According to the ECB, deposit facility usage - an indicator of capital flight in the European banking system expressed in euros not dollars, just hit the highest since June 2010, over €300 billion for the first time in 18 months, rising from €297 billion to €304 billion overnight. On its face, this is not a good indication, with the only saving grace being that this was potentially before the market open on November 30, before the central bank announcement. Marginal lending, or the ECB's discount window, also rose from €2.7 billion to €4.6 billion, the highest since October 18. Needless to say tomorrow's deposit facility update will be critical because unless there is a major drop in usage, it will confirm that in addition to a USD-funding shortage which should have been ameliorated even if very briefly, other EUR-based risks are being observed by Europe's banks, who better than anyone know what the interbank system risks are, and the Fed's USD liquidity injection will have failed to achieve anything except to ramp risk higher for a day or two.
As the market digests the European bailout and prepapres to plunge back into the abyss of the unknown, we get ISM, jobless claims, construction spending and vehicle sales
- Lower than expected manufacturing PMI data from China prompted concerns surrounding sustainability of the Chinese growth, and raised hopes for further monetary easing measures by the PBOC soon
- Successful bond auctions from Spain and France resulted in significant tightening of the Spanish/German and French/German 10-year government bond yield spreads with heavy buying from domestic accounts
- Market talk of the ECB buying in Italian and Spanish government debt via SMP
- Gilt futures dropped more than 50 ticks following a lackluster Gilt auction from the UK’s DMO
Gold ended November with a 1.9% gain in US dollar terms, the seventh month of the dollar falling against gold so far this year. The euro fell 5% against gold in November. The British pound fell nearly 4% against gold. The Aussie dollar fell nearly 6.5% and the South African rand by 5%. Thus, gold again protected investors and savers internationally from the global financial crisis. Gold is now more than 20% higher in dollars and 18% higher in euros and pounds in 2011. It is only 9% below the record nominal high of $1,920/oz reached in September and given the degree of systemic and monetary risk in the world this price level will likely again be reached by early 2012. Global ETF holdings of gold topped 70 million oz for a second day in a row, marking not only a new record high, but meaning that ETF holdings of gold are double those held by the Chinese central bank and are just a few metric tonnes behind those of France, the world's 5th largest official holder of bullion (2,435T).
- Fed Dollar-funding Cut Shows Limits of Action (Bloomberg)
- Global euphoria runs out of steam (AP)
- Chinese Manufacturing Activity Slows (FT)
- Draghi calls for eurozone ‘compact’ (Dow Jones)
- Close Ties Facilitated Coordinated Moves (Hilsenrath)
- Congress Push to Relax US Securities Laws (FT)
- ECB hints at action if euro zone adopts fiscal pact (Reuters)
- Japan to Compile Fourth Extra Budget (Bloomberg)
China cut rates yesterday potentially as part of a globally co-ordinated central bank plan or co-incidentally because their economy was losing steam or both. I would bet there was communication and that may have impacted timing but with the weak PMI number China did what was necessary for China - as they always do. Much was made of the globally co-ordinated rate cut on USD swap lines. Any swap requires a minimum of 2 counter parties and since this plan had been globally "re-instated" or "re-affirmed" in September the market may be making too big of a deal of this global coordination. This was largely cutting the cost of an existing series of global swap lines by 50 bps. It did not change the liquidity available to banks, just the cost. Currently it seems that only $2.4 billion is being used. It is not a bad step but no new liquidity is added (through I work under the assumption they will increase availability if needed) and it is impossible to cut unilaterally and would be pointless since as recently as September there was global agreement. Rumors that a bank was on the verge of failure seems overdone and changing this fee by 50 bps does nothing for that. Sadly, since the Fed is both independent and unaccountable there may be additional activities behind the scenes that we don't know about that may be supporting strong price action. More people feel forced to follow market moves based on the assumption that some people may actually KNOW something about future policy moves or existing but undisclosed actions. It is a rational reaction but does tend to exaggerate the moves and lead to quick reversals when no one actually KNEW anything.
