Swedish Vengabus

Wednesday, November 16, 2011

Well, after yesterday's utter carnage in European government bond markets with not even Finland - ironically, the only country within the Eurozone to actually *STILL* meet the Maastricht Criteria - being slotted as players try and sell anything they can, TMM reckon we are getting very close to the end game. It's pretty clear that liquidity in European bond markets and the price action within them has now become completely disorderly, non-functioning, and at the point of seriously impeding the flow of credit and transmission of the ECB's monetary sadistic policy. The front-ends of the core countries of Holland, Finland, Austria, have all sold off between 25bps and 100bps over the past few days, something TMM would argue constitutes a de-facto monetary tightening in those countries. Given these are, arguably, not the "profligate" iPIGS, a sound monetarist like the Bundesbank would loosen monetary policy. TMM reckon policy action is imminent...

...The question is, "by whom?".

TMM have been debating precisely what is going on behind the scenes, as to whether the Axis of Evil are merely ignorant to the seriousness of developments, or whether this is all part of a grand plan driven by Realpolitik. And TMM have come to the conclusion that it is a gigantic game of chicken... Not between the ECB and Italy or whoever. But between France and Germany. The former is desperate for the ECB to do the heavy lifting, especially so given that their AAA-rating is the one at risk when it comes to EFSF leveraging and the oncoming Euroarea recession. Germany, however, wants to push for "More Europe", with the EU being able to have a veto on national budgets and balanced budget rules across Europe - i.e. fiscal union on Germany's terms. The French, eager to avoid surrendering to the Germans... Again... Hope that Germany blinks first, and allows the ECB to step up. Yesterday's comment from Schaeuble, contradicting Buba's Wiedmann, coupled with German Wiseman Bofinger's warming to this idea suggest that the domestic economic debate and political stance are close to backing down. TMM would expect given the kicking the rest of Europe has been given the past few days that some of the Axis of Evil begin to defect, and the ECB's Nowotny on Friday was a notable example of this. But, with French 10yr OATs approaching 200bps, the pain level in the Elysee Palace must be approaching capitulation levels.

Who will blink first?

All TMM will say on this - as far as relevant analogy goes - is that in November 2008, when Fannie and Freddie AAA bonds were widening sharply in response to indiscriminate deleveraging and general selling of anything related to those entities, the Fed capitulated once this paper got up to 195bps intra-day and began buying MBS in size.

Moving on...

Something TMM have often shaken their heads in despair at is the perennial determination of commentators and market participants to present the "Theory of Decoupling" (repeatedly resulting in a massacre of EM assets) and "The New Safe Haven". The former theory builds over time as punters form the opinion that their portfolio has some uncorrelated trades, then all of a sudden there is a dramatic leverage-driven unwind that blows said portfolios out of the water, and the theory dies for about 9 months (Asian FX). The latter, however, appear in a sudden rush to buy a currency/asset, with strategy and sales notes spouting the virtues of said country. Said Nuvo-safe haven will then embark upon a worrisome backslide toward the level at which it traded prior to its status elevation and then promptly resume trading like the cyclical beta asset it always was, sending everyone off looking for finger-burn remedies. TMM have witnessed this with the Singapore Dollar, the Aussie and most recently, with the Swedish Krona (SEK)...

Now, TMM agree there are loads of reasons to love Sweden, not least the quality of their gene pool, but, as with many other exoduses to new safe havens, neither the numbers nor the fundamentals stack up. When thinking about what you might want in a safe haven, the key things are: (i) somewhere large enough to park your cash in a liquid manner, (ii) somewhere safe enough to park your cash, (iii) a current account surplus to remove capital flight risk, (iv) low government debt to help provide (ii) and prevent (iii), and (v) low beta to the global economy. Now Sweden certainly satisfies conditions (iii) and (iv), and its government debt is certainly safe enough to satisfy (ii). However, with respect to (i) and (ii), there are distinct differences with, say, Switzerland. In Switzerland's case, while there isn't much in the way of a bond market, there is a very large banking sector with a long history of providing safety for investors. However, Sweden is distinctly lacking in this respect: the stock of outstanding government debt is rather small, at less than $200bn (see chart below, orange line), and its banking system just isn't big enough. And while certainly, since the Eurozone crisis erupted there has been a flow of money into Swedish banks (white line - non-resident Swedish bank deposits, $bns), it has been a small net ~$31bn and has actually reversed over the past few months.

