Home > Uncategorized > 2012/03/08: When is today not today? When it’s PSI participation results!

2012/03/08: When is today not today? When it’s PSI participation results!

© 2012 ROHR International, Inc. All International rights reserved.

Yes indeed, today is the deadline for the next European Sovereign Debt Crisis decision: PSI (Private Sector Involvement) decision on whether to participate in the ‘voluntary’ dilution of the value of their outstanding Greek bonds. Regardless of how that turns out, we must say it’s refreshing to finally actually have a bona fide deadline of any sort for what has been the otherwise amorphous European success in simply “kicking the can down the road.” And yet, in terms of its actual impact on the markets, it really isn’t actually, officially today that counts

…because the 20:00 GMT (15:00 EST; 14:00 CST) deadline for bondholders to decide is not the moment we will find out the actual results. Those will be announced Friday at 07:00 CET (Central European Time: 06:00 GMT; 01:00 EST; 00:00 CST.) While it is probably fair to allow some time to review the results after the formal deadline, this just shifts one more of the intensive late week influences we had highlighted at the top of the week for today into tomorrow into the last trading day of the week.

All of which leaves that much more of a profound influence on the equities. Even allowing that they have rebounded so nicely from the early week selloff, their decision at the end of this week is that much more critical than any of the previous churning against the lead contract S&P 500 future major 1,367 high from last May. See the market comments below for more on that.

Suffice to say for now that the equities did not seem very bothered by the fact that a minimum required ‘participation’ will allow for the use of the Greek government Collective Action Clauses’ (CAC) to ‘force’ a dilution of value on resistant Greek bondholders. And that will likely be characterized as a ‘default’ which will cause the ISDA (International Swaps and Derivatives Association) to declare a “credit event“.

That will trigger the payouts on the Greek bond Credit Default Swaps (CDS.) However, for all that this was an event that many anticipated with fear and loathing (especially European governments on the latter), current activity in the equities would seem to indicate it is not a big deal. We find this to be a bit odd in light of the degree to which some of the major European banks were the folks who wrote a lot of CDS; and are ostensibly liable for some significant payouts if they are triggered by a “credit event.”

And to illustrate the degree to which it believes a default is likely, ISDA has compiled and released a preliminary list of the bonds that would be ‘deliverable’ in that event. It was noted in an article in today’s International Financing Review that the ISDA EMEA Determinations Committee has put out a statement that, “…it is prudent for ISDA to be prepared in the event that a credit event is determined to have occurred…” It goes on to note that this is similar to the action taken “…on the obligations of monoline issues prior to a credit event being declared…” back in 2008. So it appears that the ISDA has a strong sense that ultimately the CAC will need to be implemented; and a Greek debt default that triggers the payout on the CDS is the most likely outcome. And yet the equities don’t seem to care.

One theory which has a clear emphasis on hope over reason is that the PSI dilution deal will achieve a minimum 90% participation. In that case, it will indeed be a purely ‘voluntary’ acceptance that will avoid ISDA declaration of a “credit event” altogether. While the threats from the Greek government that put a lot of pressure on the bondholders who also own the CDS, that result is still viewed as highly unlikely.

The second possibility is that the issuers of the CDS have reduced their exposure significantly, so that no banks (which is to say especially European ones who were heavily involved in that market) are going to suffer in the wake of a default “credit event.” They may have been already making partial payments based on the mark-to-market weakness of the Greek bonds, or underwritten the transfer of their CDS position to another party willing to take those risks.

The dilemma is that the Greek debt CDS market was so opaque as to not allow any reasonable assessment of individual bank’s positions or overall banking sector exposures. Especially into that other key US Employment report event tomorrow (which is preceded by no small amount of Chinese and European economic data), it transfers all of the critical influences into a single day tomorrow.

That is even more so the case with all major central banks in stealth QE (quantitative easing) mode regardless of what they might say to the contrary. At today’s post-rate decision press conference Signore Draghi expressed wholehearted support for the ECB’s LTRO (Long Term Refinancing Operation) in support of Euro-zone banks.

