Spain continues to be under pressure this morning - focus on the credit markets , not equities. Focus on the money fleeing Spain and Italy , not the commentary from the pols.

http://www.zerohedge.com/news/if-spain-10-year-750-then-ltro-3

If Spain 10 Year > 7.50% Then LTRO 3

Submitted by Tyler Durden on 04/16/2012 07:21 -0400

• Discount Window
 
• European Central Bank
 
• Germany
• Italy
 
• Sovereign Debt
 
• Sovereigns

At least that is the bogey according to JPMorgan's Pawan Wadhwa, who in a note announced that the ECB may resume SMP purchases if the 10 year hits 6.5% (as in a few hours), much to the chagrin of Germany, which was foosed into believing LTRO 1+2 would mean no more SMP purchases. More importantly, since the 6.50% barrier will be taken down with impunity in days if not hours, and the SMP has proven time and again to be powerless to prevent mass selling, the next big bogey is 7.50% at which the ECB will likely announce another 3-year Discount Window bazooka, pardon, LTRO. What JPM does notsay is that with the halflife of each successive LTRO getting cut in half, LTRO 4 will be needed in June, LTRO 5 in July, LTRO 6 in July, LTRO 7 in July and so on. Mostimportantly, now that banks, who are desperate for some cash infusion from either the Fed or the ECB, know what the critical threshold bogey for action is, they will be sure to facilitate the ECB's life, and send Spanish 10 Years plunging to at least 7.50% and demand Draghi play ball, again. In other words: now that the market knows what the consensus is to get more European QE, it will promptly do it. After all the LTRO was never for the benefit of the countries: it was always and only to benefit Europe's insolvent banks. If that means "Greecing" Spain in the process, so be it.

observations from Wadhwa, via Bloomberg:

• Stay short peripherals with stop at 5.75% in 10-yr Spain, targeting for 6.25% or spread target of 450bps
• Specifically recommend to exit peripheral shorts if Spanish 10-yr yield hits 6.25% due to heightened risk of policy response
• Stay in 3/9 Spanish curve flatteners vs Italy and sell short-dated Spanish CDS-cash basis
• Domestic banks have reasonable firepower to support sovereign bonds though large upcoming redemptions for Spanish banks suggest their support for sovereigns may be limited
• Although EFSF now has ability to buy sovereign debt, meaningful EFSF bond-buying program unlikely 
• Given ECB’s reluctance to use SMP in size, reigniting domestic banks’ demand is only meaningful way to stabilize sovereign spreads in long-run
• Recommend to position for 5/10 German curve flattening
• • Close Italy overweight vs. Spain after Spanish auction

and.....

http://www.zerohedge.com/news/overnight-sentiment-nervous-chance-iberian-meltdowns

Overnight Sentiment: Nervous With A Chance Of Iberian Meltdowns

Submitted by Tyler Durden on 04/16/2012 06:41 -0400

• 10 Year Bond
 
• Auto Sales
 
• Bond
 
• British Pound
• Carry Trade
 
• CDS
 
• Citigroup
 
• Consumer Sentiment
• Crude
 
• Crude Oil
 
• Equity Markets
 
• European Central Bank
 
• fixed
 
• Housing Market
 
• Housing Starts
 
• Initial Jobless Claims
 
• International Monetary Fund
 
• Morgan Stanley
 
• Nikkei
 
• SocGen
 
• United Kingdom

As traders walk in this morning, there are only two numbers they care about: 522 bps and 6.15% - these are the Spanish 5 year CDS and 10 Year yields, respectively, the first of which is at a record, while the second is rapidly approaching all time wides from last November. Needless to say Europe is no longer fixed. And yet despite a selloff across Asia, Europe is so far hanging in, as are the futures courtesy of a persistent BIS bid in the EURUSD just above 1.30 to keep the risk bottom from falling off. It remains to be seen if they will be successful as wrong-way positioned US traders walk in this morning.

