I often repeat the trading maxim, "What everyone knows is not worth knowing". Such is the case in European markets as they close. On the face of it, equities did well, that is what everyone knows. Dig a little deeper though and some disturbing trend are emerging and continuing.
I often post the Credit/Risk markets relative to the SPX, this is because the credit markets are much larger and they are traded by smart money, how many retail traders do you know who invest in Credit (Sovereign or otherwise) or Corporate Credit? It is for this reason that what happens in the credit markets often leads the equity markets. On an intraday/multi-day basis, I showed you proof of that in the Credit/Risk Asset Update earlier. The longer term performance is what is scary.
Last week European Financial Credit started to deteriorate, then we heard about the S&P ratings agency downgrade a slew of Italian banks, more downgrades of EU financial institutions are on the way as the S&P gets them out as fast as they can (being they looked at sovereigns first and downgraded a handful of them and then were to look at financials next which we are seeing now). I doubt it was coincidence that European Financial credit sold off last week before the Italian bank downgrades.
Today Senior (higher quality) and Sub (lower quality) financials both closed significantly lower on the day despite what equities did, in fact they closed wider then Friday and at two week new lows.
Interestingly, earlier I showed you the 3C negative divergence in ES pre-market, it was at the same time that sovereign debt/credit took a plunge, but almost exclusively in Italian 10-year BTPs.
As I showed you in the earlier Credit/Risk Asset update, not only are we seeing High Yield Credit and Corporate Credit under-performing, but this is the case in Europe as well, with both closing at losses today. A true risk on rally should see credit performing well with equities or in fact, leading them.
As I first speculated last week and then received confirmation the next day, the performance between EU financial institutions that took LTRO money and those who have been especially vocal about the fact that they did not, is seeing a spread and deterioration among the banks that DID take LTRO money. This is the EXACT same situation that occurred here in the US during 2008 when any bank that borrowed from the F_E_D's discount window was immediately seen as suspicious and as likely in trouble, those names were shorted and the F_E_D had to 1) create a facility that banks could borrow from without their names being disclosed (which were later disclosed a after a couple of years) and 2) force banks to take money, some of which maintain to this day that they did not want or need it, like JPM who continues to tell Wall Street this years after it happened. The point was, the F_E_D was trying to remove the stigma of borrowing as the financial markets had frozen up and credit was not being extended as banks were loathe to do so as the market would immediately punish them. The same thing is happening in the EU right now via the LTRO which has another operation this week.
Senior Financial Credit Spreads are at the widest levels in two weeks with the biggest deterioration since Thursday in over two months. As expected, the gap between those who borrowed from the LTRO and those who did not is widening, which may have implications on the next operation this week as banks needing the money are being punished in the markets for taking it.
The main point being, what is seen (via equities) does not mesh with the larger credit markets which are diverging from equities; we have seen the same trend here as well in both credit and other risk assets such as commodities.
The FX market, specifically the EUR/USD is declining from this week's opening print which came on the heels of the Greek vote to agree to austerity measures. However the lack of enthusiasm from Greek's potential saviors is making the market nervous and the Euro is dropping, now having taken out the next support level I mentioned earlier. In no way does the Greek vote being passed guarantee the Greeks will recieve the next bailout tranche needed before their March 20th debt service comes due. Furthermore, the agreed upon tranche of $130 bn is no longer enough to keep Greece from default as their economy has fallen apart faster then anticipated in October when the $130 bn trnche was agreed to, they now need at least $15 bn more and there is no talk of that happenng. The only talk coming from the Troika is (not what the market expected) talk about "Passing the vote is one thing, implementing the measures is another" and the creditors want to see action apparently before they approve the next tranche, yet as I pointed out last week, while March 20th is the deadline for the payment, it will take a lot longer to take care of the logisitics, such as votes in Germany, the Netherlnds, Luxembourg and Finland to name a few. This does not include the PSI debt negotiation and bond swap that would have to be completed, again something that takes time. There are many other issues on the table as well, but I suspect what is sending the Euro lower after the knee jerk reaction to the Greek vote yesterday, is the fact that rather then adulation coming from the Troika (who we may now count as the Northern countries that are still AAa rated as well as the IMF/ECB) or a positive tone, we are hearing more and more today that the vote alone IS NOT ENOUGH. At this point, there has been no formal submission of what the Greeks need to do that will be enough. It seems as I said earlier, every time Greece moves toward Troika demands, the demands become more and more absurd. It seems to me they have already decided to cut Greece loose, but are searching for ways to save face and say, "We gave them the opportunity, we didn't kick them out, they just didn't want to make the sacrifices".
In other semi-frightening news, the German Foreign Minister was quoted in an interview today saying,
"It's undoubtedly a moment of truth for Greece. If a sustainable and correct course is set in Athens now, Greece can expect our support -- but only then. There will be no more advance payments. Only actions count now."
"I am more than dissatisfied with the political impasse in Greece in recent weeks. I'm also addressing the German opposition when I say this: You can't solve a debt crisis by constantly incurring new debts."
and finally, when pressed by the interviewer,
"I don't want a German Europe. Q. What do you want? A European Germany."
All of which confirms everything we have suspected both since the Greek vote and on a longer term basis as a matter of German policy.
5 years ago
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