GLOBAL GROWTH - Clearly Slowing and near Contraction Without BRICS

A Graphic Breakdown Of World GDP 06-29-13 Marc Chandler, Marc to Market via BI

This Great Graphic comes from The Economist. It depicts world GDP on a year-over year basis for the world, high income countries, the BRICS and other emerging markets.

The Economist estimates that world growth slowed to a 2.1% pace in Q1 13, down a full percentage point from Q1 12. The high incomes countries are barely growing net-net. Europe is largely in recession. US growth in Q1 has been revised lower. The prospects for Q2 look poor. US growth has not improved, though the euro zone contraction may have eased, it is still appears to be contracting. Japanese growth is likely to lead again, with both exports and domestic consumption continuing to recover.

Emerging market often grow faster than the high income countries, though it does not always lead to superior asset returns. The BRICS have slowed, as have other emerging markets. The sharp rise in global interest rates starting in late-May will not help matters. The increase in interest rates is not a reflection of greater demand for capital due to increased activity. Rather the rise in rates reflects portfolio adjustments in response to the tapering talk the US (less stimulus is not the same thing as no stimulus), continued selling of foreign assets by Japanese investors, and the liquidity squeeze in China.

With the Fed officials trying to help the market understood the meaning of its forward guidance and the acute phase of the Chinese squeeze being alleviated, rates ease and stabilize. There remains a reasonable chance that global growth picks up late Q3 or early Q4. Read more:

US PUBLIC POLICY - Where is the Logic In US Public Policy

36 Tough Questions About The U.S. Economy That Everyone Should Be Asking 07-01-13 Michael Snyder of The Economic Collapse blog via ZH

If the economy is improving, then why aren't things getting better for most average Americans?  They tell us that the unemployment rate is going down, but the percentage of Americans that are actually working is exactly the same it was three years ago.  They tell us that American families are in better financial shape now, but real disposable income is falling rapidly.  They tell us that inflation is low, but every time we go shopping at the grocery store the prices just seem to keep going up.  They tell us that the economic crisis is over, and yet poverty and government dependence continue to explode to unprecedented heights.  There seems to be a disconnect between what the government and the media are telling us and what is actually true. 

With each passing day the debt of the federal government grows larger, the financial world become even more unstable and more American families fall out of the middle class.  The same long-term economic trends that have been eating away at our economy like cancer for decades continue to ruthlessly attack the foundations of our economic system. 

We are rapidly speeding toward an economic cataclysm, and yet the government and most of the media make it sound like happy days are here again.  The American people deserve better than this.  The American people deserve the truth.  The following are 36 hard questions about the U.S. economy that the mainstream media should be asking...

#1 If the percentage of working age Americans that have a job is exactly the same as it was three years ago, then why is the government telling us that the "unemployment rate" has gone down significantly during that time?

#2 Why are some U.S. companies allowed to exploit disabled workers by paying them as little as 22 cents an hour?

#3 Why are some private prisons allowed to pay their prisoners just a dollar a day to do jobs that other Americans could be doing?

#4 Why is real disposable income in the United States falling at the fastest rate that we have seen since 2008?

#5 Why do 53 percent of all American workers make less than $30,000 a year?

#6 Why are wages as a percentage of GDP at an all-time low?

#7 Why are 76 percent of all Americans living paycheck to paycheck?

#8 Why are so many large corporations issuing negative earnings guidance for this quarter?  Does this indicate that the economy is about to experience a significant downturn?

#9 Why is job growth at small businesses at about half the level it was at when the year started?

#10 Why are central banks selling off record amounts of U.S. debt right now?

#11 Why did U.S. mortgage bonds just suffer their biggest quarterly decline in nearly 20 years?

#12 Why did we just witness the largest weekly increase in mortgage rates in 26 years?

#13 Why has the number of mortgage applications fallen by 29 percent over the last eight weeks?

#14 Why has the number of mortgage applications fallen to the lowest level in 19 months?

#15 If the U.S. economy is recovering, why is the mortgage delinquency rate in the United States still nearly 10 percent?

#16 Why did the student loan delinquency rate in the United States just hit a brand new all-time high?

