When the market briefly surged yesterday, following the cryptic note from the ECB that it would "provide liquidity within existing rules" we urged to ignore the kneejerk algorithmic exuberance (although with only algos left trading that was obviously self-defeating) which interpreted this as an indication the ECB would provide unconditional liquidity now and forever, and that this was hardly a bullish sign because "the last thing the ECB wants is to appear weak, and fold letting every other broke deadbeat country to demand the same equitable treatment and diluting Germany's political might." Today, Reuters has picked up on this coming out with its own analysis that the "The European Central Bank is prepared to cut off funding to Cyprus and let the Mediterranean island succumb to financial meltdown if it has to, confident it has unlimited firepower to protect the rest of the euro zone."
There is a lot of strangeness out there today - though that in itself is not so strange anymore. Spanish and Italian (and Portuguese) bond spreads rallied back to only +12bps on the week (but Spain's equity market is rolling over (down 2.5%) into the close. The S&P, Dow, and Nasdaq are all pushing unchanged on the week (ignoring Cyprus) but the Dow Transports is plunging (as FedEx is smashed lower on the biggest volume in 6 months). 2Y Swiss rates have dropped to their most negative in 2 months as safety is chased and we suspect the EUR strength (a 100 pip pop on yesterday's US close) is much more repatriation flows than risk-on confidence flows. US homebuilders are bid (+2.2% on the week) as hope springs eternal for high-beta chasing and a UK housing bailout. European credit markets have not recovered from Cyprus, while stocks... have.
The following Wall Street Journal article deserves to be read in its entirety...
Wearing the disguise of austerity, the euro has emerged as the gatekeeper of what is fast becoming a debtors’ prison.
Monetary union, the vehicle to bring about peace and prosperity, has become the lash that tears at the fabric of the poorest of nations. In the case of Cyprus, it could easily push that nation into the arms of Russia and abandonment of the euro - the exact opposite result of what the single currency was designed to do.
We can only hope that nobody will be shocked that the greatly overhyped Friday Cyprus bank reopen has been postponed.
- CYPRUS BANKS EXPECTED TO REMAIN CLOSED THROUGH END OF WEEK:CYBC
And since March 25, Monday, is another Cyprus bank holiday, "Greek Independence Day" (from whom? Certainly not the Troika), it means Cypriot banks will now remain closed at least until next Tuesday and likely far longer. In the meantime, since TV cameras can't show lines of people at their freindly neighborhood bank, which will have been closed for over a week, the propaganda machine will blast full bore how because the market is pushed higher by the Fed, any fears of bank runs can be forgotten. Actually instead of "can", replace with "must."
These photos illustrate the fundamentally arbitrary nature of fiat (paper) money. Why do we prefer the $100 greenback over the $100 trillion note issued by the Reserve Bank of Zimbabwe? The purchasing power of the Benjamin far exceeds the purchasing power of the $100 trillion bill. But the Benjamin is not immune to inflation; the dollar has lost about 95% of its 1900 purchasing power. If 95% of households are experiencing a loss of purchasing power and most of the new money and credit are flowing to the top 5%, you get asset bubbles, not demand-driven inflation. When 95% of the households are poorer in terms of purchasing power and financial wealth, where can demand-driven inflation arise in a global economy of massive manufacturing and labor over-capacity? The rise in costs within industries controlled by cartels (healthcare, higher education, defense, etc.) may look like demand-driven inflation, but are actually transfers of wealth and purchasing power from households to the government-protected cartels.
Oh wait... Nevermind
In the last two days, Spot Copper prices have broken below a three-year up-trend line and as Stone McCarthy notes, continue to extend their worrisome divergence from stocks, "this has been one of the primary pieces of evidence [they've] been using to make [their] case that the U.S. equity market is in the final stages of an impulsive rally off of the November '12 lows." They go on to note that, "Due to the fact that copper so closely measures the "pulse" of global economic activity, the tendency for copper to lead equities at market tops and bottoms is something we've covered many times in our writings over the years. This time around, unprecedented efforts to stimulate the domestic economy have left many uninformed investors blind to the weakness that is being experienced in what is seen an important engine of global growth, emerging markets." Every market cycle is different, with leading divergences by copper prices lasting anywhere from a couple of months to several years. The last time the divergence between copper prices and the S&P 500 was as long lasting as the current cycle was prior to the S&P's 2007 price top...
