Archive - Mar 16, 2011

The real price of crude oil really topped out at $120/barrel last week. Anyone in the oil industry will tell you that, considering only the true supply and demand for oil, the price should be about $70/barrel. All of the $23, or 27% increase in the price of oil in the last four weeks has been about fear. We are going to see $90/barrel before we see $150. Saudi Arabia is not Tunisia, Algeria, Egypt, or Libya. The Saudi’s had a lot more money to spread around to keep everyone loyal. This is why Al Qaida has made absolutely no inroads there for the past 10 years.

Earlier today Portugal had a deplorable bond auction of €1 billion in 12 month Bills, which saw the interest rate paid jump to nearly 4.5% even as general demand indicated by Bid to Cover plunge from 3.1 to 2.2. And even so, the bulk of the purchasing was from Asia, read China, as the last thing Japan needs now is to rescue a insolvent Portugal, according to a finance minister disclosure. From Reuters: "The 12-month T-bill yield rose to 4.331 percent from 4.057 percent in an auction on March 2, in line with analyst expectations of around 4.3 percent and with the secondary market. It also stayed below record levels seen in December." Alas, while Portugal purchased a few days of funding, it merely confirmed that it is now effectively bankrupt as paying 4.3% for 12 months worth of debt indicates the Rubicon has long been passed. Look for Portugal to be bailed out any minute. And in attempting to avoid the same fate, Belgium decided to "postpone" its own bond issuance of 6 year benchmark notes on concern investors will puke all over the paper. "Belgium delayed the sale of a new six-year benchmark bond on Tuesday due to market volatility caused by the Japan earthquake and explosions at a nuclear power station there. Plans to issue the new bond, maturing in June 2017, were announced on Monday, with Deutsche Bank, KBC Bank and Morgan Stanley mandated as joint bookrunners. The markets are so volatile at the moment and attention is concentrating on what is happening in Japan," debt agency chief Anne Leclerq told Reuters." Luckily unlike Portugal which has no choice but to raise debt at every opportunity, Belgium has the choice to await greener pastures. For now.

Is Japan's already fragile financial system about to realize that not even endless pumping of liquidity by the BOJ will do much when the entire country is on the brink? According to Kyodo, Mizuho is unable to complete ¥570 billion in transactions, as problems include money transfers caused by a "system glitch." Si ATMs now, shadow banking tomorrow? The last thing an already stricken Japan needs right now is to remove cash access to its citizens. And while we await more information, we can't help but wonder just how lucky the country's financial system has been so far in preventing a wholesale freeze.

The Nikkei 225 finally saw a rebound yesterday, moving up 5.7% after its biggest two day fall in over twenty years. Nevertheless, the threat of nuclear disaster lingers and investors are demanding higher premiums on the country’s debt. Japan sold ¥1.1T in 20Y JGBs today at 2.13%, steepening the curve. S&P sees Chinese expansion slowing in 2011, forecasting GDP 9.1-9.6% with CPI in the 4.3-4.8% range. PBOC household inflation expectations weakening. February data indicate that money supply and lending activity have slowed, with lending down almost 50% from January’s flows. In its FOMC meeting yesterday, the Fed reported that the economic recovery is on a “firmer footing” while it made no mention of the current turmoil in Japan. The Fed acknowledged an increase in commodity prices, but qualified them as temporary. In our opinion, the Fed appeared more hawkish than in the last meeting in January, especially given the circumstances. The usage of the stronger language, however, does not foretell any significant change in our opinion, but rather should serve to shift the market focus even more towards jobs data. Mortgage applications for last week dropped 0.7% v +15.5% the week prior. Meanwhile, as anti-government protests continued, Bahrain declared a three month state of emergency yesterday. Along with the declaration came a second unit of military support from neighboring Gulf nations and a Fitch ratings downgrade from A- to BBB on the country’s long-term sovereign debt. Bahrain closed its stock market today and CDS spreads widened significantly.