#17 Why is the sale of hundreds of millions of dollars of municipal bonds being postponed?

#18 What are the central banks of the world going to do when the 441 trillion dollar interest rate derivatives bubble starts to burst?

#19 Why is Barack Obama secretly negotiating a new international free trade agreement that will impose very strict Internet copyright rules on all of us, ban all "Buy American" laws, give Wall Street banks much more freedom to trade risky derivatives and force even more domestic manufacturing offshore?

#20 Why don't our politicians seem to care that the United States has run a trade deficit of more than 8 trillion dollars with the rest of the world since 1975?

#21 Why doesn't the mainstream media talk about how rapidly the U.S. economy is declining relative to the rest of the planet?  According to the World Bank, U.S. GDP accounted for 31.8 percent of all global economic activity in 2001.  That number dropped to 21.6 percent in 2011.

#22 Why is the percentage of self-employed Americans at a record low?

#23 What are we going to do if dust bowl conditions continue to return to the western half of the United States?  If the drought continues to get even worse, what will that do to our agriculture?

#24 Why is the IRS spending thousands of taxpayer dollars on kazoos, stove top hats, bathtub toy boats and plush animals?

#25 Why did the NIH spend $253,800 "to study ways to educate Boston’s male prostitutes on safe-sex practices"?

#26 Why do some of the largest charities in America spend less than 5 percent of the money that they bring in on actual charitable work?

#27 Now that EU finance ministers have approved a plan that will allow Cyprus-style wealth confiscation as part of all future bank bailouts in Europe, is it only a matter of time before we see something similar in the United States?

#28 Why does approximately one out of every three children in the United States live in a home without a father?

#29 Why are more than a million public school students in the United States homeless?

#30 Why are so many cities all over the United States passing laws that make it illegal to feed the homeless?

#31 Why is government dependence in the U.S. at an all-time high if the economy is getting better?  Back in 1960, the ratio of social welfare benefits to salaries and wages was approximately 10 percent.  In the year 2000, the ratio of social welfare benefits to salaries and wages was approximately 21 percent.  Today, the ratio of social welfare benefits to salaries and wages is approximately 35 percent.

#32 Why does the number of Americans on food stamps exceed the entire population of the nation of Spain?

#33 The number of Americans on food stamps has grown from 32 million to 47 million while Barack Obama has been occupying the White House.  So why is Obama paying recruiters to go out and get even more Americans to join the program?

#34 Today, there are 56 million Americans collecting Social Security benefits.  In 2035, there will be 91 million Americans collecting Social Security benefits.  Where in the world will we get the money for that?

#35 Why has the value of the U.S. dollar fallen by over 95 percent since the Federal Reserve was created back in 1913?

#36 Why has the size of the U.S. national debt gotten more than 5000 times larger since the Federal Reserve was created back in 1913?

ROTATION - Traders Reacting to the 1994 Pattern

The "Great Rotation" from Bonds to Stocks Appears to have Finally Begun 07-01-13 Navellier

For the first half of 2013, the Dow rose 13.8%, NASDAQ +12.7%, and the S&P 500 +12.6%, marking the best first half since 1999, the last of five consecutive years of double-digit annual gains. Now, with U.S. Treasury bond yields shooting up so rapidly, it appears we’re finally seeing the start of a rotation from bond funds into equity funds, reminding me of a similar situation in 1994 when bond yields rose by 245 basis points, launching the most explosive phase of the 1990s stock bull market. Could it happen again?

Beware the “Bond Bombshell” of 2013

While traveling last week, I kept hearing stock brokers ask: “What are my fixed income clients going to say when they receive their June monthly statements?” Due to the sudden surge in Treasury yields in the past two months, bond investors have had a truly horrific few weeks watching their principal erode due to 10-year Treasury bond yield rising from 1.66% on May 1 to an intraday peak of 2.67% last week, before settling back to 2.52%.

