Ze Bund thoughts

Recent activity: Been a bit of a turnaround since the second half of last week. There’s been a lot of indecision this week so far, it's been trading in a very very jerky manor. Today we once again came close to the 2% yield mark.

Recent fundamentals drivers: Monday night the finance ministers finally passed an agreement which will permit Greece to obtain its next bailout funds. We have been waiting for this since f*cking October when it was announced. Monday was full of ‘risk on’ sentiment as participants were pre-empting a completed deal. Yesterday there was a troika report doing the rounds (http://av.r.ftdata.co.uk/files/2012/02/Greece-DSA.pdf) that basically said they thought Greece was f*cked! Many people that I talk to seem sceptical of the deal and think it will be a matter of time before holes are poked in it and floors are found. When a fundamentally important piece of news is the market focus for a prolonged period of time, once a conclusion is made the market usually breaks out of the range to make significant new highs or lows, so the next few days are significant to show how the market will absorb the news.

Guru’s thoughts: I think being as there has been such a build up to the Greek deal and it has been the focus of most bund traders, it has over shadowed other dilemmas. At the centre of Europe there is still a rotting core. I think the deal will only supply a short-lived flood relief. The chances that other peripherals will need a second bailout and/or debt restructuring is pretty high, I think this will still keep some sort of bid in the bunds and not let it run too far over the longer term. I will be watching to see if the bund rejects the current lower levels, if the scenario occurs I think there is a strong possibility we will see the top end of the recent range.  – Good luck!

PSI thoughts

This morning it was unveiled that the Greeks and the European authorities are at the final stages of a bind swap deal with the private sector. The deal is meant to ensure that the private sector will suffer a reasonable loss whilst the ECB and any other central banks will not suffer any.

The fact that they are forcing the losses on the private sector is in my eyes a deserved punishment. The problem with the PSI procedure is that it doesn’t reward these economic agents accordingly. This PSI example means that in the future if another government bond crisis occurs again then private investors are far less likely to provide support to troubled governments, and the pesky bond vigilantes are rewarded once again. Investors are then going to short a country’s debt at the very point in time when it needs confidence and buyers. So should this happen again, it could happen a lot quicker.

From a fund/bank/insurance company/pension firm that is going to get scalded for owning Greek debt, will be thinking this: “the investors which were short made money, legal powers are guarantee authorities will endure no damages whilst I’m taking a slap?”. The next time this happens instead of buying it when its cheap and assuming that it will get resolved, you may want to get short or use other derivative instruments to go short of the country.

The vigilantes will feed well, the authorities will not eat less, and the private investor will waste away.

Market thoughts

Equities: Strength is remaining with what I think is investors keep buying in the cash market as they don’t want to miss the rally, and the PBOC’s cut in their RRR gave them a bid yesterday. I can see added strength in the near future as the European shenanigans are pushed aside for the time being. But, I do believe that there are sellers waiting, there will be a point when long term investors decide to get involved and sell into a rally as the market will get more sensitive to negative news.

Bonds: As I think the Greek nonsense is coming to a temporary halt I can see the flight to safety bonds selling off, but if there is a big equity squeeze I don’t think the bonds will sell off as much as participants may think. I also think that Greece will come out the limelight then come back, whether it is in a week to 2 weeks or a month to 2 months, I don’t know. I believe that this ‘trigger’ what ever it is that will bring Greece under pressure again will bring a fresh wave of buying in the market.

Euribor: Can’t really have much of an opinion as these levels, but I do slightly favour the downside from here, however that won’t stop me buying at levels I deem reasonable. In terms of the curve I think the fronts will maintain more of a bid than the pressure that will be on the backs. So I think spreads will remain some sort of bid.

Short Sterling: It looks like it is ready to take a further wallop in the near future as we have burst out of a tight range on reasonable volume. However the fact that everyone thinks this could lead to a squeeze, and remember that gbp LIBOR is still in an uptrend.

Another Greek update

The days seem to be numbered in Greece as the March bond redemption looms. The fear is now that Greece won’t get their second bailout package and that many investors are having doubts on the PSI deals. A Greek finance minister called it a choice between bad and something worse. It has been said that all this tussling between the politicians is simply the politicians trying to look ‘tough’ and are actually bluffing as they will meet troika’s demands as soon as they are re-elected.

