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.