Global Currencies and Interest Rates- Spain Needs Life Boat- Spainsh Banks “RAGE”; Roubini Spain should Default NOW

 

• Spain will need rescue according to Merrill - "Spain's debt crisis may force the country to tap the EU-IMF rescue fund over the next two to three months and set off a political storm, according a confidential report by the Bank of America Merrill Lynch." London Telegraph
• Spanish banks “rage” at end of ECB 12 month liquidity tender - Spain’s banks have been lobbying the ECB hard to take action and alleviate the stress that will arise as a result of the 12 month expiration. Spanish banks accuse the ECB of “absurd” behavior by permitting the tender to expire. “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.” FT 
• Greece - N Roubini oped in the FT this morning - says Greece should default now - “Greece’s best option is an orderly default.” The country’s austerity measures will impose cutbacks that are too large for its economy to bear. FT  
• ECB takes the place of the interbank market in Europe - The ECB is currently lending close to €900bn ($1,098bn, £728bn) to eurozone commercial banks, jumping to near-record levels since the creation of the central bank 11 years ago. The ECB has become a lifeline for some of Europe’s ~3K weaker banks. FT
   

Market Update – The SP500 has been down now for 9 of the last 10 sessions “buyers are no where to be seen” $SPY

• Market Update – equities extended their decline this week, w/the sp500 dropping ~5% (on back of last week’s ~3.6% decline), although late on Thurs and into Fri, it appeared like the worst of the selling pressure had been exhausted. 
• The SP500 has been down now for 9 of the last 10 sessions (and 4 of those 9 days have been declines of more than 1%, inc. the 3.1% drubbing experienced on Tues June 29).  The big underlying catalyst behind the weakness has been a theme present in the marketplace for a couple weeks now but gaining more adherents every day – a concern that economic growth is quickly slowing and potentially heading for a “double dip”. 
• US investors have endured a slew of economic readings coming in below consensus really since the May jobs report back on June 4 (when the private sector adds of just 41K badly missed St expectations of +180K; that 41K has subsequently been revised lower to +33K). 

Weekly Focus Fear of a major slowdown is mounting #ecb $ewb $spx

• ECB meeting on Thursday - questions are expected to centre around additional liquidity measures and the ECB's asset purchases. Developments in Euroland bond markets and news out of southern Europe.
• US non-manufacturing ISM - will it hold up better than its manufacturing sibling?
• Monetary policy meeting at the Bank of England is not expected to bring any changes.
• Swedish industrial data and the government s net borrowing needs. Norwegian CPI.

• Global Update
  Global PMI's have fallen - fundamentals suggest a slowdown, but the European debt crisis has likely accelerated the decline.
• The Riksbank hiked rates by 25bp, as expected, and the repo path was revised slightly higher in 2010 and 2011, but lower in 2012-13.
• The expiry of the one-year LTRO has brought the duration of Euroland money market liquidity lower, which has put upward pressure on short-term rates.
• The G-20 summit highlighted the change in policy focus from coordinated global growth support to a more diverse agenda. In Europe, focus is on public finances and in Asia attention has turned to inflation fighting.

Big Picture Catalysts to Watch Coming Up in the next few weeks European Bank Stress Tests

Big Picture Catalysts to Watch Coming Up in the next few weeks – resolution on these issues would remove a major overhang for the market. 
· Financial Regulatory Reform – see the broader update. 
· European Bank Stress Tests – European bank stress tests - results could be published by mid-Jul - in an attempt to break the market panic that surrounded its banks and debt markets this week, the Bank of Spain said it would conduct "stress tests" of its banks and publish the results to the public.  The news took much of Europe by surprise and caused shock - while many other countries have been conducting similar tests on their institutions, no other major nation was prepared to divulge the specific individual results to the public.  However, at a European leaders summit on Thurs, the major countries of the EU, inc. Germany, said they would follow in Spain's footsteps and publish the test outcomes (the results are due to start hitting in mid-Jul).  Investors will be focused on two critical issues: 1) whether the assumptions underlying the tests are "credible" (i.e. are they

New yield forecast Greece still putting a lid on German yields

Greek woes still keep a lid on German yields despite increasing risk appetite and a better outlook for indicators in coming quarters.Short rates have range traded over the past month and the 2Y-10Y curve has remained unchanged. Going forward, we expect the curve to flatten.The first ECB rate hike will probably occur in Q1 2011, though the market is not discounting the first hike till Q3 11.We expect the Danish central bank to deliver another CD rate cut within the next month.The US recovery is leading the eurozone so the Fed will act before the ECB. We expect a first US hike in November 2010.Yields should rise on both sides of the Atlantic in 2010.Next yield forecast due 14 May 2010

