In the midst of a dramatic seven-day bond selloff, extending from Tokyo to Frankfurt, London, New York and all bond markets in between, Chair Yellen chose today to add verbal fire to stoke the bond rout. In the early hours GLOBAL BONDS had tried to stage a rally from the previous days of endless selling. (It seems that the ECB was in buying European peripheral bonds from Spain and Italy.) Once Yellen began her remarks the BOND onslaught began anew. The key paragraph in the Yellen interview: “We need to be attentive–and are–to the possibility that when the Fed decides it is time to begin raising rates these term premiums could move up and we could see a SHARP JUMP IN LONG-TERM RATES” (emphasis mine). Upon the utterance of those six words the markets took note and the selling of all bonds in Europe and the U.S. accelerated.
Posts Tagged ‘Bund’
In a weekend of very little financial news the biggest story becomes the announcement by Deutsche Bank that its plans to raise 8 BILLION EUROS ($11 BILLION) in new capital to shore up its balance sheet. (Deutsche Bank closed near its 50-week on Friday at $42.17.) I have had many calls and e-mails about the impact from this news. My response to all has been to wait to see how Deutsche Bank trades tomorrow to see if this is a buy the fact opportunity. It is no secret that DB is the most highly leveraged of all the major global banks so a capital infusion is not a surprise event as Europe undergoes ECB-mandated stress tests. The bottom line is that the DB news will have little impact upon the EURO currency or the BUND market. If Deutsche Bank had failed the upcoming stress tests that would’ve been a major news event. Eight billion euros to shore up its balance sheet is a mere ounce of prevention.
In the realm of loving and promoting the irrational over the rational expectations of the MODEL BUILDERS, there is no better poster child than German Finance Minister Wolfgang Schaeuble. As I warned Mario Draghi to unpack his speedo, today BLOOMBERG NEWS ran an article, “SCHAEUBLE DECLARES MARKETS WRONG AS EUROPE COASTS INTO VACATION.” This is the German finance minister who has the audacity to proclaim that the markets are wrong and head off for vacation. It seems that the German hierarchy is convinced that all is well because the BUND market is healthy. Is Schaeuble so naive as to think that strong BUNDS reflect the health of Europe? Don’t German policymakers understand that the BUNDS and SCHATZ are at absurdly low levels because many other Europeans are “packing their suitcases” with EUROS so as to transfer their wealth to the perceived safety of the German financial system and thus for its haven status? It is astounding that the EUROCRATS believe that the markets will wait for the decision makers to return before any further market action will take place.
It is startling to think that the S&P downgrades could have any sort of effect on the markets. The sovereign debt markets have been telling those who are attentive that not all countries in the European Union are equal. Several of the GIIPS have had interest rate yields far above those of the German benchmark for almost two years. Even the French 10-year note has widened to 150 BASIS POINTS over the German 10-year BUND during the last six months. DO WE REALLY NEED S&P OR OTHER RATING AGENCIES TO CERTIFY WHAT THE MARKETS HAVE BEEN SAYING?
Almost 67 years ago, U.S. General McAuliffe told the German command that the U.S. forces at Bastogne would not surrender and actually said it in a one-word response: NUTS. In a parallel response to German/Franco demands that all European nations surrender their sovereignty by succumbing to a “FISCAL COMPACT”, British Prime Minister David Cameron basically said the same as the U.K. moved to cast a veto vote on the proposals that resulted from the European Summit.
The European debt markets were thrown into further chaos today as the German/Italian 10-year notes spread blew up. In cash terms, the move was a widening of 58 basis points while in futures prices the differential was 512 ticks. Notes From Underground has been monitoring the BUND/BTP futures spread for almost two years. The BUND and BTP 10-year futures are the proxies for Europe as they are the only liquid contracts available to hedge risk. Prior to September 2009, the BUND was the only bond future contract available to manage risk and speculate on the European debt markets. The ITALIANS moves to list the BTP FUTURES so the banks and pensions would have a viable tool in which to hedge the massive amount of Italian debt that was in the market. It seemed that the Italian finance ministry had a noble intention, but as the debacle of the PIIGS has moved to center stage, the Italian BTP has been the only viable tool for speculators and hedgers to participate in the long end of the EURO debt markets.