Previewing key macro events are SocGen, Citi and Morgan Stanley via Bloomberg. As expected, all are on pins and needles ahead of Thursday's 2 and 10 year bond auctions.

SocGen:

• This Spanish crisis won’t go away while everyone is getting stressed about it, Kit Juckes says in note; Thursday’s 2-yr, 10-yr bond auctions in Spain will probably become a magnet for worry
• Assumes “risk will be off,” EUR/USD 1.30-13430 range will finally be broken

Citigroup:

• Week ahead may not provide any meaningful respite; renewed focus on the periphery means Spanish bond auctions, G-20 meeting of finance ministers on Thursday high on the agenda
• Indications of weak investor demand for government debt may translate into higher Bond yields; in the absence of ECB purchases may add to headwinds for the single currency
• • At times of market uncertainty safe haven currencies USD, JPY could remain supported; outperformance of U.S. economy will remain an important driver of EUR/USD via its impact on EUR/USD rate spread
  • An escalation in investor fears could weigh on the likes of SEK, CAD and AUD
  Morgan Stanley:
  • EUR/GBP on the selling list, Hans Redeker says in note; says while EMU deals with the effects of its debt turmoil, U.K. is seeing signs of labour and housing market stabilization
  • Ahead of tomorrow’s 12-mo, 18-mo Spanish bill auctions mkts will watch sovereign credit spreads carefully; with bank shares under selling pressure, the willingness to add to the carry trade may be reduced
  • It has become clear IMF unlikely to agree to increase support for Europe at next weekend’s meeting; the EU130b Greek aid package will be affected if IMF doesn’t agree to increase support.
  • Below is a detailed summary of overnight action from Bank of America
    Market action
    Overnight, most Asian equity markets sold off overnight as Asian investors worried about weaker consumer sentiment in the US and the unresolved debt crisis in Europe. The worst performing market was the Japanese Nikkei which fell 1.7%. The Korean Kospi lost 0.8% while the Hang Seng fell 0.4%. The Shanghai Composite also finished lower losing 0.1%. On the flip side, the Indian Sensex managed to close up 0.3%.
    After starting the day lower European equities are now trading 0.4% higher in the aggregate. The major European equity markets are trading roughly in line with the broader aggregate. The one market that is noticeably higher is the French CAC, up 0.6%. At home, futures are pointing to a modestly higher opening. The S&P 500 is set to rise 0.3%.
    In bondland, Treasuries are trading flat except for the long bond which is 1bp higher at 3.14%. In Europe, the UK gilt and the German bund are both rallying with their yields down 1bp to 2.03% and 1.72%, respectively. The yield on the Spanish 10-year yield has crossed the 6% mark after rising 12bps to 6.07%. Italian yields are rising as well with the 10-year note currently trading at 5.58% after climbing 8bp.
    The dollar is strengthening in the currency markets. The DXY index is up 0.2%. The strong dollar is helping push the price of commodities lower. WTI crude oil is off 42 cents to $102.42 a barrel and gold is down $9.05 an ounce to $1,649.05.

    Overseas data wrap-up

    Quiet day, there was nothing on the overseas data calendar that caught our attention.

    The week's events

    We will be watching the March reports on retail sales and housing starts for any lingering signs of a positive boost from the recent warm weather. The reported value of retail sales should also benefit from higher gasoline prices; conversely, weaker auto sales should act as a drag. We also are looking for initial jobless claims to tick back slightly to 370,000 after their surprise jump for the week of April 7th to 380,000 -- some of this increase may be due to the timing of the Easter holiday. Finally, with the next FOMC policy meeting scheduled for April 24 and 25, the calendar of Fed speakers is relatively light.

    
    

    and .......

    
    

    http://hat4uk.wordpress.com/2012/04/16/euroblown-clubmed-money-stampedes-northwards-as-french-lay-plans-to-cut-the-bond-markets-throat/

    
    

    
    

    EUROBLOWN: ClubMed money stampedes northwards as French lay plans to cut the bond market’s throat .

