Archive - Jun 2010

Brown Brothers joins Meredith Whitney, who earlier noted that the collapse of state and local government funding is one of her primary concerns, in warning that the "The similarities between Europe and the US, in terms of debt and deficit issues, are much greater than the different political, social and regulatory regimes may suggest. While investors are well acquainted with the US federal deficit, they may be only vaguely aware of the increasingly difficult strait of many US states and local governments." BBH's Marc Chandler, Head of Currency Strategy, presents his view on the dramatic surge in regional deficits, and concludes that Whitney's words of caution need to be seriously considered: "The essay does warn that the cutbacks by state and local governments will retard the US economic recovery for the next year or two. These cuts have blunted the impact of increased federal stimulus. Going forward, perhaps after the November Congressional elections, the increase in federal spending will also slow, reducing its offset of state and local budget cuts. The US may face a greater fiscal drag than many observers suspect due to the impact of state and local government fiscal conditions. Investors would do well to consider the possible impact of similar fiscal conditions in European regions and cities." Yet Chandler's most relevant observation is that even as the domestic implications of this topic have been largely underreported, what is happening in Europe is likely far worse, and even more under the radar.

Someone needs to up the Kool Aid consumption of Bank of Canada staffers:

• 21 Jun 2010 15:29 BST *DJ BOC: Overall Level Of Risk To Financial Stability Has Increased
• 21 Jun 2010 15:29 BST *DJ BOC: Risk Of Another Period Of Severe Stress In Financial Markets, Global Banking Sector
• 21 Jun 2010 15:29 BST *DJ BOC: Steps Taken In Europe In May Fall Short Of Lasting Solution To Fiscal Woes
• 21 Jun 2010 15:29 BST *DJ BOC: Countries Need Realistic Plans To Achieve Sustainable Fiscal Positions
• 21 Jun 2010 15:29 BST *DJ BOC: Europe Fiscal Woes A Risk To Timely Resolution Of Global Imbalances
• 21 Jun 2010 15:29 BST *DJ BOC: More Flexible Exchange Key In Resolving Global Imbalances
• 21 Jun 2010 15:29 BST *DJ BOC: Sees "Transitional Challenges" Form Implementation Of Bank Capital Rules
• 21 Jun 2010 15:29 BST *DJ BOC: Downside Risk To Canada Financial System From Global Downturn Has Risen

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/06/10

We pointed out previously that the one certain mid- to long-term impact of China's revaluation decision, aside from stimulating the US manufacturing export economy (don't laugh), will be to trim Chinese interest for bonds. This is due to a direct effect of fewer Chinese dollars being recycled into USTs now that less USD reserves will be accumulated, but also due to an indirect effect of stimulating demand for risky assets, pushing USTs off the plate of investors. For a much more in depth perspective, we provide the views of MS Rates strategists Jim Caron and Igor Cashyn.

The ECB has announced its weekly Term Deposit Auction to be held tomorrow will be for an incremental €4 billion, bringing the total variable tender to €51 billion, compared to last week's €47 billion. This simply means that as of Monday, €51 billion in sovereign debt has been monetized by the central bank. As always, this is a liquidity circle jerk, in which the auctioned deposits are eligible collateral for any other ECB credit operations, thereby not having any liquidity-reducing impact whatsoever, even as more Spanish, Portuguese and Greek bonds are purchased by JCT.

The bulls may be ready to challenge resistance levels, thanks to China’s loosening of the yuan peg. The napkins see S&P first resistance at 1123/1125 with a fallback at 1130/1134. Support looks like 1110/1112 and then 1104/1106. Over the last seven years, the week following the June Expiration has seen stocks move lower. Given the look of the pre-opening futures, the bears will have a lot of wood to chop. - Art Cashin

The daily spill estimate has been ratcheted up from 1,000 barrels a day to 35,000, and now 60,000. Fitch downgraded its debt a stunning six notches from AA to BBB. Obama’s oval office salvo was directly aimed at the firm. $20 billion has been forced into an escrow account to cover damages. And now lightning has struck their crude recovery ship! Is it possible that the capitulation sell off in BP stock is at hand? (BP), (RIG).

