A few thoughts by Peter Tchir of TF Market Advisors.
Don’t Ignore the Irish Comeback This chart is important for a couple of reasons. The story in Ireland doesn’t get much attention, but what a comeback. The Irish 2016 bonds started the year yielding 7.5% and are now down to 4.43%. So while we are inundated with reports about “Italy is not Greece” we rarely see anything about the improvement in Ireland. Or for that matter, Portugal, where the 5 year bond started the year at 15.6%, peaked at almost 22% and is down to 7.6%. That is still in the danger zone, but a stunning turnaround.
So while it is easy, and even fun to point out how nothing worked in Greece, the situation in Ireland has turned around and even Portugal seems to be coming around. Heck, even the much maligned Greek PSI bonds are getting back to their CDS auction level from March. The “front-end” bonds (which are 2023 maturities) have clawed their way back to 22 from a low of 14, and have actually managed to accrue more than 1% of interest. I’m not making light of the situation there either and think it remains precarious unless the Troika does some form of debt extension (or better yet forgiveness), but there have been signs of slight improvements.
Patience is Running out in Spain and Delays are Costly
Over the past week or so, the market is starting to question whether anything will happen in Spain. The 2016 bond hit a low yield of 4.99% on August 21st and has drifted back to 5.45%. The move in the 10 year is more pronounced as it went from 6.18% to 6.83%.
One encouraging sign is that the 2 year has been pretty stable, moving from 3.42% to 3.59% and the yield here actually declined.
With economic & political problems spreading rapidly around the world and – importantly –an accompanying negative price trend, the mood in the speculative markets has darkened rather suddenly (and – for us at least – rather amusingly). Just two short months ago, the S&P 500 had enjoyed a 37% gain over 10 months, and – with the consensus’ seeming tendency to extrapolate the recent past into the future - sentiment towards stocks, commodities, non-government debt & ‘risk’ currencies had become fiercely bullish. By that time, the contempt bestowed upon the steadfast bears was onerous; in short, being bearish was well and truly out-of-style.So, as ever, the market proceeded in the least appetising direction so that the greatest pain could be imparted upon the greatest number of speculators. After about a month’s worth of technical divergences, the major US equity indices and commodities topped out on May 2ndand have subsequently proceeded lower ever since (i.e. with lower short-term lows & lower short-term highs).
So we got that Spanish auction out. As some cheered the fact Spain paid below 6%, the Med indices are back to normality, ie trading in red. Momentum regarding Spain and Italy is so bad. Quick chart kneejerk reaction below.
With the collapsing Spanish and Italian stock markets, don’t be surprised to see the ECB step in and create a “short term bottom”.
Chart, Scott Barber.
The Spanish situation is now reaching the “ridiculous” phase, where we will be getting conflicting messages on a daily basis it seems. Spain is telling the world it doesn’t need a bail out, but would love to see the ECB step up the bond buying. The “positive” effects from the mighty LTRO has only accomplished one thing, an arbitrage where the Spanish banks have loaded up on Spanish sovereign debt, all financed by the ECB. Despite this fact, some want the ECB to restart buying Spanish bonds. As we wrote earlier this week, we are getting that funny feeling regarding Spain. Maybe after all it is time to bring out those pesetas? From Bloomberg.
A Spanish minister called on the European Central Bank to do more to stem the sovereign debt crisis as the cost of insuring the country’s bonds against default surged to a record.
“They should step up purchases of bonds,” Jaime Garcia- Legaz, a deputy minister in Luis de Guindos’s Economy Ministry, said yesterday in an interview.
His comments came as ECB officials split over the steps to tame the crisis amid growing expectations that Spain will be the next euro member to seek a European bailout. Spanish banks’ borrowings from the ECB surged almost 50 percent in March, data showed yesterday, as they took almost a third of the longer-term lending offered to euro-region institutions.
One of the hot words last year we learnt of was Contagion. Many have used it to describe the possible spill over effects from the Greek mess, but few have actually studied the “real” implications and effects on stock and bond prices. Time for some empirical research, by Mink and Haan;
Using an event study approach, we examine the impact of news about Greece and news about a Greek bailout on bank stock prices in 2010 using data for48 European banks. We ﬁrst identify the twenty days with extreme returnson Greek sovereign bonds and categorize the news events during those daysinto news about Greece and news about the prospects of a Greek bailout. Our ﬁndings suggest that only news about the Greek bailout has a significant eﬀect on bank stock prices, even on stock prices of banks withoutany exposure to Greece or other highly indebted euro area countries. News about the economic situation in Greece does not lead to abnormal returns in bank stock prices.
According to the Slog, there is a set timetable for the Greek default. Whether true or not is hard to say, but “somebody” must surely know.
A written document giving firm dates and detailed actions for a planned Greek default has been in the possession of two top Wall Street bank currency trading bosses since the second week in January. The Slog has separate but corroborative sources affirming the existence of the document, and a conviction among senior bank staff that – at least at the time – the plan represented “a timetable, not a contingency”. The plan gives a firm date of March 23rd for default to be announced after the close of business.
Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical ‘orders’ about last use of the euro as a currency there.
News (Fri evening) – BTH
Week in review – DealBook / NYT
Weekly Scoreboard – BTH
Macro: Summary for Week – Calculated Risk
Credit: Weekly Update – Danske Bank (pdf)
Weekly bull/bear recap – Rational Capitalist Speculator
Succint summation of week’s events – The Big Picture
Full weekend reading below.