Archive - Jun 23, 2010

Goldmans' Dominic Wilson,director of global macro & markets research, is out with a note which indicates a material shift in the firm's sentiment on risk. In a nutshell, the firm, unwilling to fight the macro double dip headwinds is prepared to concede that the American stimulus/reflation experiment has failed, and that investors should instead focus on underperforming markets (O'Neill's N-11 comes to mind): "Our own forecasts point to one other emerging theme. We see more risks of slowing in the economy where people have seemed most comfortable (US) and expect less slowing in places where people are more worried (Europe, China). If our forecasts are right, US domestic outperformance could ultimately reverse more." Also amusing is the attempt to reconcile a slightly bullish residual view on risk assets with the firm's 1.15 target on the EURUSD which would imply an S&P in the triple digit range. In summary - get out of America if you are a Goldman client, or, using the whole re-reverse psychology trick, now is the time to short the BRICs and Europe (even more), and buy the US. As usual with a Goldman report, more questions than answers, none more so than the original one - has recent market performance been a product of an actual rally, or nothing but massive squeeze?

New home join the existing home sales double dip brigade, and plunge by an unprecedented 32.7%, nearly double the expected -18.7, compared to a previous reading of 14.7%. The government succeeded in making a mockery of this data series with all its ridiculous stimuli, and now we are officially in a housing double dip absent another massive stimulus bill. The median sales price of new houses sold in May 2010 was $200,900, lowest since December 2003, and a 9.6% drop YoY.

An update on the GoM headed Invest93L from Jeff Masters' blog at wunderground.com: "NHC is giving 93L a 40% chance of developing into a tropical depression by Thursday morning, which is a reasonable forecast. Given the storm's current lack of spin and relatively modest amount of heavy thunderstorms, the earliest I'd expect 93L to become a tropical depression would be Wednesday afternoon, with Thursday more likely. Wind shear is expected to be low, less than 10 knots, over the central and western Caribbean this week. Water temperatures will be warm, dry air absent, and the MJO favorable. I don't see any major impediments to the storm becoming a tropical depression by Thursday, and it is a bit of a surprise to me that the computer models have been reluctant to develop 93L. The GFS, NOGAPS, and UKMET models do not develop 93L, and the ECMWF model doesn't develop 93L until after it crosses the Yucatan Peninsula and enters the Gulf of Mexico in a about a week. The current (2am EDT) run of the GFDL model predicts 93L will be a weak tropical storm in the Gulf of Mexico in five days; its previous run had 93L as a major hurricane in the Gulf. Given all this model reluctance and the current disorganization of 93L, I give the storm a low (less than 20% chance) of becoming a hurricane in the Caribbean."

From Barclays: "Financial market conditions have deteriorated notably since 1Q10, evidenced by sharply wider credit spreads, cash-derivative basis, declines in structured finance indices, sharply higher volatility and a "flight-to-safety" trade in less risky assets. We believe this market dislocation, while certainly smaller than the dislocations seen in 2008 and early 2009, has impacted broker-dealer revenue generation in terms of client activity levels, trading revenue and investment banking results. Additionally, we believe that 2Q results will be more divergent across the Street, driven more by relative positioning for the moves this quarter." The key reasons for the Barclays cut: "The largest downward revisions are in lower core FICC (-40% seq to $4.49bn, -$1.18 EPS), lower core equities (-40% seq to $1.4bn, -$0.75 EPS), weaker investment banking (-37% seq to $743mm, -$0.39 EPS) and the inclusion of$650mm of UK bonus tax (-$0.90 EPS)." The Q2 financial earning season just got interesting.

Gold rallied Tuesday, recovering $7 from the washout on Monday. Gold continued its uptrend in Asian and European trading and is up about $3 of the day. Traders are keeping their ears to the ground ahead of options expiries tomorrow. The Federal Open Market Committee will announce any changes in interest rates this afternoon and while there is almost no chance of it moving interest rates the accompanying statements they release could influence market prices.

• Gold set for growing role as reserve asset (FT)
• Volcker rule under attack as lawmakers seeks loopholes (Bloomberg)
• Melbourne-based Sonray Capital collapsed at 11pm yesterday, freezing 3,000 clients (SMH)
• Yuan shift won't make stocks better buys, Mobius says (Bloomberg)
• Nato warns against McChrystal dismissal (FT)
• Blanche Lincoln intervenes for Arkansas bank (WSJ)
• Schumpeter 2.0 (American)
• You did a heckuva jov Mr Orszag (RCM)

Even as CDS spreads continue surging on solvency threats, FX markets seems comforted by the latest batch of drivel out of Moody's, which earlier reported that UK emergency budget is supportive of the country's AAA rating. GBP spikes immediately following the news, leading to a rise in all EUR pairs as well. Ironically all this isoccurring even as a new rumor of an imminent Fitch downgrade of France is making the rounds.

Ironically even with Greek CDS surging by 60 bps to 909 bps this morning, the biggest mover in percentage terms is not the bankrupt Mediterranean country but Europe's "stablest" one -  Germany, whose default risk has spiked by 9.19% according to MarkIt. Without splitting hairs, Europe is a sea of red this morning as the ugly specters of default and complete lack of credibility in the EU administration raise their ugly heads again.

Markit reporting that Greek Bund Spreads have suddenly exploded by 65 bps to 776, the highest since May 7, and inches away from the all time record of 900 bps, even as CDS blows out to over 900 bps. The reason quoted is that traders have cited forced index selling and the absence of central bank buying: have banks finally left Greece to dry? Or is it just that Greece is once again caught lying, pardon, having to issue a public retraction: apparently German Handelsblatt ran an interview with Greek finance minister George Papaconstantinou, in which the Greek was "misquoted."According to Market News: "Some of the headlines issued earlier Wednesday on the basis of an interview Greek Finance Minister Giorgos Papaconstantinou gave to German business daily Handelsblatt were based on an erroneous version of the interview placed by the paper on its website. Papaconstantinou did not say in the latest interview with Handelsblatt that Greece would get its deficit-to-GDP ratio below 3% by mid-2012; that and some other headlines were based on an older interview the paper accidentally published. In the actual interview, according to the print version of the newspaper, Papaconstantinou said, "Of course not," when asked if he expects his fiscally troubled country to go bankrupt." The credibility-deficient minister also noted: "The country will “absolutely” endure the crisis without
restructuring its debt, he vowed, since such a step “would exclude Greece for a long time from the financial markets." The punchline was the conclusion that Spain and Portugal are “in a much better position” than Greece. Which bring us to our next point - Portugal's 5 year auction which came in at 4.657%, almost a full percentage point worse compared to the last auction on May 26, which closed at an average yield of 3.70%. Portugal may be better, but at this rate of collapse it means absolutely nothing.

• 56% of 106 economists, analysts surveyed expect home prices to fall this year: Macromarkets LLC.
• Asian stocks fell Wednesday, with energy stocks among the biggest losers.
• Banks hit by £2B yearly levy in UK; France and Germany promise similar measures.
• Chinese steelmakers hit hard by govt saying it will scrap a tax rebate for exports.
• Oil firms, drill operators clash on who should pay for rigs idled by the recent offshore-drilling moratorium.
• Adobe Board grants authority to repurchase up to $1.6B in common stock by 2012.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 23/06/10