We decided once more to follow on one of our favorite theme of maritime analogies looking at the recent evolution of events. After all, our recent post of the 8th of May "The Tempest" was a reference to Shakespeare's late masterpiece of 1623. Our title "The Tempest" was also a closely affiliated to our chosen post title Saint Elmo's fire, displaying a more negative association than our opening quote, as evidence of the tempest inflicted by Ariel according to the command of Prospero in Shakespeare's play:
"Hast thou, spirit, Perform'd to point the tempest that I bade thee?"
As we ramble again in the opening of our post, in our usual habits, one of the earliest references to the St Elmo's fire phenomenon appeared apparently in Alcaeus's Fragment 34a (Ancient Greek lyric poet - 6 BC) about the Dioscuri, or Castor and Pollux. Why are we making a reference to the Dioscuri again you might wonder? Because in our conversation "Leda and the (Greek) Swan and why Europe matters more for Emerging Markets" in reference to the Dioscuri we argued back in early November 2011 the following:
St. Elmo's Fire is also a 1985 American coming-of-age film directed by Joel Schumacher, a prominent movie of the Brat Pack genre, revolving around a group of friends that have just graduated from Georgetown University and their adjustment to their post-university lives and the responsibilities of encroaching adulthood. Looking at the attitude of our "European Brat Pack", one has to wonder if our European Politicians will ever adjust to their respective responsibilities and embrace somewhat adulthood which would in effect determine whether our Saint Elmo's fire evolves towards a positive outcome in Ludovico Ariosto's fashion, (leading to the rise of the Dioscuri), or to the negative association of Saint Elmo's fire, namely disaster and tragedy. So for Europe, we think it's graduation time but we clearly divagate..."Misery Loves Company" we wrote in October 2011, and in similar fashion many asset classes have recently experienced similar pain due to the ongoing crisis particularly once again in Emerging Markets. In our long conversation, we will look at the broader impact and consequences following our usual credit overview.
The risk of course of deposit flights is indeed a very serious cause for concerns as indicated in the same note by Divyang Shah:
Deposits flows are indeed key factors in determining the stability of any financial system in peripheral countries as indicated by Bloomberg:
In relation to Banks' "viability" and connection to sovereign risk, we have been sounding the alarm for a while in relation to subordinated bondholders about the very real risk of debt-to-equity swaps occurring in the financial bond space, meaning more pain and losses for both bondholders and shareholders alike. Time has come to warn senior unsecured creditors as well, as reported by Jim Brunsden and Ben Moshinsky in Bloomberg on Friday:
When it comes to financial institutions in distress, it seems that more and more financial institutions are relying on ELA (Emergency Liquidity Assistance), which according to Bloomberg is increasingly being tapped - Frozen Europe Means ECB Must Resort to ELA for Banks:
In our conversation "The Raft of the European Medusa", we discussed the ill-fate Bankia IPO which occurred in July 2011. Rodrigo Rato was the former Managing Director of the International Monetary Fund (IMF) from 2004 to 2007 and declared in relation to the July 2011 IPO for Bankia that it “has been considered a reference point for the Spanish banking industry” and was completed “in the middle of a true storm in the markets that imposed the toughest financial conditions of the last decade,” in a speech on July 20 2011.
Individual investors bought about 60 percent of the shares on sale in the IPO we indicated previously.
Meanwhile the price action in the European Bond Space has been volatile to say the least.
The current European bond picture, a story of ongoing volatility for Italy and Spain, but with France, joining the fray with a significant drop in yield over two days, dropping more than 20 bps - source Bloomberg:
French OAT 10 year Government Bond Yield receding significantly on the 24th of May - source Bloomberg:
The "Flight to quality" picture as indicated by Germany's 10 year Government bond yields (well below 2% yield), with 5 years Germany Sovereign CDS above 100 bps - source Bloomberg:
Another interesting graph we have been tracking with much interest displays the ongoing relationship between Oil Prices, the Standard and Poor's index and the US 10 year Treasury yield since QE2 has been announced - source Bloomberg:
Misery loves company" back in 2011. In similar fashion, many various asset classes are experiencing significant correlation on the downside, following a similar pattern.