In response, PIMCO’s Bill Gross and five Fed Presidents were out and about last week telling investors that Fed Chairman Ben Bernanke’s recent comments were “misinterpreted,” and that bond investors have grossly “overreacted.” For instance, New York Fed President William Dudley said last week that any expectations of imminent rate hikes are “quite out of sync” with the FOMC’s official statements and the expectations of most FOMC participants. Still, bond investors withdrew $23.7 billion from taxable bond funds in the past four weeks. Additionally, foreign central banks sold $32.4 billion in Treasury debt last week, the largest weekly redemption ever and the third net weekly withdrawal in the past four weeks.

Bond yields have settled a bit in recent days, but the damage has been done. Fixed income investors seem to be realizing that bonds are not an oasis of safety when their principal erodes so rapidly. The last time I can remember seeing such a sudden spike in bond yields was 1994, when 10-year Treasury rates rose from 5.6% in January to over 8% in November. That sparked an impressive stock market rally in 1995.

The strong recovery in stocks since last Tuesday suggests that this bull market remains healthy and resilient. The stock market could become the new oasis for conservative investors, just like it did back in 1995. So far, the market gains of 2013 rival the start of the big market surge in 1995. Now, as then, the bull market was already 4+ years old – starting in late 1990 – but the biggest gains were yet to come.

Ironically, the market rose strongly after we learned that the first-quarter GDP was revised from an annual rate of 2.4% down to only +1.8%. Since slow growth implies that the Fed will likely continue its round of quantitative easing (QE), the market greeted this otherwise-dismal news with a sigh of relief. Still this GDP revision was a big surprise since the consensus estimate was for “no change,” i.e., 2.4% growth.

The Commerce Department reported that the primary reason for the big downward revision was that the service sector only grew at a 1.7% annual pace, down from its preliminary estimate of 3.1%. Business investment was also revised down to an 8.3% decline, from a preliminary estimate of a 3.5% decline.

A growing trade deficit also weighed down GDP, since U.S. exports actually declined 1.1% in the first quarter instead of rising 0.8% as in the Commerce Department’s preliminary estimate. Imports fell 0.4%, well below the Commerce Department’s preliminary estimate of a 1.9% rise. Clearly, a strong U.S. dollar and slower global economic growth sharply reduced American exports and imports in the first quarter.

CONSUMPTION - Signs of Serious Troubles

The personal consumption expenditure deflator increased 0.1 percent in May, 1 percent from year ago levels. The core PCED was up a similar 1.1 percent over the last year – well below the Fed’s desired 2 percent target. r eal disposab le personal incomes were 1.1 percent higher than year ago levels during May, unchanged from the pace registered during April. With limited funds available to fa- cilitate spending, weaker household incomes may upend the fragile recovery. Consumers cannot spend what they don’t have.

Low Inflation Highlights Fed Dilemma 06-27-13 WSJ

Inflation is running well below the Fed’s 2% target. Thursday’s reading on the Fed’s favorite inflation gauge showed prices up just 1.1% in May from a year earlier, matching the lowest pace on record.

If inflation doesn’t rise close to the Fed’s target, Mr. Bernanke said the Fed might rethink its plan to begin scaling back the size of its bond-buying program later this year.

Medical payments are a key wild card. Automatic federal spending cuts, known as the sequester, imposed a 2% reduction on Medicare payments starting in April, easing price pressures. But other factors could have a longer-term impact, such as cheaper generic drugs coming to market and replacing more expensive name brand products, as well as the potential effects of the Affordable Care Act. Declining government payrolls and tightening federal spending also could play a role in pushing inflation down.

EARNINGS - China Impact

Nike Earnings May Be Tripped Up by China 06-26-13 WSJ

With LeBron, Tiger and Federer on the payroll, clutch performances should be business as usual for Nike Inc.

Looking back at a decade of quarterly earnings reports, that has been the case with 36 "beats" of the analyst consensus out of 40 opportunities. The company's performance against the point spread was less impressive, with the stock rising on just 27 occasions.

Although Nike shares fall on earnings day only a third of the time, Thursday's fiscal fourth-quarter report runs a higher risk than most. Forecast earnings of $2.68 a share for the year through May, up from $2.37 a year earlier, look achievable. But investors care more about "futures"—anticipated future shipments—and those have the potential to disappoint. It was last June that Nike saw its sharpest one-day share-price drop in years after unveiling weak fourth-quarter earnings and a sharp cut in futures. The culprit that time, "Greater China," looks shaky again.

