THURSDAY, AUGUST 2, 2012
"Shorter part of the yield curve"?
It was all going well when Draghi started speaking. Yes the ECB is "working" on a bond buying program. Until this comment came out:
But we know the "shorter part of the curve" isn't the problem. Both Italy and Spain have the ability to roll short-term paper. The issue for these nations is being shut out of the long-term markets and having to constantly auction bills, risking market disruptions. We all know what happens when firms rely on short-term funding when markets lose confidence (Lehman).
Needless to say, markets reversed the initial euphoria, as Italian 10y bonds swung 3% and the euro went into the red on the day.
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| Italy 10y bond price intraday |
and more from Sober Look ....
THURSDAY, AUGUST 2, 2012
Draghi engineers a "reverse Twist", again
By focusing on the short end of the Eurozone periphery curves, Draghi's comments resulted in curve steepening for both Italy and Spain. And as anyone at the Fed will tell you, this is exactly the opposite of the effect one needs to help these economies. The Fed's effort for almost a year now has focused on flattening the yield curve, while the ECB (both in July and today) has managed to accomplish the opposite.
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| 1 day change in Spain's sovereign yield curve |
http://www.zerohedge.com/news/bnp-furious-draghi-jumped-gun
BNP Furious That Draghi "Jumped The Gun"
Ken Wattret who is chief Euroarea economist for BNP is quite furious with Draghi: the reason? Precisely what we warned last week: that Draghi is posturing and attempting to bluff the Bundesbank into accepting his "conditions." End result, Buba called the bluff and the ECB blew it in a fashion so spectacular that Draghi actually had to defend himself from reporters who were mocking him and the ECB with questions if the ECB won't get its inflation call wrong "again." It also prompted the head of the Central Bank to spin off Mario Draghi FX trading advisory, of which he is the sole employee, and issue the following Series 7 and 63 unauthorized advice: not to short the EUR, which incidentally was the dumbest thing he could say, because the one thing that can save Europe is if its currency keeps sliding (much to the benefit of Germany) in the process boosting Europe's manufacturing sector. That he openly warned against this is perhaps precisely why the EUR tumbled just after he said it. Trust us: the Chairsatan would love if investors were shorting the USD. Anyway, back to Draghi and the biggest French bank which realizes all too well one simple thing: Draghi no longer has credibility, and all those European banks which rely on the ECB for their day to day operations (like BNP) are suddenly far more exposed than ever before.
Specifically:
and........The ECB could have sweetened the pill of no action on debt purchases today with a few other initiatives but opted not to. This is compounding the sense of disappointment. There was a reference in the Q & A to other things the ECB could do, including LTROs, collateral requirement changes etc, and a hint towards something coming in September.
The lack of detail on all the above is a major problem. There were a few more details here and there in the press conference, including the ECB buying in short maturities, but it would have been far better for Mr Draghi to have kept quiet and deliver the "big splash" when there was sufficient agreement to allow the details, and the action, to follow in short order.Expectations should have been much better managed and Mr Draghi's credibility is taking a hit accordingly. Hence the numerous questions in the press conference about whether the Governing Council was onside. He swatted those away, suggesting his comments in London had strong support, but the sense that he jumped the gun last week, at a cost to his and the ECB's credibility, will linger.
Bottom line: Draghi bought the markets a quick 5% rise for month end markups. In the process he made sure that nobody will ever again "believe" him.From BNPThe markets response to the press conference is very negative, which is no surprise on the basis of the failure to live-up to the comments made by Mr Draghi in London a week ago. The bar had been well and truly raised and the ECB has under-delivered. (This is a common thread of eurozone crisis response, just think of all those summit meetings in the past!)The way we saw it ahead of the press conference, the preferred route for the ECB is for the EFSF - for now, and then the ESM - to take the lead in sovereign market interventions, which would bring an explicit conditionality. The ECB would be willing to back this initiative with its interventions but would not front-run the process. This assessment has been strongly reinforced by what we heard today.
The conditionality is key. So the governments have to request the assistance to set the wheels in motion. The worse the adverse reaction in markets, the more likely the politics will fall into place.The problem is, of course, the stress in markets and ongoing uncertainty in between times.
The ECB could have sweetened the pill of no action on debt purchases today with a few other initiatives but opted not to. This is compounding the sense of disappointment. There was a reference in the Q & A to other things the ECB could do, including LTROs, collateral requirement changes etc, and a hint towards something coming in September.On policy rates, there was a comment in the Q & A to it "not being the time" for further action. This suggests that our call of a move in September holds together, for the refi rate at least, in tandem with the new staff projections.The decision regarding the rate on the deposit facility is a complicated one. The reference to the ECB being in "uncharted territory" is instructive: the ECB wants more time to assess the effects of the cut to zero and to mull over the pros and cons of going sub-zero.Still, this is a secondary consideration, the real issue is how to interpret the "guidance", to use Mr Draghi''s words, towards a potentially more radical intervention by the ECB in the sovereign space.To quote the relevant parts of the statement..."The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.
In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist - with strict and effective conditionality in line with the established guidelines.The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures."There is plenty of information to digest in there. Key points include: the references to the need for strict conditionality; that governments must take the initiative; the recognition of concerns over seniority; and the possibility of acting in a size "adequate to reach the objective".
But what is the objective? What are "outright money market operations"? How will the seniority issues be addressed?