THE LETTER: (http://online.wsj.com/article/BT-CO-20120215-705612.html) First thing this morning this was seen as a good thing but once it was actually read by market participants, it emerged that there was a typical Greek slippery underlying current. The part that caught much attention was the last paragraph where this is said: "policy modifications might be required to guarantee the full program's implementation. And, once again, we intend to bring these issues to discussion along with viable policy alternatives..." To me this says: “we’ll renegotiate a deal once we have got our money”. Some EU ‘sources’ I think have realised this and stated that they are considering hold back some or all of the bailout money, but will still avoid a default. Sounds to me like this whoooole thing is about to crumble in front of us.

BRIDGE LOAN: This would take the immediate risk off the table of a default in March. It would also allow a delay of a full bailout until after the election. Now that’s smart, for a change. Greek politicians would have to run on supporting the bailout or risk not getting it. Less chance for “adjustments” after the election under this scenario.

Guru’s thoughts: I’m not at all surprised that there are doubts, it is almost too typical for Greece to bite the hand that’s feeding them. What I think is happening here is due to the Greeks promising everything and delivering f*ck all, now the EU actually want evidence their money is attached to some results  and this is going down too well. There is no way that a PSI deal will be made if there’s a chance the Greeks won’t get their money. A bridge loan will help the immediate threats but as I have said before; at the end of the day they are Greeks and they won’t live up to the terms of the bailout because the terms are unachievable if you don’t like working or paying tax. The Greeks are making it pretty obvious that they would rather be broke than be told what to do by the Germans, so will there be a point where one party says: “poke it up you’re a*se”?? I’m starting to doubt that the disease is actually worse than the cure. But I will warn that you should get you umbrellas out – the sh*t is about to hit the fan....

Bund rundown

The Bunds are currently in a big tug of war, with extremely choppy trading occurring. Bears look like they took the 2% yield level but bull mange to snatch it back during the whole Greek vote palaver. The main things which have affected the bunds today are: the Moody’s downgrades, a good BTP auction, a very very good German ZEW.

The end of last week put a bid into the bund as there were a lot of rumours and sh*t about the Greek vote flying everywhere. Some Greeks didn’t like the terms of the austerity measures, this lead to some of them resigning. As Monday came it appeared that the parliament managed to pass the measures. Despite this the markets did not show any clear-cut response which was expected.

Guru’s thoughts: Bund failed to definitively sell off on good news and again failed to rally on bad news, this combined with very choppy trade leaves me at the conclusion that no-one really knows what the hell to do. With these aggressive burst on minimal volume makes me think that it is simply small investors with low commitment getting stopped out each way. I was very bullish on the Bund last week but now I’m losing faith in the Bund bulls slightly. I still believe that the 2% yield level is something that should be watched closely as a pivot type thing, coinciding with the futures price of around 137.50. An established break below here will put me back in bear mode. However above last week’s high will make the chances of a squeeze to all time highs of 140.23 more likely.


Guru's rant: I don't think it would take the most cunning of people to work out that the c*cks at Moodys gave some of their buddies a nod! Since the US opened yesterday afternoon the Bunds squeezed and the eur/usd got sold. Is it a coincidence?....is it f*ck!
I wish I was in the free money gang!!

A glance at the equity markets

Yet again Greece dominated the markets focus with the coalition government prepared to vote on accepting fresh austerity measures laid out by the EU in return for dishing out further aid in the form of a second major bailout. Some ministers were shock and decided to resign in protest as they thought the austerity measures were too much, this led to equities selling off. This was the first time in ages where the markets have properly reacted to some negative news out of Greece. Luckily not all the Greeks are thick and the new terms were voted in and the markets have reacted accordingly, with risk markets opening higher: Dax +52, Eurostoxx +15 and eur/usd +92.

The central bank meetings we had last week turned out to be boring, with nothing unexpected said. The BoE increased QE by another 50bn as expected and the ECB staying in ‘wait and see’ mode. The meetings next month in my opinion should be much more eventful, as the second 3year LTRO will be out the way; I think this could sway the ECB’s policy decision a lot at the next meeting.

