Risk aversion coming back (update 8) - EU bond contagion, China

We got a two way (risk averse) knock down on equities, as discussed in The Dow successfully creates another 'bulltrap', and Risk aversion coming back (update 7) - Ireland bailout/PIIGS tumoil just begining (update 3) - Poland 1st victim re: CDS spreads as bond spreads widen the market is now pricing in a bond contagion from Europe, essentially what that means is that the bond spreads of high risk debt widens against 'everything' which in turns erodes the value of the bond/s worth, on top of that is the insurance to cover a default on a bond, the CDS spreads, which are widening also; this can be attributed two the EU/IMF bailout of Ireland that in turns has put stress on the other 'peripheral' (PIIGS) countries such as Portugal, Spain and Italy. So now we are going into the big leagues of 'bailouts' as countries like Spain and Italy are larger economics to Ireland. The general fear is does the EU have a enough cash and can they afford to insure (via German, ECB backstops) against other EU countries asking for a bailout. The market doesn't think they can, therefore it is now wise to factor in a possible default by one of those countries (Portugal, Spain, Italy) and then a restructure of debt payments (bond holder losses) that do not involve a bailout by the EU/IMF. This country may be Portugal.

All and all this will effect risk and risk aversion will be in full swing, any bond losses from a default could be the precursor for a major correction on 2010. The interesting aspect to that was discussed in Contrarian play on the upcoming Permanent Open Market Operations (POMO) by the FED ala 600billion buy up of US Treasuries and an early post titled An interest rate wipeout coming , is that the Federal Reserve 600billion stock market prop has been a flop, with POMO operations occurring everyday. There is no indication that stocks will rally with so much risk around. I called a contrarian play on the start of the Fed's T-Bill buyup and POMO operations, that they would NOT cause a rally in market. I was right. But in saying that, we have an overstretched market on thin liquidity, which is lethal for buying into a bull-trap, both dumb money and smart 'dumb' money have been buying into closing of stock rallies (HFT 'grinds'), only to be sold at the start of the next day trading; this patten may go on for awhile, as the market edges down towards supports, that may then set a 'flash crash'. This is something that needs to be watched.

China has been speeding up in a hyper inflation way, with China now panicking to maintain price stability, I think this is the start of the China inflation driven crash, which should finally correct their property market, but the correction will be brutal. As discussed in China's 'Goldilocks Omen'. A major Chinese economic correction is now on the cards.

When an stock index, the Shanghai composite ,can crash in one day and strip 3% value in minutes. We have a problem



The other risks to the market are geopolitical South/North Korea, and social/political unrest in Europe stemming from Ireland, France, Spain, Italy.

We are now entering a time of major economic, social and political problems

Risk aversion coming back (update 7) - Ireland bailout/PIIGS tumoil just begining (update 3) - Poland 1st victim re: CDS spreads as bond spreads widen

refer:

"The Republic of Poland's 3s/5s dual-tranche Samurai has been pulled on the back of EU periphery widening sparked by the Irish debt problems. The EU sovereign debt concerns have taken its toll on Poland having pushed out the deal's spread to the wide-end of price guidance. As of yesterday, the last day of marketing, joint-leads Daiwa Capital Markets, Mitsubishi UFJ Morgan Stanley and Mizuho refined the price guidance to OS+90bp for the 3-year tranche and OS+105bp for the 5-year tranche, the wide-end of the OS+70bp-90bp and OS+85bp-105bp respective price ranges. A total size of around JPY45bn has been expected.

The Irish contagion has spread to the Samurai market. "Poland has effectively satisfied its total borrowing requirements for 2010 already and therefore agreed that the optimal course of action was to approach the market again once stable investor sentiment has returned," noted the leads in a statement."

Risk aversion coming back (update 6) - Ireland bailout/PIIGS tumoil just begining (update 2) - Interbank CDS fear gauge blows out

This is so similar (regarding fear 'contagion') to what happened in 2008 when US banks started writing down, a contagion of write-downs of other banks (overseas or otherwise) started to write-down assets/derivatives connected with the US suprime housing meltdown, when Lehman Brothers went bankrupt; the whole banking system was crunched: CDS spreads, TED spreads and LIBOR/interbank spreads all blew out.

Ireland is looking like a 'Lehman' style epicenter, of course the Irish government has not only handled the situation appallingly, they have also treated the Irish people like imbeciles. This is going to backfire, as the Irish are now ready to protest and kick out the government that caused this mess by recklessly allowing over speculating through banking/mortgages. Thus creating a housing bubble that went bust.

The fear is to what extend will the ECB/IMF/EU able to provide adequate liquidity to Ireland (through the bailout), if the whole Euro Zone starts to buckle under the fear that the EU may break up, or a country is kicked out and restructured with out ECB/EU assistance. The costs to insure and purchase/hold EU debt will skyrocket and if senior bond holders are asked to write-down or take a 'haircut' on bond values. You'll see liquidity completely dry up for Ireland, which will effect the whole European sovereign markets i.e EU banks

This can now be seen via fears of a sovereign/bank contagion from Ireland is spreading, effecting the whole EU banking system. RE: CDS's on Senior Financials

"LONDON (Dow Jones)--The iTraxx Senior Financials index traded wider Wednesday as concerns around sovereigns spread into the financials' sector.

