Archive - Apr 7, 2011

If one scours the newspapers, maybe, just maybe, one may find reference, in the page 13 fine print, that gold prices keep hitting fresh all time highs each and every day. The rumor now is that petrodollars have had their fill of EURs (which they have been buying instead of USDs) and are migrating to PMs. Another catalyst is the earlier announcement by Jean-Claude Trichet that the rate hike may not be the first in a series, confirming the vacillation by the European Central Bank. Until we see confirmation we will let this rumor be. One thing we are certain of: there are more buyers than sellers.

Goldman's Natacha Valla has compiled this useful paraphrase of the Trichet press conference conference. In a surprising turn of events, the ECB head pulled a Greenspan and left many scratching their heads just what he means. We will take a quick stab at predicting the implications of today's rate hike: once the EFSF runs out of capital, or outright fails, the ECB will be back in loosening mode right fast.

Back in February we were wondering how long before Gadaffi starts a scorched earth policy on his own country, and primarily his oil infrastructure, in a repeat of Hussein's non-triumphal departure from Kuwait. Turns out the answer is about a month and a half. With it now becoming painfully clear that the whole purpose of the humanitarian intervention is to procure preferential terms of oil imports from Libya's rebel alliance, the "humanitarian" force has forgotten that despite no airplanes, Gaddafi will likely not take too kindly to not collecting revenues from what he perceives as his natural resources. From the FT: "Oil production in rebel-controlled eastern Libya has stopped after troops loyal to Muammer Gaddafi bombarded several oilfields, the opposition said on Wednesday. The assault came hours after the rebels exported their first cargo of oil into the international market, potentially opening the door to millions of dollars of funding to sustain their uprising against Colonel Gaddafi’s 41-year rule. The attack against oilfields in the east was the first against production facilities. Previously, only port facilities and crude oil storage tanks in the Es Sider and Ras Lanuf, also in the east, were damaged during the conflict." We are confident that this escalation will give NATO the caed blanche to commence a land-based campaign and prevent further infrastructure destruction before Gaddafi causes irreparable damage to even more facilities (although Halliburton naturally couldn't care less).

Following yesterday's bailout request by Portugal one would have expected that the Portuguese bond curve would tighten at least a little on some short covering in rates. One would be wrong. Except for a tiny tightening in the short-end (sub 1 Year), Portuguese rates have actually deteriorated across the curve with roughly a 0.075 widening in all points east of the 2Y. Is it time to pull an Ireland and start pricing in Portugal bailout #5?

No surprise in this number: last week's 388K was revised up to 392K, declining to 382K below expectations of 385K, which in tried BLS fashion will certainly be revised next week so that the actual number will have been a miss but by then nobody will care. Continuing claims were higher than expected at 3,723K on expectations 3,700K, with the prior revised, where else, higher to 3,732K from 3,714K. Importantly, there was a plunge in all persons claiming UI benefits in all programs: down by 245K in the week ended March 19. Altogether nothing special about this update, which refuses to take out recent lows of 375,000.

• China Inflation May Hit 6%, No End to Tightening (China Daily)
• Portugal Bailout May Reach $129 Billion (WSJ)
• Brazil Takes Fresh ‘Currency War’ Action (FT)
• Obama Says Meeting ‘Narrowed the Issues’ on Budget Impasse (Bloomberg)
• Government Shutdown Threatens 800,000 As Obama Seeks Solution (Bloomberg)
• Ireland will need another bailout, says former IMF director (Guardian)
• Japan to Head Off Hydrogen Blast (WSJ)
• U.S., Italy Consider Arming Rebels to Speed Qaddafi Ouster (Bloomberg)
• European banks in further capital calls (FT)

The UN's Food and Agriculture Organization, whose January print was the catalyst for us to revolutionary food riots ahead of time, released its March food price update - "the Food Price Index (FFPI) averaged 230 points in March  2011, down  2.9 percent from its peak in February, but still 37 percent above March last year. International prices of oils and sugar contracted the most, followed by cereals. By contrast, dairy and meat prices were up." So in essence the drop in the volatile energy component has been transitory, courtesy of WTI and Brent now at 30 month high, and the April number will be yet another surge. Reuters agrees: "new increases are in sight as demand grows and supplies tighten, the UN Food and Agriculture Organisation said. Rising food prices have climbed to the top of the
international political agenda after contributing to protests that
toppled the rulers of Tunisia and Egypt earlier this year, with unrest
spreading across North Africa and the Middle East." The spin: ""The decrease in the overall index this month brings some welcome respite from the steady increases seen over the last eight months," David Hallam, director of FAO's Trade and Market Division, said in a statement. "But it would be premature to conclude that this is a reversal of the upward trend," he said." It isn't. And with loose monetary policy expected out of the US for as wide as the eye can see, little if anything will change for a long time.

Canadian companies have crossed a “pension Rubicon” and are continuing to dismantle traditional defined benefit plans even as the economy improves, according to a review by Towers Watson...

Gold’s two consecutive days of nominal record highs have seen some profit taking as oil is flat, the dollar is marginally higher and the euro has fallen. The ECB’s 0.25 % interest rate hike may lead to further profit taking today but rising interest rates in an increasingly inflationary environment will be positive for gold as it was from 1965 to 1981 (see charts below). It is only when real interest rates turn positive (nominal interest rates are again above the nominal rate of inflation) that gold and silver’s secular bull markets may be challenged. Inflation in the eurozone is 2.6%. Today’s interest rate rise will leave eurozone interest rates at 1.25% well below the 2.6% rate of inflation meaning that savers continue to lose out due to very low yielding deposits. Negative real interest rates will likely lead to precious metal prices continuing to rise or rather very low yielding fiat currencies falling in value versus non yielding finite gold. Rising interest rates are bullish for gold also as they may see the primary asset classes of equities, bonds and property come under pressure again.

Update 2: EURUSD now rising gradually as JC Trichet language in conference more hawkish than expected.

Update: ECB Hikes by 25 bps as expected - No market reaction whatsoever: all telegraphed.

Previously

Today at 7:45am EDT the ECB's Governing Council, which convened at 3 am, will announce its interest rate decision, which is expected by 76 out of 80 polled economists to be a 0.25% hike to the current rate of 1.00%. This will be the first rate rise since July 2008. Ironically, the decision to curb inflation will come hours after Portugal demanded a bailout: a development which will only be intensified by an interest rate hike. Zero Hedge will follow and announce the decision in real time, while the press conference following the decision which will provide clues about Trichet's future rate strategy can be seen here.

With all eyes on Europe today, where the BOE just announced it is keeping rates at 0.50% as expected, the events in the US are jobless claims and February consumer credit.

As destructive as the Japanese tsunami has been, it may have left some investment pearls in its wake. It has suddenly made available some of the country’s best of breed, world beating companies available at throw away prices. But this is going to be an investment for longer term money, not a trade, as some patients may be required for a payday.

Thanks for looking out Strade.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/04/11

The price of corn has moved up sharply higher during the last couple of trading days. This time around, the newest USDA figures were giving (short) traders headaches over U.S. corn inventories. And there’s more where that came from…