Tonight's Futures

The opening futures is where the damage was done, the S&P futures to 1 week lows and Gold Futures to 3 week highs, this is exactly what I was talking about in the context of Credit which took a dump Thursday and Friday, when the market speaks, listen because all it takes is a day to erase everything.

The HY Credit chart we had been following the last several days as part of our leading indicators proves, it doesn't take much to erase a lot of gains in a short period as fear always trumps greed and markets always fall faster and harder than they rise.

HY Credit vs the SPX, tracking together all year and then erases all 2013 gains and then some in 2 days.

So far as mentioned above, the damage was on the open, now there's a bit of wait and see what happens next, but I think the precedent set, the peak in to how far the Eurocrats are willing to go is more than enough to spook the market and certainly more than enough to cause European Financials incredible pain as they are about to see a bank run like they've never seen before-get ready for news of bank "Holidays". Financials have the power to bring down the house of cards, think back to Lehman.

So far here's what we have in the Market Index Futures...

 ES 1 min with a slight 1 min positive divergence, this means almost nothing as Europe hasn't even opened yet, just some profit taking I'm guessing or perhaps a VWAP reversion driven algo as we saw that earlier.

 The ES 5 min chart with distribution in to last week's highs (buy low/sell high) and the extent of the drop on the open of futures this week.

 NASDAQ futures are down big as well, no signals there, just trading in line for now.

 The 5 min NASDAQ futures showed distribution in to Friday's highs.

 As I have been talking about, the Russell 2000 Futures have shown a strong negative divergence since last week.

 The EUR/USD daily with tonight's open

 The 5 min back under the $1.30 ECB stop-gap

 And over the last several times under $1.30, we have a lower low in the pair.

 Abe has got to be nervous as the Yen gains against the Euro

 5 min EUR/JPY

 EUR/JPY, not good for Japan and certainly some carry traders are feeling quite sick tonight.

 USD/JPY is even showing weakness even though, as forecast, the $USD would be the safe haven currency bought as you'll see in single currency futures, this just shows us how bad the Yen is moving up as we have suspected for weeks.

 Euro single currency future is down and trading in line on the  1 min so far.

 The 30 min Yen chart, despite everything the BOJ is expected to do and Abe has done, the Yen is appreciating and Abe is not appreciating that scenario, nor are any Carry traders with a Yen cross.

 Here's what I meant, the 30 min $US Dollar Index which has been positive and the currency I figured would be bought, has been bought, despite it being down vs the Yen, that just shows how much the Yen is up.

 Dollar Index 5 min with positive divergences late last week, add that to the list of strange things we saw late last week.

 Even stranger maybe, our long GLD options hopefully hold up overnight as Gold futures jump on a richer dollar, whoa!

If anything changes in the futures before i turn in, I'll let you know.

Cyprus- Another Example of Euro-Incompatence

Friday I posted quite a few charts of Credit, especially High Yield and in this post from Friday (March 15th), "Credit is Screaming" the very first chart I posted was of European Financials...

Since the start of the year, European Financial Credit has had a VERY different opinion of the situation than the easily manipulated stock market. As I almost always say as boilerplate when talking about credit as a leading indicator, "Credit leads, stocks follow". Perhaps we understand now.

Sharon Bowles, head of the European Parliament’s Economic and Monetary Affairs Committee, said:

• Levy on deposits agreed under Cyprus bailout deal means circumventing EU deposit guarantee laws
• “It robs smaller investors of the protection they were promised,”
• “The lesson here is that the EU’s single market rules will be flouted when the Eurozone, ECB and IMF say so,”

Saxo Bank CEO, Lars Seier Christensen had this to say among fuller comments...

"It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors' money and 9.9 percent of big depositors' funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy?

I heard rumours about this when I visited Limassol last week, but dismissed them as completely outlandish. And yet, here we are. The consequences are unpredictable, but we are clearly looking at a significant paradigm shift. *Perhaps the credit markets didn't find the rumors as outlandish and improbable late last week?

This is full-blown socialism and I still cannot believe this really happened."

What is this all about?

Friday after the market's closed, something big happened, whether this is what we have been seeing the last couple of days as I said on Friday, "It seems some very big money either is no longer willing to hold risk, or they just really don't want to hold it over the weekend".

Perhaps this is why...

European Finance Ministers announced their bailout (5th now for the EU) for Cyprus, with a big twist. The bailout funds come in at $13 billion Euro, additionally a levy of 6.5% on savings account under $100k Eur. and 9.9% on accounts > $100k Eur.; the levies are expected to raise $5.8 bn Eur.

Fund for the levy were immediately frozen in Cypriot bank accounts, while the bank run you would expect left ATM machines flat broke.

Why go after Cypriot deposits, here's a partial reasoning...

