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.
If investors are hedging Spanish, Portuguese, Greek or Irish debt, they are relegated to using the Italian as the proxy. Is Italy in a terrible situation? YES! Are they as bad as today’s rise in rates indicates? Probably not but the Italian bond is forced to carry the burden of the entire wows of all the PIIGS. As traders pile into the short side of the BTP futures, bond traders lay off their purchases in the cash market, which most investors don’t have access to. Therein lies the huge pressure place upon the Italians.
Today’s collapse in the EQUITY and BOND markets of Europe is sending a message that the Europeans need to make a dramatic move to shore up investor confidence. The problem is and has been that the EUROCRATS IN BRUSSELS AND FRANKFURT ONLY REACT TO CRISIS. Every move in the markets is not magnified as the financial markets push the policymakers to shoot their proverbial “BIG BAZOOKA.” It seems that nobody in Europe is licensed to fire the big gun, thus the responsibility is falling onto the shoulders of IMF Director Lagarde. Ms. Lagarde has deep knowledge of Europe’s problems as her previous position was FINANCE MINISTER OF FRANCE. While Europe fiddles, it will be the IMF who will have to provide the needed resources to shore up Europe’s banks and sovereigns[they are so connected now as to be one]so as to prevent global contagion.
As the crisis deepens, look for President Obama and Secretary Geithner to give the authority for the IMF to increase its firepower to help stem the spread of the CREDIT CRISIS. The U.S. is already stretched in trying to stimulate its own economy so the IMF’s resources need to be utilized. IMF action will enhance the stature of the BRICs while utilizing the FUNDS balance sheet. The world has changed dramatically since 1991 and the European bailout will testify to the “GREAT TRANSFORMATION.” In a note to yesterday’s BLOG, Jim Sinclair wrote that the IMF would probably move to use SDR creation to ramp up its liquidity and probably increase the GOLD component of the SDR basket. Whatever takes place, the IMF with U.S. support and Chinese influence will be the default mechanism to power up the EUROPEAN BAILOUT AND STEM THE CONTAGION.
***Italian 2/10 curve flattened by another 31 basis points moving to 19.5 at the close. As much as the 10-year BTP is the benchmark, it is the 2-year bearing the brunt of cash market sellers. Most of the global curves flattened today as RISK-OFF was the dominant themes, but when the U.S. flattens it is bull flattener rather than the Italian curve which is a bear flattener. Same result, different message. Fear of Italian debt versus just overall fear of all things financial. If the ECB were to cut rates from its present 1.25% it will be important to see how the Italian 2/10 reacts. There were rumors today that the ECB was in an emergency meeting to cut interest rates but nothing came of it. Europe’s ability to disappoint the markets continues. The story is old and calls for some real leadership. Christine Lagarde … EN GARDE.
Tags: Bond, BRICS, BTP, Bund, Christine Lagarde, ECB, equity, Euro, Eurocrats, Gold, Greece, IMF, Ireland, PIIGS, Portugal, Spain
November 9, 2011 at 10:20 pm |
Ira.. You have pointed out that gold is slowly emerging as part of the discussion in Europe on how to solve the European financial crisis. Witness the call for Germany to use its gold hoard to collateralize the EFSF bond fund. Germany, of course, declined. The epiphany in the financial markets that is sure to follow is all of Europe’s financial problems can be solved if Germany’s, Italy’s, France’s etc. gold reserves were substantially marked up in price. Gold is on the asset side of the balance sheet and is dramatically undervalued relative to the debt or liability side. The debt market is gradually closing in Europe. Therefore, either the asset side materially appreciates in value or bankruptcy becomes unavoidable(without the ECB becoming the lender of last resort). In the immortal words of Eddie Izzard “would you like cake or death”. Which alternative do you think the European leaders are going to eventually choose(absent ECB printing)? Cake(revalue gold) or Death(bankruptcy)? In the event the Germans relent and allow an ECB Euro printing solution to emerge gold will seek a materially higher price level anyway. Thus,either way, gold will be the primary beneficiary when this financial mess reaches its conclusion. Your articles are very thoughtful, extremely well written and widely followed. If you begin to point out that gold is not the enemy(of the central banks) but part of the solution to Europe’s insolvency perhaps this line of reasoning will take flight. I enjoy your work. Stay well. Gary S. Rosenthal
November 10, 2011 at 7:11 am |
Where have you gone Joe DiMaggio? the mother country needs you.
November 10, 2011 at 7:21 am |
Gary–beautiful post as it is well thought out.As it has been told to me 25 years ago ,Paul Volcker,viewed the GOLD PRICE as his enemy.Mr.Volcker was FED Chairman during the tumultuous period of high inflation and therefore began his day with a much different perspective then today’s central bankers.While Paulie V. feared the ravages of inflation ,Ben fears the lingering effects of a deflationary spiral—witness his present concern about unemployment.It is investors overriding concern that central banks will continue to “print” to prevent the credit bubble from cascading into a major liquidation of assets.The problem for the world is that Germany and others lean towards austerity as the necessary cleansing agent of too much DEBT[See Ambrose Evans-Pritchard today in London Telegraph].I have opined in the BLOG and on various TV interviews that all of Germany is a Tea Party movement.If the liquidationists hold sway GOLD as an investment will suffer,if the credit enhancers prevail then GOLD will be put to use as a derivative and liquidity will be tied to it in a leveraged way with the comfort that new liquidity creation is backed by GOLD—may that ego maniac Jon Corzine can leverage the IMF GOLD PILE to 40 times.No easy solutions which is why the swings in the market are so volatile on a regular basis—-
November 13, 2011 at 3:01 pm |
[…] and investors we need to be vigilant. ***As an aside, after Wednesday’s collapse in the BUND/BTP futures spread, the DEC/DEC contracts gained back all of its losses and then some by Friday’s close. This […]
February 14, 2017 at 6:48 pm |
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