The lack of detail on all the above is a major problem. There were a few more details here and there in the press conference, including the ECB buying in short maturities, but it would have been far better for Mr Draghi to have kept quiet and deliver the "big splash" when there was sufficient agreement to allow the details, and the action, to follow in short order.Expectations should have been much better managed and Mr Draghi's credibility is taking a hit accordingly. Hence the numerous questions in the press conference about whether the Governing Council was onside. He swatted those away, suggesting his comments in London had strong support, but the sense that he jumped the gun last week, at a cost to his and the ECB's credibility, will linger.That said, amid the hullaballoo over whether Mr Draghi has mismanaged the communication in a spectacular way, and the adverse market reaction as a result, there is a risk of losing sight of the progress made over the past month.At the 5 July press conference, we were told that the ECB did not discuss any unconventional measures at the policy meeting and the suggestion was that there were no additional initiatives in the pipeline. A month later, the ECB is talking about a potentially very different outcome. If the communication had been handled more effectively, that may have been today''s story.The circularity of the process is also an important consideration. If the reaction in markets is bad enough, it will increase the likelihood that the countries which have been reluctant to ask for assistance will have to ask, opening the door for the EFSF/ESM involvement and conditionality which will then bring the ECB into play.
http://www.zerohedge.com/news/european-bonds-give-all-draghi-believe-gains-worst-day-over-decade
European Bonds Give Up ALL Draghi "Believe" Gains In Worst Day In Over A Decade
Spanish sovereign bond spreads blew almost 60bps wider today - that is the single-largest absolute move in spreads on record. Almost the entire gain in bonds post-Draghi 'Believe' speech from last week has been retraced in a mere few hours and while the front-end of the Italian and Spanish curves has outperformed, the sad fact is that in promising to maintain that end, then the entire rest of the curve becomes subordinated and therefore is sold as hope fades.Swiss, German, and Dutch short-dated bond yields all dropped to new record low rates. EURUSD has retraced its entire gain from Draghi-'believe', back to 1.2150 - despite his call not to short the EUR. Equity markets in Europe has dumped across the board today - with Italy and Spain -7% from pre-Draghi this morning - though notably still full of some hope from last week. It would seem that perhaps Mr. Draghi should keep his arrogant mouth shut a little more as we thought price stability was his mandate? The largest rise in EGB yields in a decade - all on the back of his misguided and over-confident egotistical attempt to jawbone markets to his reality.All mouth; no trousers.
Spanish bond spreads rose the most on record today...
as the entire gain from the Draghi 'believe' speech is gone...
and EURUSD has retraced the entire gain also...
but European stocks remain well above pre-Draghi-believe levels - despite a huge dump today...
as credit is leading us lower (but clearly stocks still 'believe' a little)...
It would appear to us that all those who 'believed' and bought and dreamed of times greater than this as we turn the corner on the Europe debacle will be just as dismally disappointed and dismissive of any future 'promises' as some of the more skeptical among us. If not, then we remind them - when you sit at the table and can't tel whop the sucker is - it's you!
and.....
http://www.zerohedge.com/news/and-another-twang-moment-broken-market
And Another Twang Moment For The Broken Market
It seemed as Rajoy and Monti let us all down, so something 'snapped'. EURUSD cracked lower and Spanish and Italian bonds re-accelerated lower but most critically an anomalously large volume rip went through S&P 500 e-mini futures (ES). 72,000 contracts traded very suddenly dragging ES down 8pts as it crossed the almighty VWAP line. 65,000 down volume or around $4.4bn notional equivalent wanted out very rapidly.
The dark red line is the VWAP and lower pane shows huge sudden volume spike...
and......
http://www.zerohedge.com/news/spain-refuses-admit-it-has-problem
Spain Refuses To Admit It Has A Problem
As hope fades of an ECB-funded lift to their bonds, Spain's Rajoy and Italy's Monti skip hand in hand to a press conference where they just agreed that water is wet and the sky is blue and that:
- *RAJOY: WE WANT BANKING UNION, FISCAL UNION SOON (and ponies)
- *RAJOY SAYS WE ARE ASKING GREAT SACRIFICES FROM CITIZENS
- *RAJOY SAYS SPAIN, ITALY CONVINCED ON NEED FOR BUDGET CUTS
But, as the market is indicating - no request for a bailout (why would they need that?) - and so Italian and Spanish bond yields are soaring and EURUSD is plunging further. It seems the Kubler-Ross model remains front-and-ceter with denial critical as beggars once again believe they can be choosers but the inexorable belief that they can magically grow their way out of over a decade of debt-fueled excess remains. (Spain 10Y Spread +65bps now from pre-Dragi and Italy +62bps)
and....
Market Reaction - Gravity Bites As Draghi Serves Cold Plate Of Epic Disappointment
Submitted by Tyler Durden on 08/02/2012 - 08:52Derisking Italy Reality
As he began to speak the EUR rallied, EGBs rallied and ES rallied - last minute hopiness wrung out of the system, but as soon as he explained that his plan to promise a plan which plans to promise a solution was nothing but another promise and not an actual plan, so everything reversed. S&P futures are -17pts from pre-Draghi, Gold back under $1600, and the USD is ripping higher, Treasury yields are down 8bps from pre-Draghi, EURUSD is down 50pip sfpom, pre-Draghi after trading up over 1.24 as he began, and has retraced over 75% of the post-Draghi 'believe' speech. Spain and Italy have given back the immediate euphoria with Italy now 50bps wider from pre-Draghi and Spain +25bps (having retraced over 60% of the post-'believe' rally).
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