Archive - Mar 2011

Earlier we briefly noted the surge in UK February inflation which coupled with the ongoing decline in GDP, and increased deficits indicates that the UK economy is in dire need of reliquification, which alas won't come (or so the rumor goes) precisely courtesy of ongoing money printing. Just confirming this deterioration visually is the UK Misery index (combination of inflation and unemployment), which has just hit a 20 year high.

The 2 Year Ireland-Bund spread has just hit an all time record wide of 835 bps, following unconfirmed rumors that either Ireland or Allied Irish Bank has missed a coupon payment. Since the latter is backstopped by the former it is rather difficult to see where one ends and the other begins. And confirming that Europe can no longer use MENA or Japan as a smokescreen, Greek 10 year spread to Bunds widens 16 bps to 935 bps. Since pretty much all curves are inverted, we expect Ireland to approach Greek default risk within days. This is especially true since nothing in Europe's fiscal situation has changed and the dire funding requirements for debt rolling and deficit funding, are, well, dire.

The “RISK OFF” trade could deliver a huge flight to safety for Treasury bonds. Is shorting short dated bond puts the best play?

With much confusion over just which radioactive isotopes are considered dangerous following the Fukushima explosions, Reuters has compiled a handy overview of the key actors: iodine-131, caesium-134 and caesium-137. For the time being only the far more inert and shorter half-life elements such as Xenon have been dispersed globally, while the more dangerous isotopes have been relatively localized, and their dispersion is limited to wind direction.  Furthermore, metrics such as halflife are relatively irrelevant for now since the release of radiation continues mostly unabated thereby producing a constant source of freshly radioactive substances. This is all the more validated by the just released NHK data indicating a surge in radioactivity as far away as 40 kms from the plant: "Japan's science ministry says radiation exceeding 400 times the normal level was detected in soil about 40 kilometers from the troubled Fukushima Daiichi nuclear power plant. The ministry surveyed radioactive substances in soil about 5 centimeters below the surface at roadsides on Monday. The ministry found 43,000 becquerels of radioactive iodine-131 per kilogram of soil, and 4,700 becquerels of radioactive cesium-137 per kilogram about 40 kilometers west-northwest of the plant. Gunma University Professor Keigo Endo says radiation released by the iodine is 430 times the level normally detected in soil in Japan and that released by the cesium is 47 times the norm."

The U.S. dollar and yen are under pressure again today while gold and silver have taken breathers after yesterday’s gains (see table). Rather than gold and silver rising in price, we are seeing the continual devaluation of the U.S. dollar, the yen and all fiat currencies and thus their prices falling against the precious metals. Incredibly, the dollar has lost 7.5% of its value in less than 3 months (since January 7th 2011) and more than 17% in just 8 months since August 2010. Hence the nominal record highs in gold and silver. The volatility and sharp falls in the dollar are leading to deepening inflation throughout the world (as seen in the UK inflation rate of 4.4% today). Thus, the dollar’s safe haven status is being increasingly questioned. Many market participants are worried because the dollar continues to fall despite the real risks of a recurrence of the Eurozone sovereign debt crisis, a wider military conflict in North Africa and the Middle East and a nuclear catastrophe in Japan.

• Arab Regimes Under Siege (WSJ)
• Rift Over Command of Libya Campaign (FT)
• Premier Wen Jiabao Says ‘Urgent Steps’ Needed on China’s Trade Imbalance (Bloomberg)
• Japan Maintains Threat of Further G-7 Action (WSJ)
• China Central Bank to Lift HK Yuan Clearing Interest Rate (Reuters)
• U.S. Banks Oppose Tighter Money Rules (WSJ)
• How Germany Can Avoid a Two-Speed Europe (George Soros)
• Trichet Signals Rate Increase Likely (WSJ)
• Osborne to Reveal Borrowing Increase (FT)