The situation in Bahrain is going from bad to dire. Earlier, thousands of protesters marched to the Saudi embassy in the Bahraini capital, angry at the intervention of Gulf Arab forces. 1000 Saudi troops had rolled into the country at the request of Bahrain's Sunni rulers. As Reuters reports, and as Zero Hedge discussed extensively before, the troop movement could signify Saudi concern that any concessions in Bahrain might inspire the Kingdom's own Shi'ite minority. Earlier on Tuesday, the Bahrain King declared martial law as his government struggled to stop the protests. The three month state of emergency hands power over to Bahrain's security forces, which is dominated by the Sunni Muslim elite. Injured were taken to hospital as violence continued in the small Gulf island. "We came out of the tunnel and they started shooting at us and I got injured here, in the back." An opposition politician said one man was killed and several wounded in clashes with police in the Shi'ite area of Sitra. But the biggest news, that which caused crude to just jump by a dollar, is that the Iran President has called the actions by the Bahrain government "unjustifiable and irreparable." And if or rather when Iran gets involved on the basis of a religious escalation, watch out for global stagflation.

Below is a heatmap of the Nikkei "no news is great news, as is 26.5 trillion in fiat injections" relief rally. Note the main equity outlier, TEPCO, which however has seen its CDS tighten substantially overnight from 390-440 to just 285-315. The reason for the credit melt up is that according to an article, the operator of a nuclear facility will not be responsible for any damage caused by their reactor if it was due to "a grave natural disaster of an exceptional character or by an insurrection." Which simply means that the nationalization of TEPCO will be indirect and that Japan will have to issue that much more debt.

• A helicopter was unable to drop water to cool the No.3 reactor at the quake-damaged Fukushima Daiichi nuclear power complex in northeastern Japan probably because of the high radiation, Kyodo news agency said, quoting the defence minister.
• Police will attempt to cool No.4 reactor's spent nuclear fuel pool using a water cannon, TV says.
• Japan's top government spokesman says radiation levels around the complex are not at levels to cause an immediate health risk.
• There is no evidence of a significant spread of radiation from Japan's crippled nuclear plants, the World Health Organisation says.
• Operator says it is unable to resume work cooling the reactors due to radiation risk. Workers ordered to leave the plant were allowed back in after radiation levels fall. Operator says there were 180 workers on site as of 0230 GMT.
• Operator of the nuclear power complex in northeastern Japan recorded the site's highest levels of radiation at the No.3 reactor on Wednesday.
• Water is being poured into reactors No.5 and No.6 at the plant, the operating company says. Those two reactors had been shut down for scheduled maintenance.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 16/03/11

In yesterdays session we saw some very 2 sided action especially in the Euro, we initially saw a EURUSD sell off as a flight to the safety took hold due to a sell of in far eastern equities. In the early part of the NY session this fear reversed and strong buying took us back the levels at which we started the day. this show of strength has pushed GBPUSD and EURGBP in the long zone and edges EURUSD into the strong long zone.

A choppy futures session has seen some modest profit-taking in line with Nikkei trading, following news that all TEPKO personnel around Fukushima are to be evacuated due to abnormally high radiation levels. Keep an eye on the Japanese market for an indication of where we open tomorrow.A somewhat bigger problem is that according to Bloomberg, which has now caught up to our radiation reporting by prefecture, the radiation in Ibaraki has reached 15,800 nanosieverts/hour at 11:40 am, which is 300 times normal. The spin: this is one third the amount of radiation in a chest X-ray. What is not mentioned is that an X-ray is exposure measured in one instant, whereas in this case the irradiation goes on for hour, after hour, after hour. And some other unpleasant news: NTT DOCOMO has announced it will limit up to 80% of voice calls in neighboring Chiba and Ibaraki prefectures, and up to 50% in Tokyo. Whether this is to conserves some mystical telephonic energy or to prevent the spread of panic is unclear. As this latest news is digested watch for the drift.