The region is important, having made up a 10th of brand revenue and nearly a fifth of operating earnings through the first three fiscal quarters. Operating earnings there fell 15% year over year in that period, compared with a 23% rise in the North America market. Management made cautious comments in March about reducing inventory in Greater China and efforts to "reset the marketplace."

The stumbles of local rivals Li Ning and Anta may have taken some pressure off Nike, the top sportswear brand in China by sales. But Adidas AG is breathing down its neck and hasn't reported the same problems with excess inventory. Nike's futures for China were positive 4% at the last quarterly update—still far better than minus-8% for Japan and minus-5% for Western Europe, but worse than positive 11% for North America. Management cautioned, though, that revenue in China may be lower than those forward orders indicate.

Nike isn't priced for perfection but, at nearly 24 times trailing earnings, looks expensive compared to its 10-year average of 20 times. The stock has returned 40% since its sharp stumble a year ago following the China warnings and has retreated only slightly more than the broad market from its spring high.

Though the odds are poor when betting against Nike, the time seems ripe for an upset.

Q2 EARNINGS - Negative Pre-Announcements Currently At Record Levels

FORGET THE FED: Here's The Troubling Trend That's Really Behind Stock Market Volatility 06-30-13 Factset aand Citi via BI

There's been an awful lot of belly-aching about the Federal Reserve possibly beginning to taper, or gradually reduce, its stimulative bond-buying program. Some have attributed the risk of the taper to the return of volatility in the stock markets. But this volatility may be explained more directly by a larger, more theoretically sound reason: deteriorating earnings expectations.

"[E]arnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention," said Citi's Tobias Levkovich in a note to clients last week.

"In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect. Upward earnings guidance has dipped as well and there has been little consternation or discussion about it."

FactSet's John Butters examined this trend closely recently with regard to the quarter that just ended.

"For Q2 2013, 87 companies have issued negative EPS guidance and 21 companies have issued positive EPS guidance," said Butters. "If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter."

The weirdest thing about this is that this trend has been getting worse for years and the stock market has only been going up.

"Although the number of negative preannouncements is running at an all-time high, the market is not punishing the performance of these stocks in the short term," said Butters. "For the 87 companies that have issued negative EPS guidance for Q2 2013 to date, the average price change (2 days before the guidance was issued through 2 days after the guidance was issued) was +0.1%. This percentage is well above the average of -1.2% over the past five years."

Here's a chart FactSet demonstrating this counterintuitive yet troubling trend:

gordontlong.com annotations

Q2 EARNINGS - Concerns Abound With Non-US Earnings

CITI: We're 'Shocked' By The Surge In Negative Earnings Preannouncements 06-24-13 Citi via BI

The S&P 500 closed at 1,573 today, which is down over 6% from its recent all-time highs.

Many have attributed much of the pullback to the hawkish tone that the Federal Reserve has recently adopted. However, stock market fundamentals have been deteriorating lately too. Specifically, earnings expectations have come down sharply. And earnings are arguably the most important driver of stocks. In his latest note to clients, Citi's Tobias Levkovich says he is "shocked" by how negative these trends have been.

The Street had become a bit too happy of late and then got upended by the Fed and the likely tapering of QE amidst some prior hopes of a delay in ending such accommodative policy, almost without spending any time looking at earnings estimates or trends less than a month before second quarter results are released. Such a thought process seems ill-founded since earnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention. In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect (see Figure 1). Upward earnings guidance has dipped as well (see Figure 2) and there has been little consternation or discussion about it.

Levkovich may be exaggerating a bit by saying "there has been little consternation or discussion about it." Indeed, plenty of people have warned about asset prices dislocating from fundamentals. They just couldn't be heard over the deafening stock market rally.

Looking forward, Levkovich doesn't think this ugly trend of negative earnings expectations to improve in the near-term.