French Yields Fall By Record, Other Sovereign Spreads Collapse Following Successful French, Spanish AuctionsSubmitted by Tyler Durden on 12/01/2011 - 08:09
The first, if very transitory, fruits of a US-taxpayer (insufficient) bailout of Europe bear fruit. This morning Italy’s 10-year yield has dropped below the psychological 7% barrier while the yield of Spain’s 10 year bonds is testing a break below 6% after strong auction results in France and Spain. As noted by Bloomberg, "easing funding concerns is also buoying core bonds as French yields drop the most on record while spreads on Austrian, Belgium bonds over bunds narrow significantly to break/test key 50- and 100-DMA supports." Naturally the safe-havens, Bunds and Gilts, slump, which makes the probability of another failed German auction remote as primary market demand will rise at lower prices. Specifically, in France the 10 year yield dropped -25bps to 3.15% the biggest decline since at least 1990; lowest since Nov. 9. France today sold €1.571 billion bonds due Oct. 2021, Average yield 3.18% vs prev 3.22% and a Bid/cover 3.05 vs prev 2.24. France also sold: €595 million bonds due Oct. 2017, at an average yield 2.42% and a bid/cover 4.4; €1.1 billion bonds due April 2026 at average yield 3.65% and bid/cover 3.24; €1.08b bonds due April 2041 at average yield 3.94% and Bid/cover 2.26. Elsewhere Spain also performed quite well: Spain met its maximum auction target today to sell EU3.75b in 3 bonds, fetching higher bid/cover ratios for all of them: Spain sold EU1.2b 3-yr bond due April 2015 bonds at an average yield 5.19% vs prev 4.27% and a bid/cover ratio 2.7 vs prev 1.66; also sold were €1.15 billion 4-yr bond due January 2016, an average yield 5.276% vs prev 5.187% and aid/cover ratio 2.83 vs prev 2.7, and €1.4b 5-yr bond due January 2017 average yield 5.54% vs prev 4.85% - a bid/cover ratio 2.69 vs prev 1.62. Yet in terms of outright liquidity, the primary beneficiary were USD-factors: 3-month Euribor/OIS spread continues to rise today to reach highest levels since March 2009 despite the concerted central bank actions on dollar swap funding, specifically the 3-mo Euribor/OIS +1 bp to 1.0 from 0.99 yesterday, highest since March 2009. However, funding strains ease further in cross-currency basis swaps. 3-mo EUR/USD cross currency basis swap +10.63bps to -120.63bps, least since Nov. 15.
First Black Friday, and now the Modern Finance Farce Company Surprise Twist Ending takes on the global bailout...
The United States is quickly becoming a post industrial neo-3rd-world country. Partly as a consequence of worsening unemployment and lack of economic opportunity, falling real wages and household incomes, growing poverty and increasing concentration of wealth, the U.S. government faces a historic fiscal crisis. Dominant corporate influence over the U.S. government, particularly by large banks, weakening rule of law at the federal level and destructive tax policies are compounding the economic problems facing the United States. Barring fundamental reforms or a hyperinflationary collapse of the U.S. dollar (due to the fiscal problems of the U.S. government), the deterioration of the U.S. economy will continue and accelerate. As the U.S. economy continues its decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate and the 3rd world status of the United States will become apparent.
In his latest letter to LPs, Kyle Bass of Hayman Capital Management, offers his tell-tale clarity on what may lie ahead for Europe and Japan. With his over-arching thesis of debt saturation becoming more plain to see around every corner, Bass bundles the simple (and somewhat unarguable) facts of quantitative analysis with a qualitative perspective on the cruel self-deception that we all see and read every day about Europe.
Whether it is Kahneman's "availability heuristic" (wherein participants assess the probability of an event based on whether relevant examples are cognitively "available"), the Pavlovian pro-cyclicality of thought, or the extraordinary delusions of groupthink, investors in today’s sovereign debt markets can't seem to envision the consequences of a default.
His Japanese scenario is no less convicted, as we have discussed a number of times, with the accelerant of this debt-bomb being the very-same European debacle and his time-frame for this is set to begin in the next few months.