“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem said, noting the country’s financial industry was five times the size of its economy."

Amazingly Jean-Claude-Juncker had this to say...

"Jean-Claude Juncker, has a warning that this "bailout" is the worst thing Europe could have done:
Skeptics including Luxembourg’s Jean-Claude Juncker had said that imposing investor losses in Cyprus risked reigniting the financial crisis that has so far pushed five of the euro zone’s 17 members to seek aid. Last year, the euro area took what officials called a unique step to ask Greek bondholders to absorb losses."

Russia a key player... One of the most asked questions was whether this applies to Cypriot citizens only or all bank deposits as Cyprus is sort of like the US's version of the Caymans for the Russians, the answer is ALL.

Corporate tax rates in Cyprus will rise to 12.5 percent from 10 percent as part of the deal, Dijsselbloem said. Rehn told reporters that Russia, whose banks have loaned as much as $40 billion to Cypriot companies of Russian origin, would ease terms on its existing loans to Cyprus as the rescue unfolds. Cyprus’s finance minister is scheduled to fly to Moscow on March 20.

Euro-Group President, Disjsselbloem had this to say when asked if this VERY unique approach of punishing anyone who dared to do the reasonable thing and save money in a bank account, is setting a precedent for future Italian or Spanish bailout requests...

On the question of whether a similar levy could be applied if Spain or Italy were to request bailout, Eurogroup President Dijsselbloem responded, “the situation in Cyprus with the specifics of the banking size and structure has led to this specific package and these instruments, full-stop.” Asked specifically whether he could rule out a deposit levy in a subsequent bailout in another country, Dijsselbloem replied, “It’s not being discussed at all, there is no reason to even discuss it, so I won’t discuss it or speculated on it. We have a very specific, very complex situation which we’ve had to deal with in a way that is leading to a very fair way of sharing the burden, and that’s the package that we have agreed here”.

That sounds like the concept is still on the table and it didn't take long (as we already see it happening in the US) for Germany's second largest bank, Commerzbank to suggest a wealth tax on Italy through a 1-time property tax to bring Italy debt to GDP below 100%. It seems Cyprus was a dress rehearsal, I don't know how you feel, but I'm feeling more and more like mattress money is the way to go.



What is even more horrific?

The President of Cyprus proclaimed this confiscation of up to 10% of savings in Cypriot banks as well as an additional tax of 20-25% on interest (which will be about zero after all the deposits -after levy- are taken out of Cypriot and probably other EU PIIGS nation banks come Tuesday morning when they re-open) is a GOOD DEAL, in context perhaps it was as Germany and the IMF had initially sought 40% of TOTAL DEPOSITS!!!

"Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund."

Who have I said is the Euro-Zone's Task Master and de-facto leader? Germany of course.

So far I've described events up to about Saturday...For anyone who thinks this wasn't planned well ahead of time, imagine the logisitics of announcing a plan late Friday night and immediately having every ATM in the country already have taken or withheld the levy, no this wasn't a late Friday night deal, the markets in some form have known about this for a while.

Moving forward... THIS IS NOT A VICTORY LAP
The truth is, EVERY SINLGE Euro-zone bailout plan or mechanism from ESFS to ESM has been short sighted and essentially a total failure-How many bailouts is Greece on now and how fare their economy?


As of this morning (US EDT time), besides every macro-economic development that anyone with half a brain can envision including Euro-wide bank runs (if they did it to Cyprus why not to Italy or Spain) destabilizing the entire banking system from the PIIGS to the core, there's the political backlash that's poster child was a citizen parking his front loader in such a way to block the entrance to a Cypriot bank. And what of the Russian reaction? Most large deposits in Cyprus are Russian, how does Russia react to the EU, of which it is not a member, confiscating its citizens' money? The political parties in Cyprus called this more or less a coupe in which the President bore full responsibility as they were never consulted, look how that worked out for Mario Monti in Italy and the Euro-task masters who replaced not only the Italian, but Greek leader with Goldmanite Hacks.

The parliamentary vote to ratify the confiscation plan was delayed as it came to light that law-makers may be able to block the move. The President said if the vote/plan was not ratified, Cyprus' two largest banks would likely fail. With a bank holiday and no resolution with one potential outcome being the failure of the two largest banks, the market is more than a little jittery, look at how Lehman spider-webbed out to effectively contaminate Europe. The market hates uncertainty.

The President's Disy party holds 20 of the 56 seat legislature, leaving them 9 votes short of ratifying the confiscation, or as the market looks at it, "Or else". You see, simple math that the Euro-crats couldn't cobble together before announcing this horrific scheme, this is the ineptitude of European bailouts that I have talked about on the first day of their announcement since the Greek bailout, they can't seem to coordinate the most basic and simple concepts they need to push through their mind-numbingly ill-conceived plans.