"[W]e suspect some additional estimate cuts may be in the making when company management teams provide more realistic 2H13 outlooks in the latter part of July during earnings related conference calls," he wrote.

"While we envision an improving US economic backdrop assisting estimates, we are more concerned about international activity trends, with Europe, China and Brazil potentially generating disappointment, alongside commodity-driven economies that may have been banking on better business activity as well."

MARGIN DEBT - Rolling Over & Suggesting a Significant Correction Ahead

NYSE Margin Debt Has Ticked Down, And It Might Be Sending A Scary Stock Market Warning Sign 06-29-13 Doug Short

The New York Stock Exchange publishes end-of-month data for margin debt on the NYXdata website, where we can also find historical data back to 1959. Let's examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter.

The first chart shows the two series in real terms — adjusted for inflation to today's dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its an all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July, 2007, three months before the market peak.

The next chart shows the percentage growth of the two data series from the same 1995 starting date, again based on real (inflation-adjusted) data. I've added markers to show the precise monthly values and added callouts to show the month. Margin debt grew at a rate comparable to the market from 1995 to late summer of 2000 before soaring into the stratosphere. The two synchronized in their rate of contraction in early 2001. But with recovery after the Tech Crash, margin debt gradually returned to a growth rate closer to its former self in the second half of the 1990s rather than the more restrained real growth of the S&P 500. But by September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market.

After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August, 2010 Jackson Hole speech. The appetite for margin instantly returned, and the Fed has periodically increased the easing.

Was April a Margin Debt Peak?

Unfortunately, the NYSE margin debt data is a few weeks old when it is published. In nominal terms, real margin debt at the end of May 2013, the latest available data, shows a slight month-over-month decline of 2.1% (1.9% in nominal terms). Will we look back at April as a cyclical peak for margin debt like we saw in 2000 and 2007? And does that anticipate a major market peak as we saw twice in the 21st century?

NYSE Investor Credit

Lance Roberts, General Partner & CEO of Streettalk Advisors, analyzes margin debt in the larger context that includes free cash accounts and credit balances in margin accounts. Essentially, he calculates the Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt. The chart below illustrates the mathematics of Credit Balance with an overlay of the S&P 500. Note that the chart below is based on nominal data, not adjusted for inflation.

Click for a larger image

As I pointed out above, the NYSE margin debt data is a several weeks old when it is published. Thus, even though it may in theory be a leading indicator, a major shift in margin debt isn't be immediately evident. Nevertheless, we see that the troughs in the monthly net credit balance preceded peaks in the monthly S&P 500 closes by six months in 2000 and four months in 2007. The most recent S&P 500 correction greater than 10% was the 19.39% selloff in 2011 from April 29th to October 3rd. Investor Credit hit a negative extreme in March 2011.

There are too few peak/trough episodes in in this overlay series to take the latest credit-balance trough as a definitive warning for U.S. equities. But we'll want to keep an eye on this metric over the next few months.

TAPER SHOCK - Bank Losses

How The "Taper Tantrum" Cost US Banks $25 Billion In Q2 Net Income 06-30-13 Zero Hedge

Ever since back in 2009 the US financial system effectively suspended Mark-To-Market accounting for the too big to fail (and all other) banks (read our description of FAS 157 and 115 here), the Income Statement impact (i.e., net income above the [Other Comprehensive Income] line) of wild interest rates moves on bank balance sheets has been one thing US banks have not had to worry about. The reason for this is the transformation of large swaths of rate-sensitive holdings (the vast majority of bank assets) on the balance sheet to “Held to Maturity” meaning no matter how much higher or lower interest rates moved, banks would be immune from flowing Mark to Market losses (or gains) through the income statement.

Yet despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves.

It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.

As an aside, it is technically not true that banks are devoid of GAAP rate and duration risk: over the past four years, banks had found themselves in the paradoxical situation where blowing out spreads impacting bank credit instruments (debt and CDS) due to systemic or industry-specific rate shifts, actually resulted in a boost to the adjusted bottom line since the so-called DVA impact had to be netted out from pro forma net income, leading to a non-GAAP EPS bonanza when things got really rough.