UPDATE: HSBC China Manufacturing PMI prints at 47.7, deteriorating at fastest rate (and lowest level) in 32 Months
Suddenly this morning's RRR cut doesn't feel quite so much like China doing Europe a favor. Chinese Manufacturing PMI printed at a lower-than-expectations 49, signaling its first contraction (<50) since Feb 2009. As if it was really ever so, as clearly concerns were growing since we had the Flash PMIs earlier in the month. Across the board, sub-indices were weak with New Orders and New Export Orders falling significantly as the latter remains below 50 and Inventories rose significantly. Notably New Export Orders have now fallen the most over two months since Dec 2008.
If anyone is still confused by what has transpired today, here is Peter Schiff explaining in simple words, why what happened "may be one of the most important economic events of the year" and what to do next: "Today’s unprecedented announcement by the world’s most powerful central banks was a loud and clear bell ringing to buy precious metals. The move, disguised as an attempt to help the fragile state of the global economy, is in reality a move to prop up failing banks in Europe and the US. By reducing interest rates paid for dollar swaps, central bankers are in effect increasing the quantity of global dollars in circulation. The result? The dollar will weaken, inflation will rise, and gold will soar. Gold was up more than $30 today, and the dollar got crushed. I urge you to take 7 minutes to watch the video I recorded exclusively for my subscribers a few hours ago. It explains, in plain language, what happened today – and what is the likely outcome for your portfolio. This may be one of the most important economic events of the year." And pardon Schiff's self-promotional piece at the end, but the truth is that he is essentially correct about what the actions means from a big picture perspective. Furthermore, as Goldman made all too clear, this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads. Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the verge of viability (and beyond) in trying.
Goldman On Today's Coordinated Central Bank Bailout: "It Isn’t Enough To Save Anyone Or Solve Averything" And "Why Now?"Submitted by Tyler Durden on 11/30/2011 - 20:16
Naturally, if there was one party that would be disappointed by today's action, it would be Goldman Sachs: on one hand because it is nowhere near enough to actually fix anything, and on the other because it delayed the moment when the 2-3 European banks which we have been saying for over a week would keel over and die leaving a power vacuum for Goldman to fill, has just been delayed. As a result, Goldman dissatisfied note makes more than enough sense: "Up, up, and away for stocks after the coordinated ease this morning. USD funding just got cheaper, which is of course a good thing. But the difference between OIS + 50 and OIS + 100 isn’t enough to save anyone or solve everything. It’s the symbolism of policy-makers again acting in concert that I find most encouraging." But, and there is always a but: "Although there is the obvious counter: why act now – is there something lurking around the corner? Those are worries for tomorrow though." Indeed, and when the worries resurface, as they will, especially following the resumption in European record yielding auctions, which incidentally the Fed's action does nothing to fix, following France and Spain bond auctions. And who knows what else. Oh yes, Goldman just cut its GDP forecast for Europe from +0.1% to -0.8%: hello, recession, the very same catalyst which S&P said a month ago will be sufficient for it to downgrade France. As usual, Egan-Jones was way ahead of the crowd.
And now it is time for our favorite monthly chart-only newsletter, The PunchLine by Abe Gulkowitz, who unlike the momentum chasing crowd which has an attention span measured in inverse significant digits, and has a brokerage account (but endless monopoly money) that is even smaller courtesy of always being on the receiving end of a market which actually needs commission payments on both sides of those candle charts, sees well behind the headlines designed to sucker in the feeble minded twitter-traders, and presents it all with gorgeous, chartific clarity. And the only thing better than the insight of his hand-picked charts is the focus of his narrative, which speaks volumes without actually speaking volumes: "European banks are dumping government debt, deposits are draining from south European banks and a looming recession is aggravating the pain, fuelling doubts about the survival of the single currency in the European zone. Between the bookends of economic data points, rating agency actions, and political developments - - market gyrations are seriously affected by policy directions. A key consideration for any 2012 forecast is the impact of public policy on risk premiums and business confidence. Persistent fears of major policy missteps could come to a head at any time regarding the U.S. fiscal nightmare and Europe’s responses to the sovereign and banking crisis. One now needs to believe that the policy environment – both in the US and Europe – could serve as significant headwinds to growth in 2012."