"Last weekend, European policymakers finally moved decisively to contain increasing sovereign liquidity risks. However, the Euro remains under pressure as the focus shifts towards the FX implications of fiscal tightening and potential monetary expansion. After weighing up the growth and interest rate implications, as well as positioning, fair value and external balances, we decided to keep our EUR/$ forecasts at 1.35 flat in 3, 6 and 12 months. Beyond EUR/$ we discuss how to position in FX for continued strong cyclical activity across the world." Goldman Sachs
Amid last week's whirlwind media tour, in which the PIMCO dynamic duo of Gross and El-Erian were jointly talking up their book and providing useful insights on contagion, was this clip with the former Harvard investment officer from an interview with Bloomberg's Tom Keene. It is by far the most informative of all of El-Erian's recent media guest spots. Below are the highlights.
With the euro collapsing, all of Europe is on the brink, and as a result, every European country has now instituted some form of austerity measures. Hereby, we summarize what these look like to date. Unfortunately, we are confident the current batch of austerity will be materially insufficient with many more rounds of cutbacks to come. Looking across the Atlantic, the US has yet to initiate any reductions in its gargantuan budget deficit or governmental spending. And as can be seen its metrics are just as bad if not worse than most of Europe. Use this chart to get a sense of what the initial round of US austerity, when it strikes, will look like.
Presenting the weekly market chart summary. And the now standard head in the sand language from David Kostin: "Despite a week of dramatic moves, S&P 500 is on pace to finish the week roughly flat. Short covering helped drive the market higher to start the week before Eurozone concerns resurfaced. In US and European equity markets, relative views on GDP and FX have favored US vs. European exposures. US corporate and macro fundamentals remain strong, which should support stocks once macro headwinds fade."
We end the week with a quick update on the US Treasury Market. First directionally we are pleased to have identified early the bullish channel for the 10Y US Treasury future and the bund as it allowed us to stay clear from the selling frenzy following the announce of the European bailout last weekend. We still think bunds will get sold hard at some point but right now they are trading with a solid bid in this weak risk environment and so we will keep them on our radar happily seeing even better levels to sell. After all more balance sheet dilution will at some point backire for Germany, and if the Euro currency regime is dismantled no doubt that the proud Bundesbank won't be long to on the hiking bandwagon, so either outcome should be bearish for bunds. Not to mention that owning low yields in a plummeting currency is not exactly the most attractive proposition. - Nic Lenoir
In addition to the EUR data in the CFTC, another data point that caught our attention is the record exposure in outright commercial shorts in gold: this week they hit an all time high of 450,950. It appears that last week the desire to suppress any gold breakouts was at historic highs, even as net commercial exposure hit a 2010 low of -282.6, just slightly higher than that seen in the second week of January. If even with this massive onslaught to keep gold low by the LBMA the precious metal managed to nearly hit $1,250 today, what will happen to gold when the 450k commercial positions are forced to cover?
CFTC Euro Net Short Contracts Surge By 10% Sequentially, Hit Absolute Record Of -113,890, Just Begging For SqueezeSubmitted by Tyler Durden on 05/14/2010 - 16:18
The most recent CFTC Commitment of Traders report is out, and at least as pertains to the EURUSD, it is a doozy. After hitting record after record in net short exposure, the Euro net non-commercial contracts have surged by 10% week-over-week, and represent a fifth consecutive weekly bet on the decline of the Euro, to -113,890 contracts. This is an all time record, as virtually all speculators are betting against the Euro. On the other hand, a reversal here for whatever reason would incite the mother of all short squeezes and likely push the EUR to well over 1.60 on a catalytic event. The only question is whether such a catalytic event can even possibly be conceived. We'll leave that one to the black swan hunters among you.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/05/10
Recently, economic pundits have been basking in the glow of the long Bund trade: it is the safe haven in Europe, it is the risk-free trade, etc, etc. And indeed, Bunds have been surprisingly tight in absolute spread terms, with the 10 Year German note trading well inside of its US counterpart. However, in a globalized market nothing is absolute: indeed, US investors, or any other Dollar-based managers, who have used dollars to purchase German EUR-denominated securities, are now holding on to substantial unrealized FX-based losses. In fact, as the attached chart demonstrates, the Bund alone has seen an FX-adjusted loss of 5.6% since April 30 alone. So imagine how investors in other less-than perfect Sovereign bonds have fared over the past month: in addition to seeing massive capital losses, bailout notwithstanding, they now have to contend with FXlosses as well. And now that there are disclosures that either Germans or French politicians could openly pull the plug on the euro, just who will be willing to invest USD to buy EUR-denominated securities. We are confident the ECB is fully aware of the sudden drought of foreign investors for European sovereigns, which is why we believe the full and outright monetization announcement is at most days away.