As far as point (v) goes, in developed market terms, Sweden is well-known to be a pro-cyclical market. The below regression of the change in Swedish YoY GDP vs. that of the Eurozone confirms its high-Beta status (1.67 since 1995) .

So TMM reckon it is hard to label the Krona a "safe haven" and are wondering if perhaps it has become the next Vengabus. Given the economic linkages with Europe, TMM reckon there is a trade here. Looking at Swedish Export growth (see chart below - blue line), a regression against Eurozone, US and UK import growth (red line) explains most of Sweden's export behaviour. But drilling down, it seems clear to TMM that the bulk of the variance is driven by Eurozone Imports (green line). As far as TMM can tell, Sweden is just a leveraged play on European growth which, coincidently, is going right down the Swannee...

...In recent months, Swedish economic data have disappointed, inflation has peaked and the curve begun to price in rate cuts. Additionally, the growing noise around EU bank deleveraging is likely to have a negative impact upon the asset quality of Swedish bank operations in Eastern Europe. Second-order feedback effects indeed. It thus surprises TMM that despite the curve pricing in rate cuts and financial volatility spiking that EUR/SEK has not really rallied much and when compared with a (very) naive model base upon rates spreads and the VIX, it seems too low to us...

And at a time of little divergence from Risk-On/Risk-Off, it's interesting that EURSEK's correlation with such factors has been pretty low of late. So, in the interests of adding low correlation trades to their book, TMM reckon scooping up some EUR/SEK is not a bad play but to avoid that Euro thing will instead go long GBP/SEK.
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Posted by cpmppi at 8:16 AM  

28 comments:

C says'
There was a moment this week when I thought should i add to my equity short and I thought since when has short on a range bottom resulted in anything ,but a whipping ,pass.
The Euro noise this week will have encouraged some shorts and if I am right they will get some sore fundaments.
I still see equity getting a timelag hit when the European credit tightening finally comes full circle ,but I also think the market has been watching the film Gladiator where at the end the guy turns away and says' "Not yet my friend".
No ,we can still have one more charge and the cry should be "For Santa and RORO we ride !"

Anonymous said...
10:11 AM  

What if the Swedish vengabus turns out to be a Saab – crash and burn if the Chinese don’t buy it? (Sounds like the EU, no?)

How ‘bout a EUR/CHF strangle? I seem to remember certain punters ascribing invincibility to the SNB. Shades of ’78?

Secret--Sauce said...
12:11 PM  

I'm not Mervy's biggest fan, but he's right when he says that it is not the ECB's job to absolve governments of difficult decisions. Core Europe's rich enough to engage in a big fiscal transfer with the periphery. If its voters don't want to, it is not the ECB's role to overrule them by monetizing debt.

Your argument seems to rest on the view that Europe's bond markets are disorderly. My feeling is that most euro zone sovereign debt was absurdly priced in the decade up to Lehmans. Now it's merely reverting to where yields once again reflect market fundamentals. Italian spreads ought to be wide.

Alen Mattich said...
12:58 PM  

And before anyone else plays. "oooo caught you out" yes Estonia is also within maastricht guidelines. It's only a short ferry trip on the Georg Ots from Helsinki. Caviar prices have gone up a lot since i was last there pre EU.

Polemic said...
2:12 PM  

Agreed that it is only a matter of time before the uncertainty in the bond markets ( ie 75bps spreads on a govt bond) effects the real economy...

LIBOR keeps creeping up... EURODOLLAR to = EURIBOR?

abee crombie said...
2:58 PM  

75bps bid/offer spreads, not over bunds, to clarify

abee crombie said...
2:59 PM  

WTI Crude at the begin. of Oct was $75/barrel. Today over $100? So did anyone see any significant changes to the economy? What a rip-off!