However, a far bigger issue is what happens to banks in a time when rates surge violently and dramatically in a short period of time. Such as in the past two weeks.

As we previously explained, in places like Japan, the rapid blow out in yields (with the 10Y hitting 1% coinciding with the peak of the Nikkei 225 so far in 2013) has a massive adverse impact on banks, and where a 100% parallel shift in the curve may lead to as much as a 35% impairment in bank capital.

But how about the US?

After all, while the Fed is the single largest holder of Treasurys (and whose P&L suffered a massive $200+ billion, or 4 times its “capital”, loss in June alone) courtesy of the ineffable “faith” in fiat, Bernanke has no Mark to Market restrictions (at least until such time as the reserve currency status of the USD is questioned, and so is the faith of the US central bank but that is the topic for another article) US banks do have substantial duration exposure to the tune of hundreds of billions, primarily concentrated in the spring-loaded clip known as Available For Sale securities.

So just how large is said duration exposure? According to JPM’s Nikolaos Panigirtzoglou it’s quite substantial, and amounts to a whopping $30 billion in MTM losses for every 1% increase in yields. Or in other words, the Q2 blow out in the 10 Year should have resulted in a $20-30 billion loss to the US financial system’s bottom line (through the Accumulated Other Comprehensive Income line) in the second quarter alone (all else equal, and for a hyper-levered system in which everything is contingent on smaller and smaller rates all else is never equal implying many more adverse downstream effects will likely be revealed).

From JPM:

How large is the duration risk of banks’ portfolios? The Fed's H.8 release provides some guidance on this for US banks. Each week, the Fed reports the net unrealized gain on banks’ available for sale securities. This is by no means a complete measure of banks’ duration exposure. It does not include held to maturity portfolios (albeit these are much smaller than AFS portfolios), and importantly does not include the impact of any swap hedges. Also, not all bank branches may mark their portfolios to market every day or week.

All that said, unrealized gains had fallen from $37bn at the start of May to $15bn by Wednesday of last week.

We can infer banks’ duration exposure by relating week-to-week changes in unrealized gains to week-to-week changes in the yield of our US aggregate bond index, the GABI. Figure 3 shows this beta, estimated over a rolling 6-month window to smooth through the noise in the estimate. It suggests that banks would make MTM losses on their available for sale portfolios of just under $30bn for each 1% increase in yields.

Estimating the beta over three months would give very similar results.

That beta is around twice as large as in 2010, whereas the size of banks’ bond portfolios has increased by only around 20% over that period, implying that banks in aggregate have been shifting towards longer-maturity securities. The beta of just under $30bn for a 1% rise in yields implies that the 18bp rise in GABI yields since the last H8 report would have reduced unrealized gains by a further $5.4bn.

Oops: this is precisely why when everyone is scrambling to chase yields and in the process increases duration to preserve some NIM in a centrally-planned, manipulated, collapsing rate environment (resulting in a doubling of bank duration exposure beta in under three years!) any rapid inverse move will leave everyone with massive losses. Losses that may be as much as $30 billion or more.

Putting this number in perspective, according to the FDIC, in Q1 banks recorded profits of $40 billion. There goes half of Q1 profits...

But while the US losses may be manageable, if crushing to sellside analysts who have bet the farm – once again incorrectly - on S&P 500 earnings picking up in Q2 due to a surge in financial profits which are now locked far lower at June 28th 10Y levels and resulting in billions in MTM losses that will have to hit the Net Income line, it is things in Europe that are about to get nasty once again.

US banks have been modestly reducing their bond holdings since the start of May, by around $19bn overall. By contrast, Euro area banks bought a hefty €48bn in May, largely because Italian and Spanish banks added to their holdings as spreads edged wider.

And while we don't have a convenient weekly update on banking sector unrealized losses in Europe as per the US H.8., it looks like the European periphery’s Monte Carlo double-down “all in” bluff may have just been called. Or in other words, now that the carry trade tide has gone away, we finally see how many European banks were swimming naked (for a hint from Goldman Sachs, see here). We can’t help but wonder how many of their US brethren will join them with their pants down as bank results are reported over the next several weeks.