A few notes on the ECB conference

The recent drop in Euribor rates is due to a large extent to a fall in liquidity and credit risk premiums on the back of improved market sentiment. However, in recent weeks there has also been speculation on the market that the ECB may want to narrow the spread between the rate on its marginal lending facility (MLF) and the deposit rate. Assuming a parallel corridor would involve a cut in the refi rate, which could be either 25 or 50bps. The reason the ECB may do this is to give the greedy banks even cheaper funding, but also so that they can ensure a firm bid in the next 3year LTRO. However I see several problems to this theory: 1. The cost and benefits of such a move is way different to previous rate moves. With a large amount of excess liquidity being locked into the market, the impact on EONIA is likely to be minimal. The use of the MLF has dropped sharply since December and the ECB may be of the opinion that a sufficient boundary between the marginal rate and the refi rate (currently 75bp) serves as an incentive for financial institutions to handle their liquidity in a successful way. 2. The reduction in collateral requirements and the reduction in the reserve requirement ratio,  should ensure together with the 3year LTRO, that there are no volume restrictions for banks. Indeed, the ECB has always been of the opinion that the unconventional measures are aimed at improving the transmission mechanism. 3. With Euribor fix still in a down trend, there doesn’t seem to be an imminent reason for the ECB in trying to accelerate this trend. 4. I would argue that keeping a bit of spare doesn’t hurt anyone! If a more unfavourable economic situation occurs, or bank lending does not show signs of recovering in coming months, the ECB has a more fundamental reason to support the spending of its remaining ammunition. With regard to the economy, I expect Mr. Draghi to repeat his view that there are “tentative signs of stabilisation” (these signs have become a bit more pronounced with recent PMI surveys), whilst on the other hand the downside risks to the economy continue to be significant. Consumer spending data, for example, have been particularly weak lately. With regard to their inflation assessment, I expect the Governing Council to maintain a neutral view (a switch to downside risks would likely be a selling point if there is a rate cut). Whilst recent figures indicate that inflation is coming down now, the pace at which this is taking place is definitely slower than envisaged a few months ago, in part because of recent euro weakness and rising commodity prices. 5Y inflation swap contracts have risen by 40bp since November last year, an indication that the market is not buying into the deflation scenario, at least for now....

Guru’s thoughts: I strongly believe that the ECB will remain in ‘wait and see’ mode as there are too many variables that need to be played out. They still have bullets they can use and it’s all about timing. However I do think they will use at least one of these bullets in the coming months, I think the ECB will want to see the results of the 3year LTRO on the 29^th and then they can look to possibly cut rates further.

A few notes on BoE policy

It is expected that the Bank of England will announce an extra 50bn of QE today’s meeting. As at this point it is expected that the bank will have completed its previous 275bn of QE target.

Recently data from the UK has been acceptable, with the exception of weaker GDP. There were a few shockingly good figures such as the PMIs, this was decreased the expectation of a double dip in the UK. Despite this I am still weary of the UK. Inflation is still eroding wages which in turn is holding back demand.

Inflation has seen a slight trend change coming in at 4.2%, but still well above the BoE’s target of 2%. However last year’s VAT hike will drop out the index from January indicating a chance of a speedy fall in inflation at least in the early part of this year. Household spending in the UK amounts to around 60% of the total demand. So, if inflation were to fall below nominal wage rises this would improve consumption. The MPC still remains wary however as to how much inflation will drop this year. This fear was clearly pointed out in the December and repeated in the January minutes. In spite of this the chief economist Dale has been optimistic that a fall in inflation and therefore a rise in real wages will add fuel to growth in 2012. But always be aware that the Euro zone crisis is just next door and still has negative impacts our exports. The UK’s latest lending survey revealed that lending to firms and households fell in December. This is a strong argument for the BoE to provide more liquidity. I have changed my previous view of a 75bn increase in QE to a 50bn increase due to the MPC reiterating their ‘less dovish’ stance combined with the staggeringly good PMIs.

It is possible that any further QE this month could mark the end of the BoE’s easing cycle, though the outlook will be determined by the relative strength of forthcoming data releases and the unhelpful consequences of troubles over the channel. It has been suggested that a BoE rate rise is unlikely until 2013.