Yesterday, at the close, the most lucrative "strategist" in the history of FX, Goldman's Tom Stolper, moments after he was closed out on his EURGBP long reco with a 2.8% loss in one week, came out with a new note, refuting his previous long-held view that in the long run the EURUSD is going much higher, specifically saying the following: "Once again we face rapidly rising uncertainty with regards to the next leg in the never-ending Eurozone crisis. Many of the features, including the unpredictability of the next headline during the final days of a bailout negotiation have been seen before, many times in fact. Short EUR positioning is not stretched yet and the EUR still looks like the natural hedge in case the situation in Europe derails more systemically. Although EUR/$ implied volatility has risen, it remains at levels that are well below those seen in past periods of stress, so options are not prohibitively expensive. The Euro has already responded and this move has pushed us beyond the stop loss in our long EUR/GBP recommendation. Moreover very near-term risks are once again skewed to the downside and a move to EUR/$ 1.25 or even lower remains entirely possible depending on the progression of the negotiations and the flow of headlines. The lack of clear majorities in the Italian parliament and the inability of the Greek government to deliver the agreed reduction in public sector payrolls all add to tactical downside risks here." We promptly took the hint and the second the note hit the tape, we advised on what is the only logical trade.
We present readers with a pop quiz: the chart below show the ratio of total financial assets to host nation GDP. The tragic cases of Cyprus and Iceland are well-known, as per Reuters, and highlighted on the chart. We urge readers to guess what the supposedly very stable countries X and Y are on the chart, whose total financial system assets to GDP are approaching those of Cyprus, especially since depositors in their banking systems may be due for a very unpleasant surprise next if indeed Iceland and now Cyprus are the case studies.
As part of its 2013 budget, the UK announced something quite dramatic - a government-funded housing subsidy. The government will to commit GBP 3.5 billion of capital spending over the next three years to shared equity loans. The Loans will be up to 20% of the value of a new-build home. The government will also offer mortgage guarantee to lenders to help them provide more loans to people who can’t afford big deposits. Guarantees will be sufficient to support GBP130b of mortgages, Osborne says. "These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending,” Osborne says.
"Having faith in policymakers' ability to provide a perpetual put may yet prove to be a serious error; and, with interest rates stuck at zero, investors' ability to easily earn back losses remains severely impaired," is the not so subtle manner in which, Reuters reports, Brevan Howard, which manages $40 billion (and has never had a losing year) describes the current shambles of a market. "Tail risks, which have haunted the markets for the last five years, appear to have receded for the time being, but have by no means disappeared," they go on to say, noting that while policymakers promise to do "whatever it takes," investors betting that actions by policymakers will prop up financial markets indefinitely will face problems as "policy hyperactivity coupled with investor apathy could lead to significant and persistent price moves in multiple capital markets." But that's just an absolute return $40bn fund manager's view as opposed to a day-trading fast money trend masher or asset-gathering index-tracker.
In a follow-up to investigations over alleged wrongdoing surrounding a EUR285mm payout by the then French finance minister and now IMF head, The Telegraph reports, Christine Lagarde's Paris flat has been raided. The fresh (if you're an orange) faced IMF Chief, of course, denies any wrongdoing in the case of a huge 2008 compensation payment to businessman supporter of ex-President Sarkozy. On the bright side, at least there were no indiscretions in hotel rooms involved (yet it seems she is following in the strong footsteps of her predecessor DSK - how can we not trust these people?)
With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg. Banco Ciudad is the only bank left that trades in gold after Fernandez banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading. There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE. Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said. The cost of 100 grams of gold in Argentina as of last week was 36,646 pesos. In New York, the same amount based on the benchmark troy ounce (31 grams) sold for about $5,126. The bank multiplies that price by 0.95 to account for the lower quality of the gold to get a dollar price of $4,870. “Historically, gold has been seen as a store of value, so as long as options for doing that in Argentina are limited, people are going to keep buying it,” Banco Ciudad’s Leiza told Bloomberg.
Blackrocks's Larry Fink "doesn't really care" about Cyprus, "it's really not something of concern," he tells Bloomberg TV. While gesturing that he can't really discuss specifics as Blackrock is an adviser to Cyprus, he then goes to explain how European and US markets have it all wrong and that "It has some symbolism impact on Europe, but it’s not a really major economic issue." This dip is "just clients taking some chips off the table and reaping some gains from the huge rally," he goes on, dismissing the interviewer's question as nonsense, "this is temporary," and adding that he "is hyperbullish on the US economy," and that "global markets will be up 20% this year." However, what is most fun to watch is his arrogant dismissal of the interviewers question over US depositor fears, there are two reasons that is foolish, he notes "a) we have insurance, so that will not happen; [ZH: umm, so did Cyprus]; and b) we have always prioritized the liabilities [ZH: umm, except for GM]." So all good then, storm in a teacup. Carry On - though he has some stern words for the French and for the Russians.