Archive - Jun 1, 2010

The euro is now back to the level it was when the ECB/SNB or Liberty 33 decided to crank the living daylight out of it around 12 hours ago. Time for another intervention. In other news, the half life of central bank market intermediation is now down to about half a day. There was a time when today's action would have kept the EURUSD propped up for days. Central banks are quickly becoming the laughingstock of the marketplace.

Something odd happened in the last half an hour of trading today: after the EURJPY had been keeping in intraday lockstep with stocks, which has been the case everyday for the past roughly 7 months now as ZH regulars know all too well, it appears this pair suffered massive decoupling failure once the market plunged on the BP news. This sudden plunge in stocks was not followed by the EURJPY pair, which in turn has opened a massive gap, with neither mutually dependent variable wishing to close. This is as close to a risk-free pick up of 70 bps as one exists: buy the ES and sell the EURJPY. Of course, this is all too glaringly obvious to the millions in SPARC stations operating thousands of gigaflops of correlation arbitrage market scans every millisecond. The fact that they have not closed the gap yet is very concerning, and points to some troubling undercurrents in the quant side of the market that we can not determine as of yet.

The BBC’s business editor Robert Peston said: “Given that BP is a core holding of most British pension funds, that’s tens of billions of pounds off the wealth of millions of British people saving for a pension.

After taking a brief break last week, the UK is once again firmly in the top sovereign deriskers: a place it has held with pride for almost two months now. Summing up cumulative net notional exposure on the UK based on just the last several weeks results in a net short exposure of well over $3 billion. Someone has now amassed a huge short on the British Isles. Curiously, the country that was actually the top derisker in the past week, with $420 million in net notional change, was Brazil, the same Brazil which today decided to not lift any offers in its 2021 Fixed Coupon Bond auction. Is this the next hotbed of instability? Look for at least one more week of aggressive derisking before confirming this trend. Turkey completes the trio of top deriskers, with $172 billion in CDS. Surely with the prior week ending on May 28, there is no way anyone could have hedged for an Israeli incursion of Turkish ships ahead of time. On the other end, some of the names that have been making the news recently, have seen some material rerisking, probably based on short positional unwinds: the top five were the US, Japan, Austria, France and China. After tonight's news out of Tokyo, look for Japan to take its rightful place at the top of this table.

Earlier, when observing the US AG disclosure of a civil and criminal investigation into BP plc, we noted in passing that BP's former Chairman, Peter Sutherland, who left the firm is a Chairman of Goldman Sachs International. Mr. Sutherland holds some other interesting titles, including a position on the Trilateral Commission, he was a chairman of the London School of Economics in 2008, he is a UN special representative for migration and development; he was the founding director-general of the World Trade Organisation, he had previously served as director general of GATT since July 1993 and was instrumental in concluding the Uruguay GATT Round Negotiations. Needless to say, we focused on the Goldman relationship. When digging deeper, we uncovered some amusing correlations, most notably between the BP plc sellside ratings by Goldman BP analyst Michelle della Vigna and the Goldman Sachs Asset Management holdings of BP plc. These are summarized on the attached chart. Yet for the ADHD challenged here is the punchline: GSAM dumped 40% of its holdings shortly after Goldman went from Neutral to Buy on the stock, and concurrent with fiduciary release by Peter Sutherland who left BP for good on January 1, 2010 to return to his full-time Goldman Sachs International Chairmanship duties.

From Bloomberg:

Ichiro Ozawa, secretary-general of
Japanese Prime Minister Yukio Hatoyama’s party, asked Hatoyama
to step down from his post, Yukio Ubukata, vice secretary-
general of the party said in a TV Asahi program today. Ubukata
said he expects both to resign before an upper house election
next month. Hatoyama refused to resign during a meeting of
senior party officials yesterday, Kyodo News reported.

As this action will likely lead to Yen weakness, and thus Euro strength, the most likely result will be a green close for the Nikkei, once again indicating that politically destabilizing fundamentals don't matter to C++.