Guru’s thoughts: I believe that there will be an increase of 50bn, easing the storm from the euro zone combined with the good PMIs in the UK will mean that the BoE do not have to as urgent as I once thought. In my eyes there are three possible scenarios to trade that I will be looking at: 1. If there is a 50bn increase there will be some movement but not much, if fixed income rallies I will look to sell at some point and the same if it sells off I will look to buy some sort of dip. This is because there are people who are long looking for more than 50 and people who are short looking for less. 2. If there is less than 50 it feel it will be a colossal surprise to the market, this should see fixed income get slammed, I will then look to sell (at the time and for the near future), it will also be a good opportunity to put on short sterling steepeners. 3. If 75bn is announced then I will look to buy dips in fixed income and put on short sterling flatteners. Being as I am flat in UK products at the moment, from a trading perspective I hope for no increase as I think this will rattle and shock them market, and shock means opportunities. Good luck!

A look at the UK economy ahead of policy decisions

• I will start with the worst....GDP. It came in at -0.2% in Q4. The data showed a stand still service sector as well as manufacturing and construction sectors both stagnating. Technically speaking it would take another contraction in Q1 for the UK to be deemed in recession, though so far survey data has hinted to us that there will be an improvement. 
• The UK employment rate pressed to 8.4% although the lower than forecasted rise in jobless claims in December was encouraging. Retail sales remained strong in the lead up to Christmas. But survey data has hinted that this may not have lasted in January. 
• The latest borrowing data was better than expected and showed that in the financial year to December 2011 the government is holding close to its original borrowing target. This is despite the government’s autumn statement suggesting that in aftermath of lower growth forecasts the budget outlook has also taken a hit. The budget is no longer expected to be balanced during the current parliament.

US – I get down, but I get up again….

As Europe tries to correct itself, economic data has been good enough in the US to be called surprisingly strong, though much of that renewed strength appears to be from the constant adrenalin shots of stimulus. Most recently the Fed extended its low rate pledge for over a year into mid/late 2014, set an explicit two percent inflation target, and reiterated that QE3 is ready on a hair trigger. But stimulus is like a narcotic, the more you take the less effect it has.

With US data yielding many upside surprises in the last few months and bond yields pinned to extraordinarily low levels, equities have had a great start to 2012. Volatility has dropped significantly and stocks have gained steadily as the recovery finally seems to be taking hold. Yet the surprise improvement trends could create ever greater expectations for each successive data point, requiring ever better data to drive markets higher. Thus, any stumble in the economic data could be amplified as the winter months wear on.

The vital signs of the US economy have genuinely improved in recent weeks. Non-farm Payrolls have grown for sixteen straight months and the data has shown steady improvement over the last four months, capping it off with a resounding 243K reading last month, a twenty month high. The unemployment rate has also yielded pleasant surprises the last two months, coming in below expectations and falling to a nearly three year low of 8.3% in the latest reading. Measures of growth also improved in Q4, with an improving trend in US GDP and production indices. The second reading on US Q4 GDP will be out February 29 after the advance reading showed sequential improvement but disappointed expectations, while US production data has been uneven, though the most recent ISM data (both manufacturing and non-manufacturing) had its best showing in over half a year.

With moderate economic growth, however temporary, and employment indicators showing noticeable improvement, risk appetite has improved and the VIX "fear" index has hit a seven month low. But the nascent economic recovery may not be as healthy as some prognosticators believe. One key factor will be the continuing absence of a housing recovery. The construction sector has played a significant role in past economic recovery cycles, creating construction jobs and perceived wealth as home prices appreciate. But this time around, even though there have been some sporadic positive housing readings, the housing sector is unlikely to undergird the recovery in jobs and production.

Greek PSI deal

According to naftemporiki.gr the PSI deal is now
completed. The coupon would be 3% to 2020. The average coupon
would be around 3.6%. There would be a 50% nominal haircut. Bond
holders would receive 15% in cash and the rest in a greek
bond. By Wed next week they are going to publish the list of 80
Greek bonds that are going to participate in the PSI plus the
loans of the  greek banks.

European illness contained?

It now seems slightly less likely that a Greek credit event will cause a domino effect across Europe this year, but if the event occurs it will still have to be absorbed. Many believe that the bond payment that needs to be on 20^th March is the date that the start of an orderly default will commence. Talks with the private sector have avoided a disorderly default, and ‘apparently’ a deal is nearly achieved, although negotiations for the next troika package have been a struggle. Greek opposition parties and unions are arguing the idea of more cuts – although I think the morons don’t have much choice but to accept. The idea is that this will contain the infection that is Greece.

