Archive - May 6, 2010

We are in the third gold war since the Second World War – the US (and other western countries/institutions, notably the IMF) lost the first one in the late-1960s to the French and the second one in the late-1970s to the Arab nations. In the report, I’ve used declassified documents from the US State Department to show how on those occasions the US authorities believed they could
defy economic gravity right up until the moment when they were overtaken by events, how they falsified economic data to support the dollar and how they negotiated secret deals to stop other governments buying gold. Food for thought I think.

Finally what we have been saying for weeks is starting to filter through to the broader population and even the politicians... Too bad Americans are too apathetic to even pretend to care that their money is being sued to fund the continued and massively mismarked existence of a few French, German and UK banks. Then again, with American Idol hitting its lowest ratings since 2002, a revolution may just be what the doctor ordered.

Barely did we have time to read the previous bearish note on the EURUSD, that we just got this latest piece from the masters of the universe: "Inverse-EURUSD overlaid with 10-year Eurozone-Periphery/-Core Spreadbasket– Continues to imply much lower levels for EURUSD" The euro will be lucky to hold 1.2700 today. 1.2400 target within a week. Some other vol pair related observations: "1-year EURUSD/USDJPY implied vol. spread– EURUSD vol. looks set to rise significantly further versus USDJPY - In the current environment it would seem reasonable to assume higher EURUSD vol. would be associated with lower-EURUSD"

Yesterday we pointed out that France was a global top three derisker in sovereign CDS as traders have shifted their worries from the periphery to the core. We have long discussed that the reason for this is that France, not Germany, has the greatest exposure to Greece and the PIIGS. Below is an RT clip in which Hugh Hendry confirms just this: according to the Ecclectica head man, a mark to realistic market of Greek debt would wipe out E35 billion in French bank capital, "and it is questionable whether the French banking system would take such a hit." Hendry's solution, as has been the case from the solution, is for Greece to leave the euro, and points out that due to FX inflexibility, there will be no tourists in Greece this year as everything becomes painfully expensive, not in Drachmas but in Euros. We would add that the burning parliament is probably not that much of a tourist draw either. In typical fashion, Hugh dismembers Angela Merkel's hypocrisy: "When the truth becomes unpalatable, what is the truth. Angela Merkel, when we say she is being generous, there is nothing generous about spending taxpayers' money in another country, that is not generosity, that is merely trying to salvage a bankrupt set of political ideology. So to blame the messenger when it's the truth that hurts, I find that inexcusable." Just as Hugh's huge bet against the euro has proven to be a terrific success, we are confident that he will be correct about the end of the EMU quite soon as well. And as the moderator adds "Shame on you, Europe, for needing the IMF to bail you out. Europe is like an African nation." Amen.

Moody's notes that the banking systems of Portugal, Spain, Italy as well as Ireland and the UK face different challenges of different magnitudes; warns that contagion risk could dilute these differences and impose very real, common threats on all of them. Rating agency is particularly worried about contagion spread to Italy.

The Eur collapse continues and what has until now be an orderly and persistent move is threatening to become erratic and disorderly ; panic is starting to set in. Today we have the ecb press conference and the market will be focused on every word of Trichet's address. We have seen mainly buying interest this morning as people do the prudent thing and take some profit in case Trichet is able to pull a rabbit out of his hat. But I am at a loss to think what he can really deliver that will assuage the markets growing concerns. I think there is a real likelihood that the market will again be disappointed and the euro will accelerate lower once he stops talking. We may be entering a new more violent phase of the sell off with bigger whips in both directions but with more risk still to the downside. We are sticking with a core short position and will look to add quickly should Trichet offer nothing new or on a bounce back to 1.2860-70 (unless a genuine rabbit is forthcoming) and roll down our stop to 1.30. Technicians have important support at 1.2740 and a close below this level should open a test of last years 1.2457 low.

RANsquawk European Morning Briefing - Stocks, Bonds, FX 06/05/10

Today Spain will test the capital markets with a downsized E2-3 billion 5 year issue (from E4.5 billion) carrying a 3% coupon. The yield on the note is expected to come higher than existing comparable maturities which are trading at 3.3%, thus pricing will likely be in north of 3.5%. At the end of March, Greece managed to raise 5 year bonds at 2.8%: there are no concerns that Greece will be able to repeat that result, much to the negative P&L of all those who bought into the last bond issue. "Spain is firmly in the eye of the storm, and the Spanish treasury cannot allow this sale to fail," said Jose Garcia Zarate at consultancy 4Cast. Yet as we showed yesterday, traders are not so worried about Spain, whom they have pretty much written off now, as the UK, France and Germany. In the meantime, the PIIGS fire is raging: Greek 3 Years just hit 15%, as its CDS trades 30 bps wider since the NY close, now at 877 bps. And the eye of the hurricane is moving west: Portugal CDS hit another high of 456 bps today, implying a 33% chance of a sovereign default. Lastly, the euro is plunging and after hitting an overnight support in the low 1.27 area, has bounced slightly. Spain will need all the help it can get. In the very least, today will be a test whether the recent rumor spread by a prominent nationalized and GGB heavy UK bank, that Spain has requested a E280 billion rescue package, was true or not.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 06/05/10

Bear's execs say, "We didn't do it. It's not our fault. Evil speculators conspired against us, and investors irrationally made a run on us." They have no clue and they sound pathetic. Perhaps they should have read two little books.

European finance ministers must be depressed that their $140 billion bailout of Greece only bought them only 24 hours of grace in the eyes of investors. The global nature of the sell off across all asset classes came as no surprise. The withdrawal of the Fed at the beginning of the quarter as the sole purchaser of real estate debt in the market, led not to a crash in bond prices, but a huge six point rally. Where am I going to buy the dip first? Shanghai.