There's another concept at play here and this is the "This time it's different" and how the smallest crack (Cyprus) can lead to the largest negative outcomes, even JPM asked the question, "Has Europe Bazookaed Itself in the Foot", the answer being yes as the precedent alone leads them to a "Risk Off posture".

Other thoughts in the JPM note...

"Significant near-term risks after flawed Cypriot deal

• Significant chance that Cypriot Parliament votes ‘no’ (30%) or has to further delay the vote (40%)
• Either outcome would be highly problematic, highlighting regional stresses
• President to address MPs on Monday at 9.00am GMT. Earliest likely time for vote late afternoon GMT.
• This could be pushed back significantly
• A delayed vote could require an extended bank holiday in Cyprus to avoid broader bank run
• Regional contagion impacts should be containable, but risks unclear with new precedents set

It is difficult to over-state the extent of popular anger in Cyprus over the bailout deal which was pulled together on Friday evening."

However before the Cypriot banks open or probably before any parliamentary vote takes place, we will see the rage of Cypriots as the first protest is scheduled for tomorrow at 3:30 

Now back to the ineptitude of Eurocrats... According to the WSJ and FT, the Eurocrats are looking to revise the original 6.75 and 9.9% confiscation rates.

"President Nicos Anastasiades is still intending to raise €5.8bn from Cypriot bank accounts to help fund the bailout, an unprecedented move by the eurozone that could yet spark wider concern about the safety of bank deposits in the bloc."

"However, a revised deal being discussed in Nicosia, with the blessing of the European Commission, would shift more of the burden on to deposits larger than €100,000, according to officials involved in the talks."

Read the following as shifting more of the burden to Russian depositors and some of the most unscrupulous characters around... talk about unforeseen consequences.

The WSJ has a little more, "the deposit "tax" would be under 5% for deposits under €100K, under 10% for deposits between €100 and €500K, and over 13% for deposits greater than half a million."

Again read as: Read the following as shifting more of the burden to Russian depositors and some of the most unscrupulous characters around... talk about unforeseen consequences. I wouldn't want to be paying my Russian Gazprom bill in Europe next winter (as Europe imports most Nat gas from Russia).

Tonight's Futures coming next....

A disturbance in the farce?

*Cyprus will be covered next...

I try to pull together event of multiple posts in the daily wrap from throughout the day, however I can't pull the detail of each individual post, I can't get you to the specifics of the horrible decline in breadth throughout the market that is specifically addressed in the Market Breadth posts and follow up posts showing breadth getting worse in to a rising market, volume falling off and of course 3C charts that are almost beyond the realm of possibility.

I will ask you to try to remember the multiple events, posts and charts of the last two days (Thursday and Friday), specifically the very odd huge plunge in High Yield credit (when something is breaking in the market it generally shows up in credit and market breadth first, the 2-dy plunge in the credit of choice in a risk on / rally is High Yield where the flight to safety is in to investment grade. The fact that HY credit not only broke with the SPX which it has been following all year, but broke in such a way over 2-days that it erased ALL of 2013's gains and then some is a huge red flag screaming that there's a massive disturbance in the farce.

Do you recall in the wrap the note regarding the 10-year Treasury falling to lows of the week?

I'm not a specialist in treasuries, but I understand the basics, when yields fall (as we saw in our leading indicator "Yields vs the SPX" it means there's more demand for the Treasuries, when there's more demand, it's typically a flight to safety away from risk asset like High Yield Credit and stocks and in to the safe haven assets such as treasuries so the fall of the 10-year to the week's lows with the fall in HY credit to the year's lows are all part of the same event, a move away from risk and in market time, this was a move that was not gradual, but a sudden disturbance.

March 13th Bloomberg reported that 10-year Treasury yields fell from an 11 month high as a $21bn issuance from the Treasury saw the largest demand since last October (remember this was during the time of the market fears over the Fiscal Cliff). Internals of the offering were also strong, the Bid to Cover (a measurement of demand by comparing the number of bids received vs the amount allocated for offered) was strong at 3.19 vs 2.68 at the previous auction in February. The March13th auction saw  Indirect bidders (includes foreign central banks) jump from the 28% at the last February auction to 47.7% (the average over the last 10 actions has been 36%). Non-Primary Dealers or Direct bidders came in at 30% vs the last 10 auction average of 21.8%. Primary Dealers were only left with a 22.3% takedown vs the average of 42.3 (these are also the group of bidders that are known for flipping treasuries to the F_E_D during Permanent Open Market Operations (POMO) as the F_E_D cannot directly bid treasuries in auctions, the Primary Dealers are the F_E_D's proxy (such as large investment banks-MFGlobal was a PD before their demise) which are required to bid at auctions and typically make a nice chunk of change flipping the Treasuries in which some cases they only hold 1 week before the F_E_D monetizes them under POMO, that's a nice profit for VERY little risk.