As much as the EU has tried to contain the infection, some symptoms of illness have been seen in Portugal and Hungary. The Hungarians have managed to make their European partners queasy by threatening the independence of their central bank. This in turn put the IMF loan package in jeopardy, which without Hungary would become a new source of contagion for central Europe. Portuguese interest rates have continued to rise even as other peripheries saw yields ease. Speculation is doing the rounds that the nation could need another 30bn bailout on top of the 78bn it received from the IMF,ECB, and troika last year. This has led to denials from officials that they won’t, but as history has proven that these denials tend to have an opposite effect, hinting that Portugal may soon need to enter bailout negotiations. The idea that Portugal may surrender to the same sickness that sent Greece to the A&E is worrying as Europe is almost expecting Greece to be on life support, no such preparations have been made for Portugal, which brings the next 999 call....French banks.

The doctors are currently trying to put an emergency medical kit together to contain such an infection. The new EU treaty is set to be signed by most of the union’s members, UK and Czech Republic decided against it and others such as Sweden may still get cold feet. This breakthrough treaty is a crucial moment for the Euro zone, as more central power gives Germany the political motivation to continue with the Euro experimentation. This could in turn lead to actual fiscal union and euro bonds. Officials have also confirmed that the ESM backstop fund will begin in July 2012, but discussions are still uncertain about boosting its capacity beyond 500bn.

Guru’s view: amputate! 

A healthy global recovery?

In recent months we have seen some optimism out of many market participants. Here are some of the main reasons that stick out to me:

• US: tax cut extensions, hinted more QE and extended lower rates, improving data including jobs market.
• Europe: closer to an orderly Greek resolution, some decisions made on how to move forward with greater fiscal integration, ECB pumping liquidity into the system as well as slightly improved data.

Despite all this, the global outlook still seems gloomy and global forecasters such as the IMF continue to cut forecasts for 2012 and anticipate a double dip in Europe. These are in my eyes three key determining factors that will play out in 2012, no-one knows what the outcome will be:

• Political clashes such as elections all over world.
• The capability of Europe being able to pull together to sustain stability and further integration.
• China being able to control its economy and keep a healthy global demand (a light at the end of the tunnel).

All eyes on ze Bunds

To describe the Greek deal I was going to say ‘further kicking of the can’ but I don’t think this quite describes it, it’s more a situation of picking it up and putting it in a cannon. The issue seems far from solved. There is a lot of friction as the private sector (obviously) doesn’t want to take a larger haircut than the 50% that was agreed at the Euro zone summit in October or want a bigger coupon on the bonds they will receive in exchange. It has surfaced that some funds bought a big chunk of the bonds that are maturing on then 20^th March; it is in their interest to drag their feet as much as possible so that they can stall any deal so that Greece have to pay the full face value of the bonds. These funds are assuming that the EU will have saved Greece from a default at this point.

The Bunds have shrugged off the surprisingly good data out the US on Friday; despite a strong sell off we have regained a lot of lost ground. The fact that this has happened proves there are investors looking for safe investments. However, a move through 138.13 should target the 2% yield level once again but if this holds there is a good chance we will see the all time highs in the near future.

Guru’s thoughts: I think that Friday’s move lower cleaned the market out a bit and has shaken out a few dusty old longs and attracted new interest. I believe we will be touching the 1.636% at some point in the near future.

Greek deal or no deal continues, a few catch-up bullet points

• As usual the Greeks decide to do what they do best today….strike! *shakes head*
• A Greek finance minister named Venizeloz made an extremely intelligent comment: “The country remaining in the Euro means great sacrifices…..failure of these talks, failure of the plan and the country’s bankruptcy means even greater sacrifice.” 
• On 20^th March Greece has to pay a whopping 14.5bn in bond redemptions, this is putting pressure on them - as the have a looming timeline. I believe that Greek debtors will be enticed to push as much of the burden of Greek adjustment onto foreign creditors, so they’re less tempted to roll-over before they have to. 
• In the thick of the ongoing manoeuvring between Greece and troika, it is getting knotty because the Greeks being awkward….again! *shakes head*

Thoughts on the Euro zone bear squeeze

Recently I have been posting about the confliction between the liquidity which is providing the market with a ‘risk on’ theme vs the real fundamentals which should really be providing a ‘risk off’ idea. As I have said before, I think that the forceful liquidity being pumped into the system kicks the can down the road rather than actually tackling the fundamental problems. As central bank liquidity does nothing to deal with the deteriorating economic outlooks.  The fact that a solid peripheral bid is not decreasing a bid for safe haven investments backs up my view. This considered I expect a restoration of fundamental concerns in the peripherals and a return to the ‘risk off’ theme, the questions are: when will this happen? What will trigger it?