We are trying to get to the bottom of the sudden weakness in Goldman, but hearing it has to do with the Barclays regulatory call which is ongoing. If readers have more info, please share.
After reading a Zero Hedge article on crude oil futures earlier today I was motivated to write something on the topic. I have been railing against the securitization of the oil futures market for some time. It’s nice to see someone else sharing those sentiments. Below are some notes I jotted down after reading the article.
I do have to agree that for 14-15 months, almost without interruption now, and since August, 2007, more generally, that the Nymex crude oil contract has too often been used as a surrogate for the economy, the DJIA or currencies, most notably the euro. However, last week’s sharp decline may have severed the relationships, at least temporarily. - Peter Beutel, Cameron Hanover
Bloomberg reports: "Goldman Sachs Group Inc., the securities firm that makes about 10 percent of its revenue from trades on its own behalf, is ceasing proprietary trading in one type of structured debt, according to a person close to the firm." A stunning development, which could be a watershed event for the banks to-date relentless refusal to budge on the issue of prop trading, better known as taxpayer/discount window backstopped gambling. CLO prop today. All prop tomorrow?
Payback is sweet. One of Obama's favorite Chicago banks, Shorebank, is on the verge of failure after a bank consortium of Goldman, JPMorgan, BofA and Citi is 25 million "short" of providing the needed rescue funding, according to Fox Business' Charle Gasparino. As Charlie reports, the consortium has secured commitments of only $100 million so far, and it is unclear if they will provide even another penny, despite the administration's explicit demands that the bank be "supported." Of course, to the abovementioned banks $25 million is less than they spend on strip clubs per month, so that this amount could be a gating issue is nothing but a political statement. As Charlie points out: “As of now Shorebank will not get bailed out. The consortium has not agreed to a final number. They are about $25 million short of the $125 million needed. From what I understand, the consortium of Goldman Sachs, JP Morgan,Citigroup , Bank of America do not want to give any more money. The banks tell me there is a degree of political pressure to give money but I think at this point they are tapped out. They just had the meeting an hour ago, they had $100 million raised, they are $25 million short. And what they are telling me is they are not giving any more money.” Now that bailouts are a political decision, you better have your money in a bank that is liked by the Chief Executive: more fromGasparino "But I will tell you this, the banks themselves are telling me that there is a degree of political pressure being applied by the Obama administration to bail this out…so we could get a last minute bailout…This is a very politically connected bank.” After the government has provided the banks with $25 trillion, the banks have a problem with returning the favor with the same number ex-six zeroes.
A comparison of the intraday cumulative TICK and the S&P 500 indicates that even with repeated stick saves of the S&P around 1,125, the behind the scenes truth is that the selling is actually persistently ongoing and in fact intensifying throughout the day. Cumulative TICK is now at day lows after rolling over without slowing, particularly during times when the index allegedly bounced as the PPT, algos, or Central Bank buyers of currencies stepped in to prevent a May 6-like rout. Our advice, as always, is to stay away from this broken casino, as we are confident that the reality of the market is about to catch up with the market value indicators.
On a variety of Senatorial hearing, Jon Kyl was a very vocal opponent of the Fed and the secrecy embedded in the system. Which is why we were pretty amused, if not surprised, by his recent vote against the Vitter amendment. Here is his explanation. We hope you buy it more than us. We also hope you enjoy this the next time Mr. Kyl theatrically crucifies Bernanke for daring to operate blatantly on behalf of bankers, but at least without a shade of hypocrisy. "The second amendment was offered by Senator David Vitter and largely tracked the original version of the amendment that Senator Sanders had offered. It would have permitted the GAO to probe the Fed's monetary deliberations, and it was rejected on a lopsided vote of 37 to 62. I voted against it. In addition to the concern noted above about injecting political considerations into monetary policy decision-making, I am concerned that a GAO audit of the Fed's open market operations could end up costing taxpayers billions by giving investors a road map to the Fed's trading strategies and the securities it intends to buy. Armed with information about the securities the Fed intends to buy (that is, information gleaned from an audit), investors could acquire the securities and then sell them to the Fed at a premium."