As part of the Federal Reserve's ongoing QE2 program, nearly each day, the NY Fed purchases US Treasury securities from a select group of primary dealers in what is called a permanent open market operation (POMO). Ordinarily, the auction begins at 10:16 am and ends at 11:00 am Eastern. While the exact mechanics of the operations are not public, the NY Times published an article about the team that manages them here, divulging a few details, which we subsequently analyzed here. Only minutes before yesterday's auction was scheduled to complete (while most, if not all, offers from the primarily dealers were presumably in), the European Union’s energy commissioner warned of ‘further catastrophic events’ at Japan’s stricken nuclear power plant. Shortly thereafter, the NY Fed cancelled the POMO--to our knowledge, an unprecedented act. According to Tyler Durden of Zero Hedge, Reuters reported the cancellation at 10:57 or 10:58 am. Using 5 Year Note futures as a proxy, we have calculated the difference in average price between what the NY Fed would have paid had it not cancelled the first auction versus what it actually ended up paying: $15.7 million ($12.1 million for the 5's and $3.6 million for the 7's). This amount was simply pocketed by the primary dealers and is now a liability of the Federal Reserve, and putatively the US taxpayer.
Markets mostly positive this morning with the exception of Asia, as the announcement of tomorrow’s G7 meeting on the financial situation in Japan soothed investors. Nuclear worries prevail in Japan and the Pacific. The G7 will meet tomorrow about Japan’s earthquake and yesterday’s record rise in the JPY. Discussions will likely revolve around JGB buying efforts and exchange rate intervention. BOJ typically targets the US/Europe overlap timeframe for intervention.
Tokyo Exodus Part 3: ATM Shutdowns, Power Outages Put Citizens On Edge, Gold Hoarded In Evacuation PreparationsSubmitted by Tyler Durden on 03/17/2011 - 07:35
The resilience of those living in the Japanese capital has been beyond admirable. After experiencing a record earthquake, hundreds of aftershocks, a historic tsunami, radioactive catastrophy 160 miles away and constant fears a northeasterly wind can bring in radioactive snow, and now unending rolling blackouts and ATM service interruptions, one has yet to hear about any mass exodus let alone coordinated complaining. That may all soon to change: Reuters reports that citizens are becoming increasingly restless and weary: " As authorities struggle to avert catastrophe at a crippled nuclear-power complex 240 km (150 miles) to the north, Tokyo faced a test of nerves almost a week after a massive earthquake and tsunami struck. Some residents are leaving, some are applying for passports or hoarding what they can -- from food to cash and gold, a safe haven during times of crisis. Premiums for gold bars rose to as much as $2 an ounce in Tokyo. At the second-floor office of the Tokyo Passport Centre in the city's Yurakucho district, queues snaked to the first floor." In other words the mass exodus we have been predicting for 3 days now, appears imminent: ""We don't know the reason but suddenly since yesterday we have had 1.5 times more people than usual coming to apply for a passport or to enquire about getting one," said Shigeaki Ohashi, an official at the passport centre." You really don't know the reason. Really?
Yesterday's speculation that a bank holiday was suggested and may be imposed in Japan due to unprecedented market swings and tens of trillions in support from the BOJ has just been confirmed. From Dow Jones: "The head of Japan's Upper House on Thursday suggested closing financial markets due to turmoil over the country's disasters, Kyodo News Service reported, in a stark example of how the crises have rattled some of Japan's prominent figures. "Markets are volatile--is such a situation acceptable?" Takeo Nishioka was quoted as telling a news conference. "Closing markets would be an option."" An option which alas would do nothing to mitigate fear, and courtesy of electronic futures markets around the world which can not be stopped save a global bank holiday, which would promptly be needed to "enforce" stability, not to mention FX or bond markets. Which is why expect to see ongoing swings of 10% in the Nikkei as everything is done to prevent further routs, up to an including the injection of further tens of trillion in taxpayer capital by the BOJ.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 17/03/11
With so much going on in the geopolitical/logical arena, it is easy to forget that there is an actual underlying economy which the Fed in its endless efforts to hike the Russell 2000 is doing all it can to destroy. Earlier we pointed out, when we looked at the PPI number, that the finished consumer food inflation index surged by the highest percentage in 37 years. This fact bears repeating. So we leave it to John Lohman to summarize briefly and succinctly as he is wont to do, how Americans will soon have no choice but to indeed eat their iPad 2 as soon as Benny unleashes QE3, which is now inevitable, or sooner.
Chernobyl was attempted to be covered up 100% at the beginning, even though eventually 600,000 people used as "liquidators" were eventually brought in to cleanup, the first 200,000 were exposed to heavy radiation. Some pictures (still in my mind from 1986) showed workers in normal street clothes shovelling radioactive materials into wheelbarrows. Tokyo Electric Power tried to cover up their problems at the start, the Prime Minister was reportedly extremely mad when they finally fessed up a little bit 3 hours after it had already become a real problem.