The problem is at the moment, is that it’s very hard to go against the grain. With the Eurostoxx up just under 10%, Dax up just over 15% and the eur/usd up just under 5% from the 2012 lows. I suspect that most ‘big players’ will be waiting on the sidelines poised for a trigger. It’s obvious that the imminent potential trigger would be some sort of fail involving a Greek deal.

Guru’s thoughts: I believe that once/if a Greek deal is complete to a satisfactory standard, this will flush out the bears that are in the market. So generates a relief rally. But, once this is over I think the market will regain some of its understanding to the threatening fundamentals that linger in the background, and will make the market more sensitive to ‘risk off’ triggers. I think that there is a strong risk that Portugal will once again come under the spotlight as they might have to restructure their debt. As I have said before I think that the process we have witnessed in Greece will become a template for Portugal, as was the case with the first bailout. Added fiscal reform will not beat off the bond vigilantes but somewhat strengthen their views as any knock to growth via austerity will trigger further panic over debt worthiness. A trigger could also come in the form of any friction in the French election, as ‘Merkozy’ could split and this could have severe implications on crisis management.

NFP notes

Many economists are expecting the data to show somewhat lower job growth than in January. This has been put down to seasonal temporary jobs related to couriers and shipping services as more people shop on the internet has declined for obvious reasons. A survey of economists showed that the consensus of the figure is 130k, down from 200k in January. 40k of this decline that is expected has been put down to the temporary jobs over the holiday season. It is being called ‘seasonal noise’.

Weekly jobless: has been below 400k for two months and the four week moving average has fell to 377k last week, this is a sign the employment situation is still improving. ADP: this showed a gain of 170k private sector jobs, but was still miles below January’s number.

It is said that there has been a boost in vehicle assembly production in the US due to a drop of production in Southeast Asia in Q4. Bu it was also noted that due to better than expected whether at the end of last year means there was more temporary construction and mining jobs as well as most service sector providing support, these people tend not to work as much in January. ISM manufacturing supported this as the employment index fell slightly but still remained above 50.

NFP, a sentiment indication?

It feels as though participants are poised for tomorrow’s NFP data, I think it could be just the catalyst the market needs to get some direction. Many analysts believe the data will give us an indication of the overall market sentiment. But, I think it will be what the market digests it and what does after the data that will be key. I believe that due to the willingness of the Fed to ease policy, a weak number could after an initially move put a boost in ‘risk on’ assets. The argument can also be reversed, if the number is really good, will the initial move follow thorough a great deal as participants may think that maybe the Fed don’t need to/won’t ease policy as urgently as everyone expects. This is why I think we could see a reversal after the initial number. 

ECB liquidity thoughts

In my eyes there are 2 layers of contagion: restructuring and bailout. Both have been examples in Greece’s case, restructuring contagion as it was putting its bailout peers under pressure and at the same time pushing up other peripheral yields as speculation over their potential bailouts increased.

To be fair, the ECB’s forceful liquidity provision has created a cushion between the 2 contagion types. As Italian and Spanish yields fell even as worries increased in Portugal. Without a doubt, Portugal will come under more fire from pesky bond vigilantes in the near future. Everyone will be looking at the LTROs to provide some extra padding but the question everyone should be asking themselves is how much pressure the cushion will be able to take.

Guru’s thoughts: I think Greek contagion will continue to build, Portugal will continue to surrender, Italy and Spain will continue to take pleasure in all this liquidity cushioning, BUT only on a temporary basis. Nothing is 100% certain but I still remain biased towards a long crisis. Be aware of France as well, they have elections on 22^nd April, and this is always going to cause controversy when the government is trying to tighten its belt!

A few observations on the Euro zone

Whilst there seems to be almost too much discussion on a PSI deal, I still firmly believe that the wont be a messy default. The consequences of a disorderly default are simply too catastrophic for the financial markets to tolerate, so much so that the EMU won’t let it happen. I also believe that this is unlikely to be the last restructuring Greece undertakes, and that if the debt talks prove successful they could be used as a template for others to follow rather than contain the crisis.