• China turns tables on AAA debt time bomb nations (Bloomberg)
• Gold at new record high after Saudi reserves double (FT)
• Germany and France examine two-tier euro (Telegraph)
• So that's why investors can't think for themselves (WSJ)
• Failed AAA-deal rated Rembrandt spurs outcry (Bloomberg)
• Medvedev sees chance for new world order (FT)
• Amid the crisis, Wall Street touted BP stock (Reuters)
• Gold reclaims its currency status as the global economy unravels (Telegraph)

There was plenty to be happy about if you are a Gold bull this weekend.

The stalking horse behind last week’s strength showed its hand in the gold markets. China made the announcement they'd be ending their peg to the dollar.

The Saudis revised their gold holdings up from 143 to 322 tons, a small (+125%) rounding error perhaps.

What's more, among the most read stories on Bloomberg was something from July 10 last year titled: Medvedev Shows Off Sample Coin of New ‘World Currency’ at G-8. The dollar barbarians are closing on the gates it would seem.

Last week, the IMF released a whitepaper of sorts discussing a new global currency. Most likely a red herring to get the conversation going at the upcoming G-20 meeting, but a sign of gathering momentum nonetheless.

Which brings us to the point. We think there is a greater chance than many that gold will be a factor in currency backing in the not too distant future.

The euro is now back to testing day lows (ignore the decoupling for the time being, total confusion reigns right now in the FX markets), not only after Meredith Whitney's very bearish remarks on the economy, but after a report by S&P that is increasing its assumption for private-sector loan losses in Spain from 4.4% to 5.5% between 2009 and 2011. Most notable is the increase in real estate loan losses by 50%, from 9.6% to 14.5%, while construction loan losses are now expected to generate 6.3% in losses compared to 5.1% before, over the same period. S&P's conclusion: "We expect to take some negative rating actions on Spanish banks as a result of these changes in assumptions." It is now time for major denials from the ECB/IMF/EC/WB/NKVD who will claim all is really wonderful.

• China kept Yuan's exchange rate unchanged against the dollar, after saying it was unhitching its de facto peg.
• Crude-oil futures inched closer to the $80/bbl in late Monday morning trading in Asia.
• Stocks, commodities, US futures rally as China gets Yuan off the USD peg.
• US corporate defaults have fallen to an annualized rate of barely 1% in 2010; future uncertain.
• Yuan climbs most in 18 months as China signals end to peg; Forwards jump.

Highlights from an interview by Meredith Whitney currently on CNBC (full interview to be posted later):

• A double dip in housing is a certainty
• State economies are plunging, and are $200 billion underwater, will lead to 2 million in state-level layoffs leading to a low-end impact; raising taxes at state level will impact the top-end
• Retail sales have been stronger only due to consumers not paying mortgages, retail sales have already topped as is
• Q2 bank results will finally catch up with accelerated mortgage foreclosures; charge-offs and delinquencies in credit cards are better due to mortgage non-payment cash flow going to other obligations, and this will soon top as well
• Structural employment issues in the US won't get better any time soon

What specifically is happening, and will happen to the CNY? Like many others, I went to bed last night thinking that how Beijing allowed the fix to move today would be key. In fact, it was unchanged, and since then spot has moved notably from 6.8275 down to 6.8055 last print. I am reminded, that truly technically, today’s fix reflects the previous days trading, so in this regard, where we close will determine tomorrow’s fix, and in some sense today’s fx was not relevant. Given that the PBOC statement said that the daily trading band will not be widened ( beyond the 0.5pct which it has never experienced), this means the limit for today is 6.7930 I believe. Of course, it also means if this is all true, then we could have in theory a maximum 2.5pct rise of the CNY against the Dollar this week. I guess if that happened, and you times it by 52 even Congress would be happy, a 130pct move….I doubt that Mr. Schumer…… - Jim O'Neill, Goldman Sachs

Even as investors increasingly sniff at the possibility of the CNY becoming the new reserve currency, buying up the Yuan with both hands, resulting in a provisional close of 6.7970, the highest since the 2005 revaluation, and even as algos cheer this move in the futures market, gold hits another all time record of $1,263. For full implications of what buying both stocks and gold at the same time, we refer you to the previously published essay by Don Coxe, but in a nutshell, it is a rather bad omen, when stock appreciation is being hedged for complete systemic failure. In the meantime, China's UST holdings just depreciated by a few billion in FX adjusted terms, and the end of the USD accumulation, as well as its negative trade balance, means that the country will now be a second-rate player in the Treasury market. We really hope the frontrunning algos have it right this time.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/06/10