In other words, as covered in "Daily Wrap-Rare Rant" on Thursday March 14th when I showed this chart of Yields covering the day's auction with an excerpt of the commentary below...

Remember the drop in yields (red) vs the SPX took place right around 1 p.m. at the time of the 10-year auction...

"Yields fell as the 10-year auction of $21 billion at 1 p.m. saw yields fall to 2.029% (vs Feb. 2.046%). The "When Issued" at 1 p.m. was at 2.053%, this seems to indicate there was a flight to the safety of bonds as we have seen in the 3C charts of TLT recently. Other internals of the auction such as the high bid to cover, huge indirect of 47.7% and the second lowest Primary Dealer takedown in history at 22.3%-in other words, the internals were stellar and the idea of front-running the F_E_D was not at all apparent in the auction."

The 10-year is a benchmark note and as such, is the instrument used in the repo-market where firms borrow and lend securities. Interestingly this securities repo-rate closed at a negative 2.95%, meaning traders were willing to PAY to borrow the security in exchange so they can lend cash. Since there's such heavy demand for the 10-year, those who want to short it or sell it are finding it exceedingly difficult to borrow the security. The strong demand has not only materialized in the internals of the auction, but in the repo-markets where those who own the 10-year are not willing to borrow it out, they are much more concerned with holding it.

Additionally the 10-year term premium (a little more difficult to explain, but a model created by the F_e_d that includes expectations for interest rates, growth and inflation) was negative 0.58 percent after reaching 0.56 percent on March 11, the least-costly level since April 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value-a measure of the Flight to safety bid.

Now I can't say I entirely understand all the dynamics here and implications, but I now it's a rare event. On Friday, 3/15, the Treasury/F_E_D issued a "Large Position Report" for the 10-year 2013 security, this is essentially a notice in which anyone holding $2 billion or more of the security must report their position to the Feral Reserve BanC of New-York by no later than 12 pm EDT March 21st.

Why? There has been a surge in "Fails to deliver" on the security last week.

What is "Fails to Deliver"? From Investopedia the most basic definition is as follows:

"An outcome in a transaction where one of the counterparties in the transaction fails to meet their respective obligations. When failure to deliver occurs, either the party with the long position does not have enough money to pay for the transaction, or the party in the short position does not own the underlying assets that are to be delivered. Failure to deliver can occur in both equity and derivatives markets.

Whenever a trade is made, both parties in the transaction will have to transfer the cash and assets before the settlement date. Subsequently, if the transaction is not settled, one side of the transaction has failed to deliver. Failure to deliver also can occur if there is a technical problem in the settlement process carried out by the respective clearing house.

For forward contracts, a party with the short position's failure to deliver can cause significant problems for the party with the long position, because these contracts often involve significant volumes of commodities that are pertinent to long position's business operations.

Failure to deliver is also important when discussing naked short selling. When naked short selling occurs an individual agrees to sell a stock that they neither own nor have borrowed. Subsequently, the failure to deliver creates what are called "phantom shares" in the market which may dilute the price of the underlying stock."

In essence, they're trying to figure out who is holding what since the paper trail of borrowed, shorted, borrowed and sold securities would be very difficult to follow, this is an accounting of who is holding what in a basic form.

Without going in to P_O_M_O specifics, Friday's P_O_M_O operations internals showed there's a lot of reluctance from Primary Dealers to hand over their safe haven paper to the F_E_D.

Also from what was published from Tuesday to Thursday of last week, the repo-rate were exceptionally low, all you need to take away from this is that, there's a sudden shortage in the 10-year collateral - apparently  leading to the F_E_D's notice for $2 bn + holdings report.

Friday's HORRIBLE print in US Consumer Sentiment would certainly give rise to a flight to safety trade, however these unusual events in the Treasury space have been going on long before the Sentiment printed Friday and the call for Large Position Reports hasn't happened since February of 2012.

The point of this post, without going to far in to the realm of speculation has to do with 1) the very odd and unusual movements in different securities, most obvious was the 2-day decline of High Yield Credit that had been following the SPX nearly tick for tick in profits this year to a sudden loss of all profits for 2008, odd rumblings in the Treasury ETFs and accumulation there, the break down of market breadth, leading indicators, volume and other factors.

As I said, I don't want to get too far in to speculation yet with regard to a shadow banking system that is so complex, regulators can't even understand it (this is where regulated financial institutions were able to keep sub-prime off their balance sheets (through transactions in the shadow banking system). However should events continue to unfold, we may be at a point in which things are becoming visible (which means they have long been troubled as shadow banking is akin to under the table deals), in simpler terms, we may be coming up on a Lehman moment.