Every Friday is starting to feel the same. Economic data is weak and is deteriorating. Spain is the main topic of discussion with just enough about Greece and Germany added in to make it truly painful. And somewhere in the world, policy makers of one form or another are meeting to see if they can come up with a plan.
Yesterday was an awful day for the markets. Goldman Sachs put out a report calling for stocks to move to 1,285 and the market seemed to instantly respond.
The Spanish bank audit was a mix of confusion and tragedy which didn’t help the market at all. For once it was clear that under adverse conditions Spanish banks won’t be able to keep a 6% buffer, at least not without a lot more money than is being proposed. The losses are just too big, and the methodology relied on too many little tricks (like “new profits” in a collapsing economy). On the other hand, what we really need as a good next step, is enough capital that assets could be written down to a realistic assessment of market value and the banks still have some capital left. That wouldn’t be negative equity.
In the end it’s hard to say or do much about the Spanish banks until Europe finally gets around to creating and ratifying an actual plan. Time is running out.
The bank downgrades certainly didn’t help the tone into the close. They certainly didn’t really tell us anything new. They decided to punish JPM more than most people expected because of the whale trade. MS came out slightly better than people feared. In the end there is likely to be some additional collateral required by counterparties due to their reduced ratings, but I’m not sure the amounts are material. Maybe this will spur some effort to actually clean up their derivative books rather than having so many back to back trades on. The fact that JPM seemed to use Bluemountain to front for them in their unwind process is another example of how inefficient the CDS (and corporate bond) market is in its current state.
High Yield, especially the ETF’s got beat up yesterday, but HY18 was a little more resilient, dropping less than 5/8 of a point. This morning HY18 and IG18 are both a tiny bit better and more surprising to me is that MAIN which was closed for much of the stock market rout is actually a smidge tighter.
Credit as a whole is doing well and seems much stronger than equities. Largely catching up from a period where it was weaker. Spanish 5 year bonds are back to 5.74% yield. Not great, probably not sustainable, but further evidence that the bond market is beginning to believe some form of deal will get put together to take pressure off the markets.
With the IFO data out today, there is further evidence that Germany is being dragged down in the global morass of economic weakness. That may be very helpful in getting them to take some action. A good solid thumping of Greece might also put them into a benevolent mood.