Thanks to our very own printing-historian hybrid, Ben Bernanke, all people who wish to understand the direction in which the economy is headed are now experts on the Great Depression. Yet more and more pundits claim that the true historical analog to our current tumultuous times are not the days after 1929, but the period between 1919 and 1923 in post WW I Germany, also known as th Weimar Republic. Attached is a summary presentation on the three critical pathways that shaped Germany in the interregnum, and set it off on a course to the Second World War. These three avenues were i)the infamous hyperinflation and associated meltdown, which even now is causing so much consternation for German politicians dealing with a suddenly printer-happy ECB, ii) the French invasion of the Ruhr, and iii) and the failed Munich Beerhall Putsch. As many see QE as a precursor to i) above, and ii) is currently playing out in various parts of the world to a lesser or greater extent, the question remains when will some disgruntled citizen rise out of the disenfranchised masses and replicate the so far missing iii). With recent developments within the tea party movement, and with the administration's plunging popularity rating, it is not a far stretch to see all three core Weimar "factors" replicated in our own back yard with a 90 year delay.

The oil complex was weaker on Tuesday, as investors and traders just could not shake the growing fear that global economic growth may be slowing again. This is the real danger facing us right now; with the economy not strengthening, the assumption quickly turns to one of the economy worsening. Oil prices started out under selling pressure early Tuesday morning, with two Purchasing Managers Index (PMI) reports suggesting that Chinese growth had cooled. That, of course, had been the intention, all along, of Chinese banks, which had increased reserve requirements. Now that we actually see signs of cooling, though, the discussion has very quickly become one of wondering whether Chinese growth has ‘stalled.’

All-in-all a very weak close to a worrisome day (especially given month-start rebalancing hopes). Even the positive ECO prints were questionable on the basis of regime-change a month ago and anything more recent was showing a disappointing trajectory. Weakness was evident across all sectors and industries in credit but the stress in the ENRG space are clearly particularly notable (especially given their somewhat safe-haven status that may have hurt so many recently). Levels to consider in IG are 109.5bps as next support with 118.75bps as a decent short-term pivot. HY held above its pivot of 645bps today with next stop 587bps (large range due to recent vol) and a target of 702bps in the short-term.

Certainly the market was eager after a long weekend! I am not too sure what prompted EURUSD and the Dax to take off vertically at 9.30AM for US equities' open: was it the excitement about the German president's resignation, a 50bps widening in Italy's sovereign CDS in early trading, follow through rejoicing at Spain's latest downgrade Friday afternoon, or the excellent news out of the Middle East on Monday? There was a piece in Barron's this weekend entitled "time to buy" (I am eagerly waiting for the day they will print something entitled "time to sell") so maybe institutionals were waiting for US equities to open to start gunning. It doesn't make much sense in my opinion. The move came out of Europe most certainly given what we observed, but nobody confirmed our suspicion that it was central bank related. - Nic Lenoir

If anyone wants to know the reason why PHYS is once again trading at about a 10% premium to NAV all over again (yes mere days after the follow on offering) look no further than the US mint. Reuters reports that "The U.S. mint sold 190,000 1-ounce American Eagle gold coins in May, the largest number since January 1999, and the most in any month so far in 2010, according to a spokesman for the U.S. agency." At least the mint still has gold coins to satisfy record demand. Buyers in Europe unfortunately are not so lucky, which is why in Greece recently an oz of sold for as high as $1,700.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/06/10

Reuters reports that Israeli military aircraft came under anti-aircraft fire over Lebanon on Tuesday but there were no casualties, an Israeli security source said. The source said the fire was aimed at Israeli planes on reconnaissance flights over southern Lebanon. An Israeli military spokesman had no immediate comment.

And here come the mutual fund liquidations. Will the US start involuntary bankruptcy proceedings against the oil giant next? Where is Steve Rattner to find some Chapter 7/11 loopholes dammit. In the meantime, we hope you are long BP CDS. Also, is it about that time for someone to ask a few questions of BP former Chairman Peter Denis Sutherland (until January 2010), who just happens to be a non-executive director of Goldman Sachs, which incidentally sold just under 5 million shares, or nearly 40% of their BP stake, in the quarter ended March 31?

BP has now dropped 14% today alone, and who knows how many percent over the past month. Here are the biggest shareholder losers: #1: State Street, with 43.4 million shares has lost $260 million today, #2: Wellington, 34.8mm, $209 million, #3: Barrow Hanley, 16.7mm, $100mm; #4: Bank of America, 13.9mm, $83mm; and #5: State Farm, 13mm, $78 million. That's half a billion in losses for the top 5 holders today alone. And this list doesn't even include Anadarko, Transocean, or Halliburton. That's some serious dumb money margin calls coming at the end of trading today.