    Capital flight from the eurozone is accelerating at an alarming rate. But the real figure to look at is that for money heading north withinthe zone. It is absolutely unprecedented. In March 2012 alone, some 65 billion euros left Spain for other euro- zone countries. In the seven months through February, the relevant debts of the central banks of Spain and Italy increased by 155 billion euros and 180 billion euros, respectively. While during that time-frame, the central banks of Germany, the Netherlands and Luxembourg saw their corresponding credits to other euro- area central banks grow by about 360 billion euros.

    The real situation in Spain has been the subject of lies and spin for months. True Spanish debt-to-GDP, for example, is not 60% but closer to 90%.  Not a single Spanish bank is in the black. Relative to the behaviour of US housing, if Spanish housing drops as much then the correction will be a further 50%. In Spain, one home was  built for every new person as the population grew. Unemployment is 23%, with youth unemployment over 50%.

    
    

    And the final nail in the coffin was hammered in last week, when Olli Rehn went there and said everything was just fine.

    The yields of both Spain and Italy are out of control again. Mario Draghi’s ECB will find new ways for both overt and covert monies to hide the truth, but a small-scale qualitative phone Study I did starting last Thursday was unable to find a single credit trader or analyst in Europe who thought Spain had a ghost of a chance of survival.

    There is no getting away from this: once Spain goes, the eurozone is dead. The Germans won’t bail out Spain – they couldn’t if they tried. Every major EU Member State – including the UK – now has an exit plan. Financial site Zero Hedge, for instance, reports an off the record conversation with a French diplomat saying that, once the elections there are over, France will recommend no more bailouts, and only issue guarantees to cover interest payments and trade deficits from here on. This effectively tells the bond markets to va t’en fou.

    So here we are again, heading for that moment when the markets simply refuse to believe in bazookas, firewalls, and turnarounds in Bond confidence; when the markets have seemingly lost all interest in funding a given Sovereign….and this starts to be reflected in the yields they demand.

    I’m not sure anyone in the MSM spotted this, but last week Spain’s interior ministry introduced new measures to criminalise “guerrilla” warfare methods (including online, texting and so forth) to incite protests. This is an accurate portent of what the Spanish elite expects. The end-game has been forecast for somlong now, some people are beginning to believe it’ll never happen. But the eurozone is in extra time now – and nobody knows what’ll happen once the penalties start kicking in.
    
    
    and from The Guardian liveblog , consider the following......As Spanish and Italian banks borrowed from the ECB by way of the ECB LTRO 1 and 2 , sovereign yields came down for a spell in Jan / Feb - note that about a month after the second LTRO , yields have risen - meaning the Spanish and Italian banks have taken considerable losses on the sovereign bonds bought by way of the LTRO 1 and 2 ......
    
    
    
    

    12.27pm: As this graph shows, Spanish 10-year bond yields are now higher than last December, when the European Central Bank made its first offer of cheap unlimited loans to EU banks.

    Spanish 10-year bond yield. Photograph: Reuters

    That rather indicates that the ECB's firefighting effort (the Long Term Refinancing Operation) is waning -- which is alarming, as it has handed around €1trn to the banks through those low-cost loans.

    Many of those loans were made to Spanish and Italian banks, who then used the money to buy their own sovereign debt (thus driving down bond yields). So why the sudden change?

    Economist Shaun Richards argues that the sheer amount of money pumped into Spanish debt by its banks, due to the LTRO, has rebounded:

    According to the Bank of Spain her banks borrowed an extra €75.2bn from the ECB in March which mostly represents take-up of its second major three-year liquidity operation. This took total borrowing by Spanish banks from the ECB to 227.6 billion Euros or 29% of the borrowing from it.

    So there you have it -- the often contrary nature of humanity as shown by investors has played out one more time. The implicit size of the operation leads to success which leads to failure when the implicit size becomes explicit!