The Economic Data calendar for the week of the 30th of April through the 4th of May is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Due to the public holiday, we probably won’t have Macau numbers until Wednesday. Here are some things we're hearing from Macau this past week:
This note was originally published at 8am on April 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“My mother said to me, 'If you are a soldier, you will become a general. If you are a monk, you will become the Pope.' Instead, I was a painter, and became Picasso.”
The Spanish painter Pablo Picasso had no shortage of belief in his intrinsic talent as a painter. His point in the quote above was to basically say that if you are going to do something well, you should endeavor to do it better than anyone. Something his nation is not currently doing well, let alone better than any other nation, is managing their sovereign debt load.
As we wake up this morning to another week of managing risk in the global macro markets, Spain, as we highlighted in a detailed note last week, is once again front and center. The leading indicator of an acceleration of sovereign debt woes in Europe is the Euro, which has dropped just below $1.30 versus the U.S. dollar for the first time in two months.
The Euro is moving in anticipation that there are a series of Spanish debt auctions this week that may not go quite as planned. Specifically, tomorrow Spain will sell 12 and 18-month notes. This will be followed on Thursday by longer term debt due in October 2014 and January 2022. Watching these auctions will be critical in determining whether the European Union has the wherewithal to contain the once again accelerating crisis in confidence in the European sovereign debt markets.
To that point, if the debt and CDS markets for Spain are any indication, the Spanish sovereign debt issues are far from contained. Spanish 10-year yields are now at 6.16% and at levels not seen since December 2010. Meanwhile, Spanish credit default swaps are, literally, at all-time highs.
As we’ve previously written, Spain is a bigger concern than Greece for many reasons, but most specifically because its economy is almost 5x that of its Hellenic neighbor and is the 12th largest economy in the world. Clearly, Spain is not an insignificant player on the world stage.
To be fair, Spain’s sovereign debt load is not elevated to a level that would suggest as much stress as we are currently seeing in its debt markets. In fact, according to Euro Stat, Spain’s federal debt balance as a percentage of GDP was only 69% at the end of 2011. Many sovereign analysts believe the number is a bit of a misnomer though and when regional debts are included, which are in effect a recourse to the federal government, the total amount of debt is closer to 90%.
Regardless, the more pertinent issue in Spain is the acceleration of debt. By Spain’s own projections, the nation will add more than 10% to its debt-to-GDP ratio this year, taking that ratio closer to 80% on Euro Stat’s numbers. This will lead the industrialized world in growth in debt-to-GDP.
Spanish unemployment hit 23.6% at the end of February and the unemployment rate for the youngest demographic in Spain is literally at 50%. Given the structural unemployment issue, Spain is literally unable to grow out of its debt issues. This lack of growth potential is clearly what the markets are starting to bake in to Spanish yields. That is, if there is a way out, it is not going to be easy and certainly won’t occur before the nation becomes substantially more indebted.
This weekend Paul Krugman of the New York Times, in typical fashion, suggested adding more Keynesian stimulus to the mix. Or, at the very least, Krugman suggests dispensing with the “insane” austerity. If the United States is any case study, accelerating government spending does not appear to be the path to sustained economic prosperity.
Krugman may actually get his way in France, where Socialist Francoise Hollande is extending his lead over Nicolas Sarkozy. Currently, Hollande is expecting to win both the first round (April 22nd) and the second round (May 6th) of French elections. Sadly, we actually know how Socialism ends as well.
The other rumor out of Europe this morning is that Spain may re-instate a short selling ban. That is a little counter intuitive to us. Even if the markets are not giving you much in the way of confidence votes, changing the rules mid game is not going to increase confidence.
In other global macro news this morning, we are also seeing increased evidence of growth slowing and inflation accelerating. On the growth front, Sweden cut its 2012 growth outlook from +1.3% to +0.4% and the Bank of Korea cut its 2012 growth forecast from +3.7% to +3.5%. Meanwhile, inflationary data from India continued to come in hot as wholesale prices “beat” consensus estimates coming in at +6.9% versus the +6.7% estimate.
