of Countrywide...

Markets update - Credit - Rates - Equities - Kneecapped...

Another day in the trench and not even the better than expected employment figures at 9.1% and Nonfarm payrolls (NFP at 117K versus 85K)have been able to sustain a strong rally in the equity space.
The intraday move on some European indices made everyone fill dizzy, or sick. It was fast and furious. In these markets you can clearly age in dog years as in 2008...
In relation to the NFP numbers, while June had come in at a horrible 18K jobs, it was revised upwards to 46K. Very slight improvement but nothing great about it. The average duration of unemployment increased to 40.4 weeks from June's 39.9 weeks as it continues to make a new high each month. 44.4% of those unemployed and still looking for work have been searching for 27 weeks or more. This is not a recovery.

The US economy looks like muddling through but the worries in the European space in relation to the ongoing contagion to Spain and Italy, make the outlook for 2012 look grim, if the situations spiral out of control in 2012.

Credit got whacked kneecapped (the joys of rebranding) and while there was some small relief in the peripheral government space, it started off with the usual flight to quality mode in the morning with German 10 year government bonds even touching 2.22% then bouncing back up to close at around 2.35%.

Here are some markets updates:
10year German Government Bond:

Greek 2 year bonds:

Creeping up again.

Vix index shooting up:

Credit Markets:
Itraxx Financial Sub 5 year CDS index reaching a new record:

Itraxx Crossover 5 year CDS, going up fast:

"In Europe, the cost of insuring corporate debt rose to the highest since June 2010. The Markit iTraxx Crossover index of credit-default swaps linked to 40 companies with mostly high-yield credit ratings increased 29 basis points to 545.5, according to JPMorgan Chase Co. at 10 a.m. in London" - source Bloomberg.

EUR/CHF, the trend is your friend and the Swiss National Bank is powerless:

Intraday volatility on the CAC40 index, you bet!

CAC40 index, that European stock index sinking feeling...

Some serious risk indices are flaring up, OIS/Libor spread and our friend TED, it is a short-term indicators of bank liquidity:

OIS/Libor spread:

We will need to monitor closely these two indicators in the coming days and weeks. Given the market is currently shut down for both Italy and Spain, their banks might need as well to curtain lending, because, like their sovereign issuer, the access to the market is as well shut down for these banks.
According to Bloomberg, the five biggest banks in each of the two countries have about 240 billion euros of debt maturing by 2013. It appears as the two graphs displayed above that the interbank market is freezing up again, as it did in 2008.
At the same thime, the average yield on high-grade corporate debentures fell
to a record 3.45 percent yesterday, according to Bank of America
Merrill Lynch index data. Investors are seeking the relative safety of corporate bonds, but we are talking about A rated companies and above, particularely high quality industrials companies in the US.

I have already discussed the issue of the wall of maturity in the following post Crowding Out. Banks and countries alike are competing to raise money. Banks will have to go to the ECB for their funding needs for the time being.

All of this means that the cost of funding will rise significantly in the years to come.