Oil prices are poised to fall further because drilling-rig use and stockpiles are at their highest levels in decades, according to Michael Shaoul, Oscar Gruss & Son Inc.’s chief executive officer as reported by Bloomberg:
“Even though demand has remained steady, it has been overwhelmed by supply,” the New York-based analyst wrote. “The clear risk is that this will be resolved by sharply lower prices in the coming months.” Oil has tumbled 14 percent on the New York Mercantile Exchange this month. The loss exceeds an 11 percent decline in Brent crude, another benchmark, and would amount to the biggest monthly loss in two years." - source Bloomberg.
Emerging-markets stocks as well, have seen the longest string of weekly losses since 1994 according to Bloomberg:
So yes, "Misery" does indeed, love company, and in 2012 like it did in 2011:
"Emerging-market equity funds posted outflows of $1.5 billion in the week ended May 23, Markus Rosgen, Hong Kong-based analyst at Citigroup Inc. said in a report today. Overseas investors sold $5 billion of emerging-market stocks in Asia, the biggest weekly outflow this year, according to the report." source Bloomberg.
Greek debt crisis further weakens the risk appetite of investors, according to Mizuho Securities Co.
The CHART OF THE DAY shows JPMorgan Chase & Co.’s Emerging Market Bond Index has dropped 2.4 percent this month, while the MSCI Emerging Markets Index of stocks plunged 12 percent. During a sell-off that started Sept. 8, the indexes fell in tandem, with dollar debt declining 5.5 percent in two weeks. The lower panel shows emerging-market credit-default swaps have being gaining since March, mirroring a rise in the cost to insure against losses leading up to early September." - source Bloomberg.
Dollar-denominated fixed-income securities from emerging-market nations have returned 4.2 percent so far in 2012.
"Emerging-market bond funds attracted $633 million in the week to May 16, taking inflows this year above $20 billion, according to U.S. research company EPFR Global. Some $15 billion of that was invested in dollar notes. About $2.3 billion was pulled from equity funds, the second week of withdrawals, paring inflows this year to $20.5 billion, EPFR said." - source Bloomberg
We've seen this movie before...
In relation to European economic data, it is hard to find any comforting news with euro-area unemployment rate climbing to 11 percent in April, the highest in data compiled by Bloomberg back to 1990, and worrisome PMI numbers coming clearly on the weak side.
The divergence between US and European PMI indexes - source Bloomberg:
On a final note, our good cross asset friend indicated to us an interesting correlation between the Japan Nikkei index and Japan's sovereign 5 year CDS since the beginning of March. The index has been falling whereas at the same time, Japan's sovereign CDS is rising. The bottom graph indicates so far a fairly muted volatility for the Nikkei index:
If Europe is moving towards a Japanese decade, there might be at least some solace for Spanish Golf players given that according to Bloomberg there has been a high correlation between Golf Membership fees and Tokyo land prices - source Bloomberg:
Tokyo’s office vacancy rates increased to a record high of 9.23 percent in April from 9 percent a month earlier, pushing rents to a record low, according to Miki Shoji Co., a closely held office brokerage company. The vacancy rate was also 9.23 percent in January. The commercial property index peaked in early 1991, about a year after average prices for the country clubs reached a record high of 288 million yen ($3.62 million), the data show. Golf-membership prices soared in Japan during the 1980s bubble economy, then slumped as the country suffered through series of recessions the past two decades. At least 800 golf clubs went bankrupt since 1991, according to Meiji Golf, a Tokyo-based broker. Some of the most expensive clubs in Japan don’t allow memberships for women or foreigners."
"Markets can be as treacherous as the sea". - Macronomics