Anonymous said...
7:03 PM  

C says'
Anon 7.03
Don't be like that ,surely you don't think all of this low rate policy comes completely free of charge do you? Personally, I look at this way,if an apple a day keeps the doctor away surely a barrel of oil a day is cheap to keep the default away .

Anonymous said...
7:48 PM  

On your analogy btw the ECB and FED, other than that both are central banks I dont see the similarity. j/k I think they will get there, just not as soon as we'd like.

On holiday rally - I think it was a bit like TMMs charity appeal this year in that it came early and hit its target sooner than expected...in other words Oct was it. Currently looking for the rising wedge to wrong way first trade.

On yesterdays post regarding TMM = Team Micro Man, it just doesn't have the same ring to it.

Corey said...
7:49 PM  

The WTI front contract is not indicative of any global oil price, it's a local price in landlocked Cushing, Oklahoma and depends mostly on storage, disruptions and other local factors. Nobody apart from a few refineries in Oklahoma can consume crude at WTI prices. 'Real' oil you can ship worldwide has traded between $100 and $120/bbl since Jan.

Anonymous said...
10:10 AM  

Anon 10:10, you are a bit behind the news: ConocoPhillips shocked the markets yesterday by their announcement of a sale of their stake in the Seaway pipeline to Enbridge for $1.15 billion. In turn, Enbridge and the pipeline operator Enterprise who own the other 50% announced plans to reverse the line so that it could bring oil from Cushing to the US Gulf, thus allowing WTI to compete with international crude oil once more. The plan is to start in 2Q next year at the rate of 150,000 b/d and increase capacity to 400,000 b/d by late 2013. It doesn’t take much in the way of mathematics to work out that the 150,000 b/d – say a million barrels a week, or 50 million barrels a year – would have prevented the build-up of stocks at Cushing to record levels in April of this year of 42 million barrels.

Anonymous said...
11:03 AM  

Alen's comment today is right on: "My feeling is that most euro zone sovereign debt was absurdly priced in the decade up to Lehmans. Now it's merely reverting to where yields once again reflect market fundamentals. Italian spreads ought to be wide."

Indeed. Like the re-pricing of credit risk in the US during the 2007-2008 crisis, this market reflects the shock that accompanies restoration of reality from illusion.

Is a market disorderly when there is genuine price discovery? The answer is, yes, but only during the transition. German-Italian spreads are not going back to where they were, but at some point this paper will trade again.

The action in crude has been a little strange. This surge looks temporary, considering the fact that US gasoline prices have been falling for a while now. Domestic demand is therefore modest, and a firmer dollar is likely to bring lower oil prices.

Leftback said...
2:33 PM  

The problem is that the point at which Italian/Spanish paper is selling now will ensure breaking off from Euro and defaulting on their debts.

Anonymous said...
3:19 PM  

Correct. That's why the Game of Chicken cannot continue more than a few more weeks, or possibly days. So Euro Whack-A-Mole is one reason why volume has dried up, at least in US trading. Nobody wants to have whipsaw markets for more than a week or two, it becomes exhausting and demoralizing.

Here is the other:

MF Global Still Money Lost

In the aftermath of MF Global, faith in one's brokers (already thin in view of evidence that they routinely trade against their clients) is wearing extremely thin. If another one of these firms blows there will be capital flight from anyone not deemed TBTF, or essentially a run on smaller brokers.

Add this newer hazard to the rise of HFT and flash crashes (which have essentially negated the use of stops) and you have a market that is alarming even to seasoned investors.

Leftback said...
4:29 PM  

....and somebody else's debt has just gone NO BID today, as their share price returns to single digits:

JEF Credit Crunch?

Anonymous said...
4:51 PM  

Adding to the Whack-A-Mole situation , you'd have to weight accordingly to which side is favoured to go bidless\offerless at the "current levels".