The endgame in Libya begins. The UN has agreed on a draft resolution to implement a no fly zone over Libya, which means the bombing may commence as soon as the vote passes later today. As to what Gaddafi's retaliation will be, and whether he will burn down the oil wells, which previously were in rebel hands, but have since fallen back into his control, we will surely find out in the next 24 hours. From AFP: "UN Security Council members agreed on a draft resolution that will impose a no-fly zone over Libya, diplomats in New York said. The decision will be brought up for a vote later in the day."
With the latest headline from Reuters that TEPCO workers are preparing to spray water at the spent fuel pool in Reactor 3 which has been overheating and spreading radioactive steam into the atmosphere, it is time to present the details of how dry casks and spent fuel are contained at Fukuchima. For that we go to a presentation by TEPCO from November 2010 titled "Integrity Inspection of Dry Storage Casks and Spent Fuels at Fukushima Daiichi Nuclear Power Station." It is no surprise that, as the introduction states, in Japan's 54 NPP, the strategy is "to store spent fuels safely until being reprocessed." Unfortunately for everyone involved, the existing spent fuel is store in a manner that is anything but "safe." Should these structures fail, the fallout that will enter the atmosphere will be unprecedented. So where and how are they stored? We find out, in detail, below.
Mizuho, the second-largest financial services company in Japan, has just locked out its customers from accessing their cash. Whether or not this is related to Zero Hedge reports from yesterday that the same bank is unable to complete ¥570 billion in transactions in unclear. What is clear is that we can only hope that those who need cash are calm and collected enough not to start a physical run on whatever bank deposit branches are open. From Reuters: "Mizuho Bank said on Thursday that all of its automatic teller machines (ATM) throughout Japan have stopped working. The bank did not immediately give a reason for the outage." One can only hope that the most recent ¥5 trillion injection was sufficient to keep the liquidity in the banking system online. Alas, should the Mizuho situation not be promptly fixed, we anticipate more injections from the BOJ before the night is out.
As was reported earlier, nuclear workers had been preparing to spray water on Reactor 3 whose spent-fuel bed is overheating and releasing radioactive steam. The idea is to refill as much of the bed and contain the release for as long as possible. NHK is following the operation in real time. Readers can follow along with the following live webcast.
It appears the earlier speculation by PTI that the BOJ would inject ¥13.8 Trillion in the market to preserve asset prices was a little premature. The BOJ just released the official number and it is a measly ¥5 trillion. And by measly we mean $63 billion. Add this to the ¥28 trillion already deployed by the BOJ and get an even more modest ¥33 billion, or roughly $420 billion, which is the cost to preserve the Nikkei from plunging for a 4th consecutive day. Yet even with this latest injection, the Nikkei is down almost 4% as of this writing. Should headline newsflow from Fukushima deteriorate, we anticipate that the full PTI number will be not only reach by surpassed very promptly as no amount of taxpayer capital will be deemed too great to preserve the wealth of those invested in Japanese stocks.
And from the relentless shock and awe happening abroad every single day, we briefly turn our attention to the total financial chaos domestically. Following the settlement of $67.6 billion in debt from last week's auctions, the Treasury managed to raise its dangerously low cash to a level that will give Tim Geithner pocket change for another week, or $99.5 billion. Alas, the cash buffer came at a price: total debt increased from $14.166 trillion to $14.238 trillion. As a reminder, the debt ceiling is $14.294 trillion, so on a pure basis there is a $56 billion buffer or less than one's week's worth of auctions. However since the debt actually subject to the limit is $52 billion less, there still is $109 billion in constitutional capacity. Add to that the $45 billion in SFP run offs over the next two week and Treasury has $150 billion or so in spending money left. As the deficit in the month of March is expected by Zero Hedge to be around $90 billion due to the deferred tax refund payments, we believe the money will last the US a month and a half, although once again depending on the daily burn rate, it may come much sooner as there is no book debt settlement until the week after next.
Goldman's John Noyce is the first FX technician with a proposed take on tonight's stunning developments. Keep in mind, he, like everyone else is in uncharted (pardon the pun) territory.
While everyone is staring in disbelief at the USDJPY, the real carry action is in the high yielding-YEN pairs, i.e., the development, high growing countries. And it's a massacre: ZARJPY, NZDJPY, AUDJPY - all are plunging far more than the USD. This is nothing short of a complete carry trade unwind. The implications: the cheapest recurring source of funding for risk assets - the Yen carry trade, is over. Those who managed to sell early on are lucky. The rest will get such an onslaught of margin calls tomorrow they may need to access the discount window (if Primary Dealers and the luckier banks). Many will be forced to sell assets to satisfy collateral requirements as ongoing sales of carry pairs push the Yen ever higher, and force ever more liquidity out of the market. And if the Yen carry trade is done, the question is when will the USD, which has also been a carry currency for some time, follow suit. And, once again, the most troubling observation is that the BOJ has not intervened. Our sinking feeling is that after pumping 50 trillion or so in money markets, the petty cash may be running quite low. In any case, ES opens in 2 minutes. Grab the popcorn now.