Summary: More of the same terror. Europe: bank stocks down a lot, bank CDS’s up, bank stock option volatility up. SocGen is in so much trouble that their spokeswoman “categorically denies all market rumors”. Everyone is now betting that France will soon lose its AAA rating. That would put the burden of EFSF practically solely on the shoulders of Germany.
Euro crisis bond CDS’s and bond yield spreads are not narrowing – nobody seems to remember ECB’s bond buying “spree” anymore. U.S. money market funds are cutting their exposure to European banks, and this is partly driving the death spiral in Europe. Huge 15% of the assets of U.S. money market funds are in French banks.
Meanwhile in U.S. of A, the Bank of America is under so much fire that their CEO has decided to answer questions from investors in a conference call. Expect difficult questions and awkward answers.
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FX-markets are still muted: EUR is getting very restless in its range. I originally thought (and still hope) that the pair would eventually break lower, the price action seems to be much more happy to test the resistance levels, instead of the range's bottom. Perhaps the market is thinking that the US plan is to depreciate and inflate, while whatever will remain of the euro, will be the hardest core.
Safe havens are taking a rest, as JPY is flirting with the ‘magic 76’-level and also CHF’s run and fear of SNB has pushed everyone to the sidelines.
View: I used to believe that the real issue was Italy and Spain, two melting cores. Now I believe that the true and much larger trouble is the reflexivity, or negative feedback effects between U.S. and Europe. If the Europeans had acted truly decisively 6 months ago, we would not be in this mess globally. The eurocrats will again have to return to the big table and agree how they will stop the interbank runs. Given how they have handled the debt crisis, and the holiday season, I do not think this will play out according to the interests of the humanity – or even financial interests. Keep the Brazil short. No other positions or ideas at the moment. Do not buy the Mexican 100-year bonds.
Joke of the day: Mexico to Sell 100-Year Bonds to Tap Into Rally Fueled by U.S. Yields Drop – Bloomberg
EURO CRISIS
Must-read: Does ‘The Frau’ have the support to keep euro together or not?
Merkel Faces Political Revolt Over Euro Rescue – The Source WSJ
Banks’ deposits at ECB hit a high last Monday: unwillingness to lend, stress in interbank markets
U.S. money market funds have tons of short-term investments in European institutions
Here’s Why the Euro Bank Stock Tumble is Worrying – MarketBeat WSJ
France is 15% of US money market funds
David Faber, Chris Whalen and Euro Banks – Zero Hedge
European Banks Hammered; Societe Generale "Denies All Rumors"; French Bank Option Prices Soar; Credit Default Swaps on France Under Attack – Mish’s
Italian, Belgian, French CDS at Record Highs – MarketBeat WSJ
Biggest test comes in September when 46 billion euros of bonds mature.
The core just assumes a lot of debt for bailouts.
European Citizens are Not Being Taxed to Fund the Bailouts – Naked Capitalism
Ignis Asset Management: “There is only one sovereign in Europe, and that is Germany,”
FINANCIAL CRISIS
Goes through all asset classes from NOK to Jap bonds. In the end, only U.S. T-bond qualifies
Desperately Seeking Safe Havens – The Source WSJ
Citi: “Only a few small countries with a surviving culture of tax compliance and political institutions that effectively impose the government’s intertemporal budget constraint may have AAA ratings in the not too distant future.”
Farewell G7 AAA’s – alphaville FT
FX swaps, increase of liquidity supply to banks
Market Wants SNB to Intervene as Swiss Franc Soars – The Source WSJ
Nobody messes with the SNB – alphaville FT
Dodd-Frank requires ‘living will’ or action plan for going bust without disturbing others. But the rules are not ready before September, and the first living wills come much later.
Gold and silver are going up too high too fast, he said, adding he hoped a correction will take place, "so that I can buy some more".
Jim Rogers says US needs to face reality, not QE3 – Business Intelligence Middle East
America vs Europe: Which is the bigger threat to the world economy? – The Curious Capitalist Time
OPERATORS
Dodd-Frank requires ‘living will’ or action plan for going bust without disturbing others. But the rules are not ready before September, and the first living wills come much later.
“The sell side anxiously is awaiting clarification on the Volcker Rule”
Defining the Future of Prop Trading – Advanced Trading
Commerzbank Faces Challenging Future – The Source WSJ
Delaware Attorney General Joins in Dropping Bombs on Bank of America Settlement and Bank of New York – Naked Capitalism
CREDIT RATERS
U.S. government proposal that would require credit raters to disclose "significant errors" in how they calculate their ratings.
Rating agencies’ stocks have underperformed the S&P 500
McGraw-Hill, Moody’s Risks Rise After S&P – The Big Picture
Very good look statistically how good (=bad) the sovereign credit ratings really are
if too long, a summary of findings here:
S&P Ratings Destroy Information - EconoMonitor
RIOT WATCH
Recommended! Size of budget cuts and number of incidents of instability go hand in hand.
How much will they hate it? Unrest and budget cuts over the long run – Ponticelli via voxeu.org
Collection of riots in U.K., Israel, Mediterranean countries, Asia
Thomas Friedman’s interesting article: first the credit crisis, first political crisis, then political elite’s crisis, next possibly crisis of legitimacy : “the elites become delegitimized and all that there is to replace them is a deeply divided and hostile force, united in hostility to the elites but without any coherent ideology of its own.”
DIVERSION
It’s the Economy, Dummkopf! – Michael Lewis / Vanity Fair
John Cashin, veteran trader for over 50 years says Tuesday was “rather special”