If it was to break up ,you'd know soon enough up here if it was for real or may be not.These bailout induced 2011 rallies up here aren't cutting it lately...Japan-Budget-BlahBlahBlah...

Bailout fatigue may be metamorphosing into Buba fatigue when those hard data points start to roll around...I've never yet met one german pro punter..that takes predictive analysis.

Amplitudeinthehouse said...
5:56 PM  

No wonder we are suddenly Occupying everywhere over here. Americans are just now waking and beginning to realize that they have been under Occupation by a hostile kleptocracy for some time.

Things are getting sleazier and sleazier in Obanana's Untied States of Bananamerica:

Congressional Stock Holdings

Leftback said...
6:24 PM  

While we don't always see eye to eye here with The Blog That Shall Not Be Named, LB happens to agree with this post so completely that we could have written every word:

MF Global Crisis of Confidence

A lot of people aren't going to exhale or sleep well until those MF Global investors are made whole, or at least have their accounts unfrozen. You would feel this immediately in London if someone mid-sized went bust with frozen customer funds.

Leftback said...
9:05 PM  

LB, Bruce has his own blog site,
http://brucekrasting.blogspot.com/
the comments, on his site, tend to be much more cerebral then ZH.

JohnL said...
1:58 AM  

Now that the Occupy London lot have taken over the UBS office, activist Sarah Layler said, "the bank of ideas will host a full events programme where people will be able to trade in creativity rather than cash," I can see why Imatwati has ensconsed himself at Crown Place.

ntwsc said...
3:35 PM  

More cheerful data from Europe. We may have a silly rally into Thanksgiving in the US, but it will be meaningless as Spanish spreads take off :

Spain-German yield spreads

Leftback said...
7:27 PM  

A prolonged discussion of ECRI's indicators from Doug Short. I maintain my position that this is a far from useful metric, and that it leans excessively on equity valuations. Furthermore, like many other metrics, it was not designed for a World in ZIRP. The main ECRI indicator has predicted 17 of the last 4 recessions, but did predict the big ugly bloody obvious ones. Well Done, Chaps!

Doug Short Deconvolution of ECRI Index

In summary, I am NOT saying is not we will not have a recession, but that if you want to find out you would be better off talking to small business owners around town than listening to Achuthan. Massively overrated, overpaid and overexposed on TV.

Leftback said...
7:42 PM  

RE GBPSEK on a technical basis we are at the top of the range. also triple top scenario 23/9 & 30/9. I understand the fundamental analysis but why not wait for the break out? rather than going short as per the range

Anonymous said...
12:35 AM  

"Anon 10:10, you are a bit behind the news"

Yes going forward WTI can reconnect again to the rest of the world. But as you say, thats going to happen in the future. Until then WTI front can still disconnect completely, as it has in the past. Same with US Natgas BTW.

Anonymous said...
10:09 AM  

The view from the safety of the Treasury and corporates tank seems preferable for today. Possible Kevlar modeling opportunity ahead, chaps. You know you look especially good in metallic grey, Polemic.

NZT equity longs bleeding from their severed limbs like the Black Knight. It's just a flesh wound... but you'd have to say this is a decent entry point.

The EMs are behind the woodshed today, and there is some screaming going on. I might venture back there later and see if there are any opportunities. Not yet though, not enough Kevlar on yet.

Leftback said...
4:36 PM  

c SAYS'
Small thanks to Corey last week.His tiemly rejoinder Was just enough to make me go and do another run through and got me the add that I'd previously decided not to go for.

LB,
Is the back of the shed where people go for decoupling exercises ;) ?
Don't smirk ,but I might also have a few treasuries ,god I feel such a whimp !

Anonymous said...
4:57 PM  

@ C
Err, youre welcome. But dont listen to me I'm not even brave enough to do that...although I probably should.

Corey said...
7:05 PM  

C says'
Don't worry Corey I wasn't following a recommend form you nor indeed would i do that.It was just the post made me relook at my setups having passed earlier in the week and lo I found I had one ready to .

Anonymous said...
9:21 PM  

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