Financial Market Report for January 30, 2011
1) … Investors fearing losses from Greek default and Portugese default, sell currencies, commodities, and stocks, recommencing the downward trend in the Age of Deleveraging.
Volatility rose, VIXY, and VIXM, rose as investors sold Major World Currencies, DBV, Emerging Market Currencies, CEW. Currencies falling lower included FXM, FXC, ICN, FXB, FXS, FXF, BZF, FXA, FXRU. The Euro, FXE, traded lower at 130.71. The US Dollar, $USD, UUP, rose.
Commodities, DBC, Base Metals, DBB, Agricultural Commodities, JJA, traded lower.
European Financials, EUFN, Global Financials, IXG, the BRICS, EEB, Emerging Markets, EEM, Europe, VGK, Emerging Market Materials, EMMT, and Global Materials, MXI, traded lower as John Shayne writes We Can't Go On Together with Suspicious Minds, Because Were Leveraged too Much Baby. (h/t to Mike Mish Shedlock)
2) … Fate is operating through creative destruction to replace the banker regime of capitalism with the beast regime of regional global governance.
Bloomberg reports Angela Merkel Says Greece's Debt Sustainability Is Especially Bad" Merkel told reporters. "You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap. EU chiefs agreed to speed the setup of a full-time 500 billion-euro ($654 billion) rescue fund and signed off on a German-inspired deficit-control treaty. After the Meeting of European Leaders, EU President Herman Van Rompuy convened a smaller group, including Greek Prime Minister Lucas Papademos and European Central Bank Executive Board member Joerg Asmussen, to weigh the next steps on Greece.
Bloomberg reports Euro Stumbles as Merkel Signals Greece Debt Deal Delay. European leaders sparred with Greece over a second rescue program, clouding progress toward a permanent aid fund and tougher budget rules designed to stabilize the euro. Greece faced criticism that its economic makeover is faltering, and it fended off German-led calls for a European overseer to take command of its budget after its deficits surpassed targets for two years. "What the Greeks have to do is show they are ready to implement the package," Dutch Prime Minister Mark Rutte told reporters as he arrived for a European Union summit in Brussels today. "We can help Greece through this difficult phase, but then Greece has to execute all agreements they made with us."
Business Insider reports Papademos Says Greece Could Need More Public Funding. Greece's prime minister says he cannot exclude the possibility that his country will need more help on top of a new €130 billion ($170.43 billion) bailout and a deal with private investors to slash its debt
Zero Hedge reports European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent. And Zero Hedge reports Good Gendarme: Recently Downgraded France Opposes German Demands For Greek "Tutelage
EU Business relates Jacques Delors Calls Resistance To Eurozone Bailout Boost Scandalous. Former European Commission chief Jacques Delors on Sunday blasted the reluctance of eurozone countries like Germany to boost the size of the Greek bailout and create a system of eurobonds to facilitate lending. "It is scandalous. You cannot be a member of the euro cooperation and at the same time say no to elementary demands for solidarity with other members within the framework of existing agreements," the prominent European federalist said in an interview with Dagens Nyheter, Sweden's daily of reference. "We have to save Greece together. What has been done so far is too little, too late," he added. Delors, who was commission chief between 1985-95 and a key player in creating the framework for the euro's 1999 launch, said it was "out of the question" to push Greece out of the eurozone and insisted the solution was for "Greece to privatise more of its economy." "The euro countries also must together introduce common eurobonds, not to finance the current debt but to create greater efficiency and connectivity in the financial and monetary system," the 86-year-old Frenchman said. The creation of such a "eurobond," which would pool the debt of the entire monetary bloc in a bid to reassure markets and facilitate lending, has long been a contentious issue among top policymakers, with the European Commission and France being in favour of such an instrument but Germany strictly opposed for now. "It is a mistake of German Chancellor Angela Merkel to refuse to go along with such bonds," Delors said.
Ambrose Evans Pritchard reports Portuguese Storm Gathers As EU Leaders Fight Over Greece Surging borrowing costs in Portugal have raised the spectre of a second full-fledged contagion crisis in the eurozone, eclipsing the latest efforts by European Union leaders in Brussels to agree on Europe's bail-out machinery and a strategy for Greece.