More bad news out of the UK, where CPI inflation surged from an already nosebleed inducing 4% to 4.4% in February coupled with deteriorating budget shortfalls as public borrowing was nearly double the consensus. The inflation number is particularly worrisome as it was the highest since 2008, driven by a surge in clothing price inflation. It seems at least UK retailers have reached their margin breaking point and have no choice but to hike end prices at this point. From Goldman: "CPI inflation rose from 4.0%yoy to 4.4%yoy in February (vs. Cons. and GS: 4.2%). This is the highest rate of inflation since 2008 and was driven by a sharp increase in clothing price inflation (from 1.3%yoy to 2.8%yoy). The public-sector borrowing data were disappointing on the month (£10.3bn vs. Cons: £8.0bn, GS: £4.3bn) but that overshoot relative to consensus expectations was almost entirely offset by (net) downward revisions to previous months' data."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 22/03/11

Futures mostly positive this morning, with European stocks rising despite rising concerns over the EMU’s bailout fund. The BOJ announced today that lender’s deposits with the bank will increase 146% to a high of ¥43.6T today v ¥17.7T the day before the earthquake as Japan continues to inject large amounts of cash into the financial system to help speed the recovery. The BOJ announced today that lender’s deposits with the bank will increase 146% to a high of ¥43.6T today v ¥17.7T the day before the earthquake as Japan continues to inject large amounts of cash into the financial system to help speed the recovery. Fiscal pressures worsened in the UK with a new report showing an increased budget deficit rose as revenue fell. Inflation pressures are worsening as well as UK CPI rose 0.7% MoM and 4.4% YoY v 0.6%E MoM and 4.2%E YoY.

The first confirmed US military asset lost over Libya is an F-15E jet, following confirmation from The Telegraph that the plane crashed, supposedly as a result of a mechanical error, not due to being shot down. From Reuter: "A U.S. Air Force F-15E fighter jet crashed in Libya overnight after apparent mechanical failure but its crew were safe, a spokesman for the U.S. military Africa Command said on Tuesday. Libyan rebels rescued the pilot after he ejected from the warplane which came down near the eastern city of Benghazi, Britain's Daily Telegraph newspaper reported on its website. "Just found a crashed US warplane in a field. believe a mechanical failure brought it down," Telegraph correspondent Rob Crilly said on the Twitter micro-blogging site." Well, at least it isn't one of those brand spanking new F-35s.

Not much in economic releases today: several Fed speeches, and the usual POMO completion at 11:00 am.

EURUSD and GBPUSD continue to make parabolic up moves whilst retail traders increase short positions. We would advise caution in the short term as strong moves like this do not tend to last, so we may see a pullback in the short term. We remain very much in the strong short zone as have for a long while with the USDCHF and USDJPY. The swissy has sustained good momentum behind an overall down trend especially last week with 5 straight down days.

When two weeks ago it was disclosed that AIG is willing to pay $15.7 billion for the same toxic securities that two years ago caused AIG to sell 92% of itself to an involuntary taxpayer, and currently make up Maiden Lane II (which is marked on the Fed's books by BlackRock at $15.9 billion) we asked why this process is not open up to broader public auction. After all these are taxpayer assets and should receive an arms-length treatment in recouping best returns for the taxpayer. It seems that other bidders are now starting to appear. The FT reports: "Barclays is among a group of investors weighing a rival bid for a portfolio of mortgage-backed securities that has already drawn a $15.7bn offer from AIG, people familiar with the matter said. AIG, which wants to buy back the assets to reduce its obligations to the government while finding a higher-yielding use for its cash, went public with its bid earlier this month after the New York Fed did not respond to a preliminary offer made in December."

While Japanese futures briefly flirted with another advance, they subsequently dropped by 1% to 9,450, even despite the BOJ's latest injection of 2 trillion yen, which if it continues at this rate will surpass 100 trillion yen in injections within two weeks: an unprecedented feat, even by the Federal Reserve's standards. Of particular note weighing on the markets has been the news from Kyodo that, in confirmation of our fears that zones "Under Survey" are nothing but hotbeds of unprecedented radiation, reported radiation levels are 1,600 times higher than normal 20 kilometers from the power plant. Recall that the first evacuation radius was just 10 km. Assuming a power rate of declining fall out strength, means that the radiation within the 20 km diameter circle centered on Fukushina is currently hundreds of thousands to millions of time higher than normal.

Nah ... Dat silly congwessman is just spouting silly conspiwacy theowies ... move along now, f-f-f-f-f-olks!