Portugal is a clear front runner to need more money next and the market is pricing in as its yield spreads over German ones are at record highs, also with Portuguese CDS’s moon bound in recent weeks. Portugal’s economic outlook is swiftly deteriorating, in the later part of last year Portugal’s 2012 GDP predictions went from 0.8% to -3.5%. This has spooked a lot of investors and they are now losing whatever faith they had that the Portuguese government would be able to control their growing indebtedness despite what austerities measures they used.

LTRO in the limelight!

At the end of February, the ECB will offer unlimited 3year LTRO. There has been rumor after rumor about ho much the take up will be the last one was 2-3 times Decembers take up of 489bn. This is due to the fact that the recent easing of collateral rules will be in place and the embarrassment of borrowing money from the ECB seems almost non-existent. To aid the expectation of a high take up is the fact that the ECB have not even hinted that there will be another 3year LTRO, despite there being theory of another, and possibly an even longer one, but banks still have to regard this as the last one – so make the most of it. 

The headline from the German FT ("Banks set to double crisis loans from the ECB") has received a lot of attention. The report says that "several" large banks from the euro zone told the FT that they "could double or triple" their takes at the LTRO. This is the main contributor to the moves we have been in the markets.

The easing of collateral rules involves instruments that some reports are heavily weighted to French banks. While other countries' banks may not have as much of the new collateral, they may be needier. It is said that Italian banks were the largest hoarders in December’s LTRO.

Some argue that the LTRO will give banks a liquidity bumper to protect from the contagion of a potential disorderly default in Greece, compared to the last one which was supposedly used to pay a lot of redemptions and coupons. The pressure Portugal has been under this month, especially since the S&P downgrade warns the supposed firewall has been breached. Investors need a high take up of the LTRO to boost confidence, I hate to think what will happen if it turns out to be weak – although I would be extremely surprised if it was!

Recent peripheral auction support, will it continue?

This week will see roughly 22bn being raised, this makes it a very busy week in terms of auctions. Often the market focuses on the supply and overlooks the maturing issues and coupon payments. For example today Italy has had one of the largest maturities of the year. It will return about 26bn to investors. In addition, coupon payments from Italy and Spain will give investors another 16bn. I think that some of these funds freed up in the maturing issue and made available by the coupon payments have been used to buy new issues. Especially with the ‘risk on’ appetite dominating the market, I think the next few peripheral auctions will be supported. However, it is worth noting that February could be different as although the issuance is around the same amount as Jan (about 80bn) the amount of redemptions and coupon payments is considerably less covering about half of the projected issuance.

A quick look at today’s action

So today when I got into work, I read the headline: ‘RTRS: a debt swap agreement is largely in place but Greece must first pledge tough reforms’ I immediately thought to myself ‘yeah fucking right’. But, not long after I was proved wrong by rallying indices and peripheral yields easing with the BTP future up 2 points. And now I’m hearing: ‘RTRS: PSI deal just a 'formal step' away’.

Indices are setting off stops, with a lack of sellers for obvious reasons.

Bunds etc have held in well due to a lot of people caught short in the market.

Euribor has kept a firm bid; I also think that this is down to short supporting it.

TED is holding securely, I think this is for a mixture of reasons. Shorts caught in Bor, easing LIBOR, and weak Schatz for obvious reasons.

Short Sterling saw some humongous selling, with spreads gaining a firm bid. As the Sun would say ‘a source’ is telling me that a big trader from a famous German bank has decided to unwind his books today.

Oil is bloody moving around! There was a spike yesterday just less than $2, this was rumoured to be a fat finger. Oil is currently toying between toying the US and Chinese data and on the flip side the shit storm in Europe. The market is making big swings on the back of the news stories we are hearing, good news from Europe is helping it regain some buyers.

EUR/CHF has seen some keen selling. It currently trades at 1.2045 which is pretty close to the SNB’s barrier at 1.20. I am also hearing rumours from ‘sources’ that some brokerages are not accepting stops between 1.20 and 1.17 because they have ‘too many’. Now we have to assume that the SNB will defend it the first time BUT what if a big bear stampede goes on in late NY time or even Asia/OZ time?? Be aware! However I’m sure the SNB are too stupid and will have someone working at night!