New York Times reports Portugal Suffers as Loss of Confidence in Bonds Sends Yields Higher. Investors fled out of bonds of weaker European countries on Monday, sending yields on Portuguese government bonds to a record high over concerns that the euro zone debt troubles were spreading beyond Greece. The fears of contagion spreading to other periphery countries in the zone that share the euro have grown more intense in recent months, with much of the latest focus on Portugal.
Reuters reports Commerzbank Says Greece Needs to Dump Euro Shackles . Greece must surrender the "shackles" of the euro in order to survive if it does not want to constantly ask for a handout from euro zone governments, the supervisory board chairman of Commerzbank said late on Monday. "What do they need, another 15 billion euros? If you think that is the last 15 billion that they will have miscalculated, then best wishes," Klaus-Peter Mueller told an industry event in Frankfurt."They will come back for more and there will be no end, unless you really see them enact structural reforms, but this won't take just two-three years -- we're talking 20, 30 or 40 years for Greece. "Mueller said it doesn't do any good to Greece were euro zone governments to continue forcing them to wear the "shackles" of a currency that only permits internal adjustments via spending cuts and declining wages."The Greeks need on balance a currency that they can then devalue," Mueller said, adding it would take a long time before the government could build up from scratch functioning structures that restore competitiveness.Athens and its EU partners have long ruled out a euro exit, which could drag the bloc even deeper into crisis. However, earlier in January a Greek government spokesman said the country would have to leave the euro zone if it fails to clinch a deal on a second, 130 billion euro bailout with its international lenders. The chairman of Germany's second largest listed lender disagreed that an exit would prompt "global chaos" and cause investors to dump sovereign debt from other periphery countries like Italy and Spain. "I don't think that markets would react negatively towards the other countries that would then remain in the euro zone after such a decision," he said
Ambrose Evans Pritchard reportsPortuguese Storm Gathers As EU Leaders Fight Over Greece Surging borrowing costs in Portugal have raised the spectre of a second full-fledged contagion crisis in the eurozone, eclipsing the latest efforts by European Union leaders in Brussels to agree on Europe's bail-out machinery and a strategy for Greece.
Gray of Between The Hedges reports The Western Europe Sovereign CDS Index is still near its Jan. 9th all-time high. The TED spread is near the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is near the highest since February 2009. The Libor-OIS spread is still very near the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. Overall, the improvement in credit gauges appears to be stalling at still stressed levels, which is liklely related to rising concerns surrounding Portugal. The market's focus is rapidly moving from Greece to Portugal, which appears headed for another bailout. Many are suggesting that the issues in Europe are priced into stock prices at current levels, however recent history suggests otherwise. Furthermore, given that several key investor sentiment gauges are registering too much complacency and stocks are technically extended, a more cautious approach is warranted. For an intermediate-term equity advance from current levels, I would still expect to see further European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices.
Stocks in Europe Fall Most in Six Weeks; BNP Paribas Tumbles on French Tax. European stocks dropped the most in six weeks as Portuguese bonds sank amid concern a meeting of the region's leaders will fail to draw a line under the sovereign- debt crisis. BNP Paribas SA (BNP) tumbled 7.1 percent, leading French banks lower, as President Nicolas Sarkozy said he will unilaterally impose a financial-transaction tax. Royal Philips Electronics NV (PHIA) fell 2.2 percent after reporting a larger-than-estimated loss. Hochtief AG (HOT) slid 5.8 percent after saying it will post a wider annual loss than previously anticipated. The Stoxx Europe 600 Index retreated 1.1 percent to 252.52 at the close of trading, the largest slide since Dec. 14.
Corporate Bond Risk Rises in Europe, Credit-Default Swaps Show. The cost of insuring against default on European corporate debt rose, according to traders of credit- default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 13.5 basis points to 618.5 basis points, according to JPMorgan Chase & Co. at 7:30 a.m. in London. An increase signals worsening perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 3.25 at 144.75 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 4.5 basis points to 215 and the subordinated gauge was up six at 375.
