Your MUST-READ Morning Stock Futures Cheat Sheet: Spanish bonds tell an interesting story

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The Precise Take – Spanish bonds tell an interesting story

Big Picture AnalysisYesterday was another risk-off day, with the ~1200 battle ground area in the ES tested and slightly broken overnight.  Indeed, the low of the day of 1202.50 was a tick below the 50% retracement of the latest up leg from the November 25 low (day session only), so the bulls have not yet given up.  The four 8:30 am EST reports this morning had a net bullish effect, as Jobless Claims came in better than expected and PPI slightly above consensus.  The Philly Fed Survey this morning at 10:00 am will likely be a market mover.  Tomorrow features CPI at 8:30 am and is also options expiration.

The Spanish government this morning was able to sell 6 billion euros of bonds ahead of an expected 3.5 billion, which has significant implications for the markets and the EU going forward.  The reason is that this strong demand is ahead of next week’s first ECB’s new three year long term refinancing operation (LTRO), in which banks will be able to pledge these and other bonds as collateral and receive cash from the ECB (after a haircut), which need not be repaid for three years.  Thus, it is a back door “solution” to not providing direct ECB monetization.  Many correctly pointed out that this will increase bank leverage ratios.  Given capital ratios are already being required to be raised, they also speculated banks would not engage in this carry trade en masse.  With the Germans reopening a 2008 vintage bank capital facility yesterday and the demand from this morning’s Spanish auction, it appears the leverage/capital ratio problem will be worked out.  This probably does not have short term implications, but it is likely bullish for the intermediate and long term, as the decision to “print” has been made, and is simply not obvious yet.

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