Switching gears, and while we wouldn’t normally flag Barron’s as a leading indicator for tail risk, the weekly publication did do a nice job this weekend discussing the next impending debt disaster in the United States, student loans. In terms of scale, the almost $1 trillion in outstanding student debt is larger than both the auto loan market and credit card market. The most interesting statistic quoted in the article is that college tuition is up 300% since 1990, which far outstrips the increase in more traditional measures of inflation by a factor of 4x.
At the end of the day, though, the vast majority of the student debt is guaranteed by the federal government, so on some level it has much more security than the typical sub-prime mortgage. Just make sure you add the $1 trillion asterisk when calculating the debt-to-GDP of the United States. Fiscal Picassos, we are not.
The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1617-1653, $118.63-122.36, $79.64-80.27, $80.12-82.34, $1.29-1.31, and 1349-1388, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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*European sovereign swaps tightened last week, with Spanish swaps tightening the most (-6.9%) and Irish swaps tightening the least (-2.85%). While Spanish sovereign swaps saw tightening, most Spanish bank swaps continued to widen out.
* We published a note last week titled "Don't Be Fooled - Counterparty Risk is Rising" where we cautioned against using the Euribor-OIS spread as a measure of interbank lending within the Eurozone. We looked at the relationship between the Euribor-OIS spread and French Bank CDS. It is evident from the results that the relationship between these two data series has been falling apart since mid-march. We now think the Euribor-OIS spread is a potentially dangerous and misleading risk indicator, which is understating the underlying risks. For reference, the Euribor-OIS was roughly flat over last week, while the TED spread continued to fall.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 0 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
1. US Financials CDS Monitor – Swaps tightened for 22 of 27 major domestic financial company reference entities last week.
Tightened the most WoW: AXP, PRU, AIG
Widened the most WoW: MTG, RDN, MBI
Tightened the most MoM: COF, MBI, AIG
Widened the most MoM: BAC, RDN, XL
2. European Financial CDS - Bank swaps were tighter in Europe last week for 24 of the 39 reference entities. The median tightening was 2.6%. Spanish banks continued to see their default probabilities rise notably week over week.
3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Spanish sovereign swaps tightened by 6.9% (-35 bps to 475 ). Irish swaps tightened the least, declining 2.85% (-17 bps to 570).
4. High Yield (YTM) Monitor – High Yield rates fell -14.4 bps last week, ending the week at 7.23 versus 7.37 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.7 points last week, ending at 1660.
6. TED Spread Monitor – The TED spread fell 2.0 points last week, ending the week at 37.69 this week versus last week’s print of 39.70.
7. Journal of Commerce Commodity Price Index – The JOC index rose 4.6 points, ending the week at -5.54 versus -10.1 the prior week.
8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by less than one basis point to 39 bps.
9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. This week we moved from tracking the 14-V1 tenor to tracking the 16-V1 tenor basket. Last week spreads tightened, ending the week at 145 bps.
11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 89 points, ending the week at 1156 versus 1067 the prior week.
12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread tightened to 168 bps, 2 bps tighter than a week ago.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.3% upside to TRADE resistance and 1.2% downside to TRADE support.
Margin Debt - March: +0.91 standard deviations
We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, it has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.
The chart shows data through March.
Joshua Steiner, CFA
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TODAY’S S&P 500 SET-UP – April 30, 2012
As we look at today’s set up for the S&P 500, the range is 17 points or -0.88% downside to 1391 and 0.33% upside to 1408.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
GROWTH – slowing, sequentially, is now a reported fact – but Treasury Yields (10yr 1.93%) and Equity Markets (making lower-highs, globally, since Feb-March) have been very stealth in discounting that before the Sell-Side has. This morning’s South Korean Export number was awful at flat y/y (ie no growth).
STAGFLATION – politically, it’s harder to say we have that in the USA right now (b/c of how we calculate GDP and inflation) than it is to say they have it in Europe. In Italy, the CPI was reported at +3.8% y/y for April, which is nauseatingly high relative to the no growth in Italian GDP (or France, Spain, etc). Brent oil $119 is a consumption killer.
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
US DOLLAR – whether people want to admit it or not, the US economic data was bad last week (jobless claims and GDP) – if the only thing left keeping asset prices afloat is the hope for iQe4, that’s dicey. We’ve seen this movie before – holding the USD down like a ball under water (down 6 of the last 7 wks) ends in deflationary tears when it pops back up.
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