The index widened "quite aggressively" early Wednesday to spike at 163.5 basis points, according to a trader, before coming back in slightly to trade at 156/158 basis points by 1540 GMT.

The widening reflects a flow-on effect from sovereign concerns into the financials sector, an analyst said.

The financial sector is strongly correlated to sovereigns because of the "implicit support" expected from government, he noted. The widening reflected concerns around the financial situation of Portugal and Spain, following Ireland's admission it needed financial support, he said.

Ireland's government Wednesday outlined EUR15 billion in spending cuts and tax increases over four years that are intended to reduce the budget deficit to 9.1% of gross domestic product in 2011.

Irish Prime Minister Brian Cowen said Ireland has discussed a financial aid package of EUR85 billion with the European Union and International Monetary Fund. A final figure is still under discussion."

Risk aversion coming back (update 5) - Ireland bailout/PIIGS tumoil just begining (update 1) - Portugal

It begins
from Reuters

"(Reuters) - Portugal's budget deficit and public debt are higher than those reported by the government, which is trying to regain investor confidence amid a debt crisis, the leader the main opposition party said on Saturday.

Pedro Passos Coelho told a meeting of his Social Democratic Party items like state-run companies' debts were not included in the overall public debt, which the government puts at 82 percent of gross domestic product this year.

He said that the "true" total public debt stood as high as 112 percent of GDP, while the budget deficit should be at 9.5 percent of GDP, far above the minority Socialist government's target of 7.3 percent for the end of the year.

"The state has for many years been removing from the budget a series of activities, which has made a large part of our numbers fictitious," he said in televised remarks.

Government officials were not immediately available for comment. They have previously denied similar allegations by smaller opposition parties, saying that the statistical and budget data were regularly monitored by Brussels."

Risk aversion coming back (update 4) - Ireland bailout/PIIGS tumoil just begining

When we talk about turmoil, we are not taking about market turmoil per se, as in the markets. Which adjust to bailouts/yields/CDS spreads all done in a less humanistic basis; an impersonal drive to protect assets. What we are taking as far as turmoil from a humanism perspective is that political and social upheaval occurs more intensely when goverments, 'custodian' type bodies like the IMF start meddling in natural ebb and flows of boom bust cycles, done in the idea of maintain stability. The arrogance is that they believe that financial stability, in their definition, should be constantly supported and controlled . We know this impossible re: collapse of communism, and the US recession and problems relating to the 'bailout' mentality of Barack Obama, who is now essentially a lame duck president. The point is, attempting to protect or insulate the status quo only allows the bad management, or bad businesses to survive; when what should have occur is a natural restructure: social/business/economy etc. But they trying a desperate attempt to justify a theory that simply does not work. In other words allow the markets correct naturally and adapt, we will ALL be better of in the long run. So the ridicules European Central Bank, the pointless International Monetary Fund and the ad hoc irrational decision making of the European Union solution to 'market' problems; is to create a 'cartel' of asset support, or economic support of countries that will should be allowed to fail and then rebuild them stronger. Rather their 'bailout' mentality has never worked in European history, strong and innovative nations evolve from change (social/economic).

That is life. It's never smooth or easy, it is a hard reality of dealing with change and uncertainty. We need support from time to time, but done with the idea of self sufficiency. A lesson that has been ignored and attempted to be remove from the public psyche; the idea replaced with a custodian rule of order, an attempt to maintain structure based on a rigid status quo.

The bailouts of the indebted badly managed PIIGS: Portugal, Ireland, Italy , Greece and Spain, so far has been Greece and now Ireland. The European central bank has been keeping the rest of the 'zombie' countries alive with constant bond purchases. The whole thing joke and a bad one, Greece will NEVER be able to pay it's loans back to the EU/IMF, the country is so economically wreaked it's basically a writeoff that should have been WRITTEN OFF, not bailed out. Ireland is the same, in fact it's worst a soon to be flow of 70billion (EURO) worth of European taxpayer money and IMF loans are going to be pumped into the Irish banking system, that, in their insane economic theory will then go into the wider ecomomy. Of course, the Irish banks will suck the bailout money dry, the pitiful Irish goverment will then attempt a push at austerity onto the populous; cutting basically everything but allowing international companies/banks to exploit Irish weak corporate taxes

It won't work, with the rest of the PIIGs hopping to tap bailout monies for their incompetence, is like giving a 'mentally unstable' drug addict more drugs

The EU/IMF are not only delaying the invertible they are fueling a more brutal restructuring of the European Zone; it will be the social and political upheaval that will cause the major pain for everyone in Europe.

Risk aversion coming back (update 3) - Ireland bailout looming (update 3)

A bet the whole thing will be a confusing flob? Hey? Alright it's my cash...

from WSJ

"Anxiety about Ireland has rubbed off on other financially shaky euro-zone countries. On Wednesday, Portugal shelled out a lofty interest rate to attract investors in a routine auction of government debt. On Thursday, a Spanish auction fared better, but the country still had to offer a yield that was about half a percentage point higher than when it last issued debt two months ago.