Tonight will be all quick hitters as the big news is sparse, to say the least. The Fed released the minutes of the September FOMC meeting. Besides discussing the idea of QE3, the most interesting read was that Fisher was not as hawkish as his NO VOTE seemed. This makes sense as his speeches this week have been pretty DOVISH and I had thought that he was contradicting himself.
Friday’s unemployment report revealed that Thursday’s ADP data was, again, a “FALSE POSITIVE.” The 157,000 ADP gain failed to show in the BLS numbers and all the Wall Street economists were caught off guard as they spent Thursday night ramping up their guesstimates to be more in-line with the private sector prognosticator. The initial response by the EQUITIES was to sell off as the lack of job growth undermines the recent S&P and DOW rally. At day’s end, the equities staged a rally and the loss on the day was small, especially relative to the strength shown early in the week.
Allow me, readers, to journey down the rabbit hole. I believe a major theme in 2011 is that many of the high correlative trades are going to break apart and fundamentals will prevail over mere mathematical permutations (hence NOTES FROM UNDERGROUND WHERE 2+2=5 is also a beautiful thing). One of the areas of decoupling will be in the area of DEVELOPING MARKETS where all nations are not equal. Russia is one of those nations that I believe will outperform, as the rising middle class will continue to push for more development that is not just natural-resource based. Now I am not naïve and certainly understand the pernicious nature of Putin and his kleptogarchs and the failure of the rule of law. One of Yra’s laws is the MONEY IS FASCIST, by which I mean that money in search of a high return will tolerate autocratic rule. History certainly bears this out, especially when we are in a greed cycle rather than fear.
Notes From Underground: Obama pushes for huge export growth while Geithner favors a strong dollar mantra–somebody is singing from the wrong sheetNovember 7, 2010
Friday’s U.S. unemployment data showed that job growth was better than estimated. This is insignificant as long as the FED has signed on to a continued dose of quantitative easing. In the eyes of the FED and its dual mandate, the 9.6 percent unemployment rate is a problem. As the economy improves, the unemployment rate will be sticky to the high side as more people re-enter the job market. If the FED solely focuses on the rate, there is no question that the FED will remain aggressive in pumping up the volume of liquidity. The U.S. action is not being positively viewed and the Germans are voicing the loudest criticism. In an interview widely broadcast throughout the world, German Finance Minister Wolfgang Schauble called the U.S. policy “clueless.”
In Saturday’s New York Times, President Obama had an op-ed in which he cited the United States’s need to double exports by 2015. At the same time, Secretary Geithner maintained the mantra of a strong DOLLAR policy. What needs to be addressed is that if U.S. exports are to become more competitive to boost sales, either the DOLLAR must depreciate or wages must decrease on a relative global basis. The easiest path from a political perspective is for the DOLLAR to depreciate and Geithner better get with the program. Geithner’s constant repetition of his strong DOLLAR MANTRA is being ridiculed as it flies in the face of the road that the FED has walked down. Again, we criticize all of Washington for its inability to coordinate policy as the different policy makers seem to all be singing from a different song sheet.
While U.S. data was better, the German factory orders were much weaker than expected. Analysts were mixed as to why factory orders fell so dramatically. Some blamed the incipient austerity in the PIIGS while some Germans pointed to the recent strength in the EURO as the main culprit. During the weekend, the Greeks went to the election booth and the regional elections were mixed, but the Socialists appeared to poll strong enough to prevent the sitting government to have to call new national elections. Another important concern in the Euro arena is the Portuguese debt situation.
Last week the 10-year Portuguese/BUND spread went out to record highs. However, on Friday the Chinese leaders were in Lisbon and made noises about their desire to buy Portuguese debt. If this proves out then the BUND/PORTUGUESE spread should narrow. If not then we will know the Chinese statement is mere noise and we can look forward to greater stress in the European sovereign debt markets.
If favorable news cannot remove the recent stress in the European sovereigns it will be time to worry about the PIIGS again. This week brings the G-20 meeting and we advise all to pay attention to what evolves from the conclave of world leaders. Let the posturing begin.