In spite of some recent criticism (not the least of which from former ECB board member Juergen Stark) that the ECB might be corrupting its balance sheet, Draghi noted that not only were collateral standards for those loans not going to be tightened, but the essay actually could be loosened quite a bit further. (??!!) Whats next? Gum wrappers?

[It was actually interesting to hear Herr Stark reinforce the sentiment we noted Tuesday morning when we co-hosted Jack Bouroudjian’s The Jack B. Show (podcast episode 192) that the ECB’s next move would be to accept those gum wrappers. In an interview with Frankfurter Allgemeine he warned the massive expansion in the ECB’s balance sheet, in which it is clear to anyone that the ECB will accept used candy bar wrappers as collateral, that “the balance sheet of the euro system, isn’t only gigantic in size but also shocking in quality.”]

And as noted above, the equities don’t seem to particularly care at this moment about the potential for a CDS-triggering Greek default. We surmise the central banks commitment to a continued liquidity flood is a good part of the reason for that. All the more reason why the it will be very important to see, not just in the United States but globally, whether all of that additional liquidity is continuing to encourage the sort of economic improvement the bulls expect. That would be an spite of some weaker economic data turning up earlier this week in key areas like Australia and Europe.

General Market Observations

That is evidenced by a strong bid returning to March S&P 500 future back above the 1,355-50 support that was just violated on Tuesday. However, several items are important to note. The first is that Monday’s actual DOWN Break below its aggressive up channel (from the mid-December selloff low) was up at 1,369; right in the vicinity of last summer’s lead contract S&P future major 1,367 high. All of which leaves that particular resistance much more critical on this next swing up compared to the churning above it last week. This is a ‘window of opportunity’ for bears to turn the short term trend back DOWN; and it is now critical to not let that window close, or more extensive strength will be the likely result. As noted in previous analyses, any sustained escape above that area points toward 1,400 at a minimum.

And it is most interesting that in spite of the accommodative indications from Signore Draghi (some would say aggressively ‘dovish’ compared to his predecessor Jean-Claude Trichet), the March S&P 500 future (still lead contract into next week) has dropped back from greater strength in electronic overnight trade early this morning right around the previous key 1,358 lows (last week Wednesday and again on Monday.) Wouldn’t it be just like that market to park itself halfway between 1,367 and 1,350 in front of tomorrow’s decisive influences? We shall see.


And the other aspect worth noting in light of the equities recovery is that, at least so far, the equities seem to be exhibiting that sort of strength on their own. That is all consistent with the fact that even the equities daily MACD’s never turned back UP on the push to new highs last week, and remain DOWN at present.

It is also still the case that the government bonds have hardly backed off from their recent strength and are therefore still holding well at some relatively elevated support levels. Even the March Bund future expiration today has only left the heavily discounted June Bund future back down testing its 138.30-.00 support.

Similarly in foreign exchange, while the US Dollar Index has pulled back once again from the .8000 area, it is holding no worse than important .7950-25 previously violated support. That is also very consistent with the euro currency recovery not even getting anywhere back near its interim EUR/USD 1.3360-1.3400 area resistance. It is also of note that the weakening news elsewhere has left the commodity currencies less than strong, as AUD/USD is not back up into its 1.0750-1.0800 resistance. Similarly the USD/CAD bounce back from near major support in the .9800 area has only backed off marginally from a retest of 1.0000 area.

So the same question arises again which we have posed previous: if the equities are all that good for a further extensive move to the upside, why is it not being reflected to the anticipated degree in the other asset classes? Of course, that can all change rather quickly (either way) in the wake of actual announcement of a Greek debt default tomorrow morning, and especially in response to what ever the other economic data and especially the US Employment report tells us tomorrow. What we still know for certain is what we postulated at the top of the week: it’s going to be a very interesting finish into the weekly Close tomorrow.

Thanks for your interest.

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