Today’s Top Stories 04/08/10 $SPY $EWG $GS

Today's Top Stories

         Keys for today: NYT says China yuan reval to come within next few days; Greek CDS @ all-time wides; ECB mtng due out this morning (focus on new lending rules); retailer sales hit all morning; LCC/UAUA in merger talks per NYT/WSJ; Kohn/Bernanke speak after bell

         European shares were hit as Greek CDS spreads blow out to all-time wides (traded out 32bps to a record 445.5 overnight per CMA DataVision) despite positive comments from Greek officials (i.e. Greek central bank official said that bank deposit outflows have stopped, finance minister said Greece is continuing to borrow normally and is executing its fiscal consolidation plan on schedule, etc.). Also weighing on European shares were cautious comments from the Bank for Int'l Settlements (BIS) which said the UK needs "drastic" austerity measures to prevent public debt from exploding out of control and that the Sovereign debt crisis is at a "boiling point."

INTERNATIONAL NEWS WRAP; Euro zone inflation; Eurozone growth outlook; Greece plans to sell a global bond in dollars in late April or early May

         Euro zone inflation was much higher than expected in March; Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February; the 1.5% compares w/expectations of a 1.1% increase.  Reuters 

         Eurozone unemployment inline - The euro zone's 10 percent jobless rate in February was the highest since August 1998 and in line with market expectations.  Reuters

         German jobs #s surprise on upside - The number of people registered as unemployed dropped by 31,000 in March to 3.568 million, defying expectations for an increase by 10,000 (DJ)  

         Eurozone – new S&P report on the region's eco growth outlook; S&P views the overall recovery in member countries as still fragile, which calls into question the single currency zone's growth model, as detailed in the article "The Eurozone's Two Growth Models Collide," 

         ECB lends banks less than forecast; The European Central Bank will lend banks less than economists forecast in its final offer of unlimited funds over six months.  Sixty two banks bid for 17.9 billion euros ($24.1 billion).  Economists forecast that it would lend 60 billion euros – Bloomberg 

Sovereign Crisis Roadmap

We recommend selling risky assets into strength over the near term. Even with an
expected announcement on Greece following the EU Summit today, the road to repair
will be a long, painful journey buffeted by tremendous uncertainty—not typically a great
environment for risk-taking. While the announcement details will garner the headlines,
the real medium/longer term issue for the markets is not whether troubled sovereigns
get the needed aid/liquidity, but rather, whether the aid and the accompanying
necessary fiscal retrenchment leads to an unexpectedly soft mid-cycle economic
slowdown—or, worse, a double dip—for the developed world.

What the markets are missing. CDS spreads on Greek sovereign debt, yield-curve
steepness, and earnings expectations implicit in equities are all too sanguine given the
severity of the crisis. The market is underestimating the tough domestic fiscal reform
needed, without which ECB liquidity support is unlikely to be forthcoming. And because
of the close interrelationships between the European banking system and sovereign
credit, the contagion effects are much greater than the market perceives.
Crisis reinforces our core views and recommendations. In a risk-differentiating
environment: (1) the euro will continue to weaken regardless of how the Greece
situation evolves; (2) the significant economic growth differential of the emerging world
(6.9% vs. 2.3%) will reassert itself, and thus its outperformance relative to developed
markets; (3) if and when markets settle down, we expect the 10-year to meaningfully
underperform as the flight-to-quality subsides; and (4) the trade in global equities is still
high-quality stocks that can handle uncertainty-induced swings.

At present, the Greek CDS spread at 355bp is pricing in a 28%
default probability over the next 5 years. This is up from a 9.5%
cumulative default probability back in June 2009. While we take real
issue regarding implied default probabilities on sovereign CDS, it is
nonetheless a useful point of context. Although Greece’s inclusion in
the EU complicates matters somewhat, we have yet to see a sovereign
or credit “crisis” bankruptcy-averting restructuring deal at a meager
price point of 355bp.

From a curve perspective, we would also have anticipated a flattening
of the various government curves, yet we experienced a parallel shift
instead. From a European earnings growth perspective, bottom-up
IBES consensus is 35% for 2010, and 24% in 2011. Given the
necessary fiscal retrenchment in Europe, those growth expectations,
particularly for 2011, seem potentially heroic.

Markets are in the early stages of differentiating risks. In its
simplest form, the negative market reaction around the sovereign debt
concerns of peripheral Europe is a natural by-product of “the end of the
easing,” both real and perceived. From necessary fiscal tightening in
Europe to monetary tightening in China, the markets are simply
reacting to the withdrawal of liquidity. With respect to the peripheral
Europe situation, the combination of fiscal austerity and contagion
concerns, which, not surprisingly, are linked, will persist for some time
to come, and thus so will volatility.

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