Archive - Jul 6, 2010

The biggest reason for the runup in the JPYAUD and its immediate secondary carry derivative, the stock market, was the earlier announcement out of the RBA claiming all is clear, there is no bubble in China, there is no bubble in OZ real estate, and all the other usual talking points one would expect out of a central bank whose future is inextricably linked to the endless commodity stocking in China. And indeed, one glance at the far more neutral indicator of the Baltic Dry index paints a far more dire picture: the BDIY plunged 4% overnight to 2,127, posting the longest consecutive decline in 6 years at 28 days. Despite the optimism from the conflicted money printers, those whose livelihood actually depends on a ceaseless influx of goods into China and broader commodity trading in general, are not nearly quite so happy, having seen a drop in their margins by almost 50% in just over a month.

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It is beginning to look like a big unwind in the markets. Perhaps ”rewind” is a more appropriate term.

I don’t often rely on technical analysis in my observations, but take note when my own short term opinion is lacking.

According to one technician we follow, GRI,: “ The drop under 122400 alerted for a bear turn and possible follow though down to the 1220-120560 zone.” Well, the guy was and is pretty good, so here we are… now what?

With regard to Gold appreciating during deflation. Generally speaking, it will sell-off if deflation is perceived as being under control. That being said, Gold competes with money as a store of value when deflation threatens to unravel into a default. Greece fallout would be a classic example of that. Gold is a reflection of fat tail risk, something we understand.

• Gloomy bond investors clash with upbeat stock managers (BusinessWeek)
• The IMF's "behind the scenes" bailout of Europe continues: Poland gets €20.4 billion (WSJ), Hungary to ask for €10-20 billion (Guardian), Ukraine - €15 billion (Ukraine Pravda)
• Obama decried, then used Bush drilling practices (WSJ)
• China awaits record AgBank IPO as books close (Reuters)
• Lula falters in bid to cut floating-rate debt as rates increase (Bloomberg)
• Paul Farrell: 12 deadly signs Wall Street's "conspiracy of weasels" killed Obama's reforms (MarketWatch)
• BP approaches funds to fend off takeover bids (Reuters), presumably just slightly more effectively than Lehman was 'approaching' Korean banks for last minute rescue

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 06/07/10

• Asian stocks rebound from one-month low on valuations; Treasuries advance.
• Aussie erases declines as RBA sees local economy growing, holds key rate.
• China says foreign reserves stable despite crisis, expresses confidence in future profits.
• China steel group accuses US lawmakers of protectionism.
• Investors fear rising risk of US regional defaults; cite difficulties in curbing pension and budget deficits.
• Just six of the world's stock markets are above their 2007 highs.
• Oil rises to near $73 in Asia as investors eye stocks, euro gains.
• Swiss banks seen hit by sharp drop in Q2 investment banking.

After last week the world saw a failed auction in the ECB's Fixed Term Operations which further spooked investors to pull away from an increasingly unstable Europe, the ECB seems to have come down with an iron fist on participating banks. With just 45 participating banks submitting bids for under €32 billion of the €55 billion on auction last week, or a 0.6 Bid To Cover, this week the bidding banks surged to 88, bidding a massive €87.4 billion for this week's €59 billion of Fixed Term Deposits intended to sterilize running Eurozone government bonds. The result was a bid to cover of 1.5x: at the current rate of €4 billion acquired each week, the ECB will be hard pressed to find marginal buyers in as little as 5 weeks when the running sterilization total passes €80 billion, and the average of all auctions is just over €82.5. This includes the outlier first auction. Yet not everything was good news: the weighted average allotment rate was 0.56% compared to last week's 0.54%. The marginal rate was 0.75% and the minimum rate was 0.29%, compared to last week's 1% and 0.25%. The ECB continues to pay up more and more to stimulate interest in having to do outright QE as opposed to this sterilization charade. And as confirmation that the liquidity is once again strained on average, the use of the ECB's deposit facility jumped from €232 billion to €246 billion overnight, even post the July 1 reset from €309 billion to €213 billion.