Jean-Claude Trichet, president of the European Central Bank, also sounded an alarm Thursday, saying he had "grave concerns" about how much was being done to toughen the EU's fiscal-discipline rules, which were widely ignored for most of the past decade.

Trying to quell public furor over how much the Irish government has already spent in vain on bank-rescue efforts, Mr. Lenihan said an international bailout "would not necessarily" create additional burdens on the taxpayer beyond fees for the borrowing.

Still, borrowing tens of billions of euros a year could add billions in extra interest payments for the Irish government.

Any loans also could come with conditions attached by the IMF, , which has dispatched a team of about a dozen economists to Ireland, and expects to start working on Friday."

Risk aversion coming back (update 2) - Ireland bailout looming (update 2)

As the market awaits Ireland's bailout do we see a massive relief rally, or a sell off?

Again, a contrarian play and it's all about yields that should go ballistic in the next 24hrs.

Risk aversion coming back (update 2) - Ireland bailout looming (update 1)

Of course Ireland's stubbornness, like Greece, of not admitting the country is financial fucked doesn't help them come to terms how fucked they really are, it shows poor leadership and arrogance. I hope the markets punish the fiscal irresponsibility of Ireland (and the rest of the PIIGS) even with the potential bailout being implicated. As the poor citizens of indebted countries deal with arrogant and pitiful leadership.

On a political front seeing the unsettled and rattled government of France (non PIIG) make suggestrions about how to solve Ireland debt woes is beyond comical. The fact of the matter is that France is a p-hair away from insolvency.

"PARIS (Dow Jones)--French finance minister Christine Lagarde said Tuesday a plan to respond to problems in Ireland's finance could include bilateral agreements.
Lagarde was speaking to reporters after European finance ministers agreed the European Commission, the European Central Bank and the IMF should travel to Dublin to prepare activation of the European Financial Stability Facility, the emergency loan program created earlier this year by the European Union to help euro-zone countries that need help refinancing their debts.
The Wall Street Journal reported earlier Tuesday that European finance ministers are working on an international aid package for Ireland and want the U.K. to make bilateral loans to Dublin as part of a larger aid package.
"If bilateral instruments are suggested, why not [...]? It is one of the options that can be envisaged," Lagarde said when asked whether the U.K. might provide an additional element in the plan.
Lagarde said the Irish government is determined to act quickly in talks with the European Commission, the ECB and the IMF.
This work involves looking verification of risks, the situation of banks and then making recommendations, she said.
Asked if it will be a question of days for that work to be completed, Lagarde answered "I think so."
Lagarde said the situation in Ireland is not the same as the situation was in Greece as Ireland's sovereign debt situation is under control and it has implemented a courageous budgetary adjustment.
She also said the Ireland situation is different from Greece's because banks were involved and required restructuring.
Still, she said observers shouldn't jump to the conclusion that it would be a bank rescue package."

Risk aversion coming back (update 2) - Ireland bailout looming

Getting closer to a complete IMF/EU bailout (Ireland), just as Greece was bailed out as discussed in Are HFT's supports @1.36 EUR? Refer April 15th 2010 (update 1); we may see a major sell off 'bailout news' the reason would be that the with Greece and possibly Ireland tapping the IMF/EU bailout fund, not only are the PIIGS on ECB bond buying life-support, but are economically dropping like flies. As a backlash against bailout of indebted countries will exasperate, more so from Germany. An eventual restructure of debt will occur, so essentially bankruptcy will be the final play. The market knows this and will sell on that premise.

Then there is the Federal Reserve 600billion print job, will that be a support to markets? Maybe not, after the 30yr (yield @ 4.32%) auction flop. Traders should quickly remember what started to knock the Dow and S&P500 rallies down in March/April/May 2010; was the high yield on the 30yr i.e pass on to 30yr mortgage rates.

Watch the EUR.

Risk aversion coming back (update 1) - Ireland

Just when the market is going all Weimar Republic with it's inflation based US dollar going down the toilet stock-rallies. It's currently (until the US backlash against the Federal Reserve/Ben Bernanke gathers steam) all about Ireland and the the Euro Zone, with CDS spreads widening further: @Ireland's five year sovereign CDS widened 17.5 BP to 605/615 BP. This if course put selling pressure on the EUR and drove down Europe's main indexes.

This is mild risk aversion. Greece is still doomed, but it's ecomomy is no where as close to Ireland and Spain that have being fed by the Europe Central Bank. Greece so far is the only country to tap into the 1trillion EZ bailout fund, which I think appalling, as German is the economic backstop for the fund (Germany now seeks to restructure fund/clauses/approach for any future bailouts).

Recently Greece's socialist government narrowly gets back into power, the bond markets will again be watching to see if they can still budget in austerity measure, which will be impossible. Greece will eventually default, as will Ireland and Spain. The CDS market and the bond markets have still priced in a major EZ default.

Ireland may be tested with a form of sovereign debt restructure rather than a Greek style bailout. If this is the case, any major risk aversion will correct 'overbought' markets end 2010 and into next year 2011