Europe had it's worst day since its rally began, today's Bloomberg 500 EU index lost -2.8% today which is the worst day since the rally started in November. As I have been saying, "this market is dangerous to be long" especially any stock or ETF with a high market correlation. As proof, the move today in Europe wiped out 5 weeks of gains, similar to my earlier post on the American averages. Even if we bounce from here (and I think we can) the damage is done, those who got stopped out may thank their lucky stars they got stopped out on a -2.8% move rather then something much nastier in the days and weeks ahead.
What is even more telling, credit is performing worse then stocks and this has been a trend that's been going on for well over a month, it is especially apparent in bank that accepted LTRO money vs, those that didn't. Financial credit in the EU has been selling off hard and the same has been happening in the US, actually nearly all corporate credit (check today's earlier 'Risk Assets/Credit" update and look at High Yield Corporate credit which is falling off a cliff).
It's not only Credit and Stocks in both the US and EU (as a side note, this bearish flush-out is probably likely to produce a bounce, as I stated a week ago or so, they'll want to keep the "Buy the Dip" crowd as long as possible), but sovereign bond yields are rising, particularly in Italy and Spain, moving toward 1 month highs. Where's Sarkozy and Draghi's LTRO carry trade now? That is a question we can answer, it's a negative carry of 25 basis points all locked up in the ECB's deposit facility.
You may remember when the ECB completed their bond swap with Greece before Greece introduced retroactive collective action clauses, I said what the ECB did was save itself from taking a little loss, but they created a senior and subordinated bond market (senior if you are the ECB, subordinated if you are anyone else) and more PIIGS will either need or want the same debt haircut that Greece was offered (whether they can get it or not is up in the air until Thursday, my guess is no). Effectively, what this creates is a situation in which to get to the targeted debt to GDP, the size of the private bond holder haircut will depend on how much of that particular sovereign's bonds the ECB holds. The more the ECB holds, the bigger the hair cut for the private sector. So who in their right mind (including recipients of LTRO cash) is going to go out and buy sovereign debt when the precedent has been set and they know they are virtually guaranteed to lose money as each of the PIIGS follow in Greece's footsteps? I said this would come back and bite the ECB in the rear end and why? Because already yields are rising and the only incremental buyer left is the ECB, so they saved a little on Greece and they'll have to spend a lot on Italy, Portugal, Spain and Ireland (Ireland is a special case if they go through with the referendum).
Are these people evil geniuses or are they as dumb as their actions suggest?
After being ordered to recapitalize and after selling everything that wasn't nailed down and still being short tier 1 capital, who really expected the banks to take the LTRO money and buy sovereign debt when that is the thing they are trying to off load in the worst possible way?
5 years ago
No comments:
Post a Comment