Tyler Durden reports Think filing for bankruptcy is the only way to get debt discharge? Think again, at least in Greece. While previously we have reported that Greek courts had written off "untenable" debts of unemployed Greeks owed to local banks, Kathimerini describes a landmark case which may have profound implications for the indebted country, in which a fully employed woman has had the bulk of her debt written off. From Kathimerini: "In what could turn out to be a significant ruling for Greeks suffering from the economic crisis, a court in Hania, Crete, has become the first in the country to order that the majority of the debt owed to banks by someone still in full employment be wiped out. Sunday's Kathimerini understands that the Justice of the Peace Court in Hania based its decision on a 2010 law that allows judges to give protection to people struggling to meet their financial commitments. Until now, the legislation has only been used to give debt relief to unemployed people or those with no substantial income." This means that virtually every indebted person in Greece, regardless of employment status will rush into court rooms, demanding equitable treatment and a similar debt write down. It also means that the Greek bank sector, already hopelessly insolvent, is about to see its assets, aka loans issued to consumers, about to be written off entirely. And since the ultimate backstopper of the entire Greek financial system is the ECB, the creeping impairments will have no choice but to impact, very soon, the mark-to-market used by both the ECB and the various national banks. Finally, how long before other courts in Europe express solidarity with their own citizens and proceeds with similar resolutions?
The GCC region of global governance emerges as Reuters reports Gulf Arabs Have Plans Against Hormuz Closure. Coastguards and naval forces of the Gulf Cooperation Council (NYSEARCA:GCC) group of Arab countries have contingency plans for a possible attempt by Iran to shut the Strait of Hormuz, a Kuwaiti maritime official said on Monday.
Love grows cold in the Age of Deleveraging. EconomicPolicy Journal reports Greek Financial Crisis Resulting in More Abandoned Children
Richard Tol writes in Irish Economy Ireland in the European Court again, now over gas In December, I blogged about the gas interconnector, the Shannon LNG terminal, and the need for regulatory reform in the wholesale gas market. Last week, the European Commission chipped in. It is taking Ireland to court over the lack of competition in the market for gas between Scotland and Northern Ireland, and between Ireland north and south. Intriguingly, the UK is sued as well, although most of this is Irish rules on UK soil. John Fingleton gave a great presentation at last week's conference on the Irish economy. Among other things, he argued that competition policy in Ireland exists by virtue of the European Union. (h/t Paul Hunt)
John Redwood reports Parliament Bares Its Teeth On RBS. Mr Hester decided to waive his bonus when he heard there would be a Commons vote on it. Labour who had signed such a generous contract in the first place decided to table a debate and vote in Opposition time to condemn it to make amends for their original deal. Many Conservatives and Lib Dems would have voted with them. The truth is the Board of RBS was set the wrong task and given the wrong remuneration for doing it when the bank was stupidly nationalised in the first place. Will this government now call them in and change the requirements? They should be instructed to split the bank up, creating new functioning smaller High Street banks which can be immediately floated off into the private sector, where they need to raise more capital to allow them to lend more to power an economic recovery. The sooner the government does this, the sooner its economic policy will function better. If the current Board does not want to do this, then there are plenty of able people who would happily go in and do it for them, for less pay. I comment that the ongoing chart of UK area banks RBS, LYG, BCS, HDB, IRE, shows that over the last ninety days, RBS, has risen the most; but now RBS is one of the banks falling the greatest in value.
Global trade is going to massively shrink; and global supply chains will become regional supply chains overseen by regional monetary cardinals. Tyler Durden in article As Europe Goes (Deep In Recession), So Does Half The World's Trade. It is of course no surprise and as the World Bank points out half of the world's approximately $15 trillion trade in goods and services involves Europe.
Charles Hugh Smith writes in Zero Hedge, One Dam Metaphor For The 2012 Global Financial System. The way to visualize the current situation is to imagine a dam holding back rising storm waters. The dam is the regulatory system, the rule of law, trust in the transparency and fairness of the system and the machinery of perception management. All of these work to keep risk, fraud and excesses of speculation and leverage from unleashing a destructive wave of financial instability on the real economy below. As legitimate regulation and transparency have been replaced with simulacra and manipulated data, the dam's internal strength has been seriously weakened.
Brandon Smith writes in Zero Hedge, Baltic Dry Index Signals Renewed Market Decline
A Global Eurasia War is coming to both Syria and Iran. Tyler Durden writes Third Aircraft Carrier Group Coming To Iran