Archive - May 2011

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

Case-Shiller house prices, the Chicago PMI, and consumer confidence. Fasten your seatbelts: bizarro day will be fully enforced today with horrible data leading to market surges.

Much has been speculated about what the possible impact on the fixed income market may be if the debt ceiling is breached. Few, however, have wondered about the impact of what the lack of a debt ceiling resolution would be on a market that one could argue is even more important: FX. Citi's chief currency strategist Stephen Englander takes a preliminary look at the implications of what this would look like. Englander admits that "a breach of the credit ceiling is priced in neither fixed income nor FX markets to any significant degree now", and proceeds to speculated that it is foreign exposure (recall that China has over $4 trillion in foreign financial assets) that would be most impacted by such an adverse development. To wit: "Our expectation is that the FX reaction to a
debt ceiling breach would be sharper and probably more permanent that
the FI reaction, because unhedged foreign investors will see another
layer of risk that can not be 'fixed' in the way that cash flows from
Treasuries can. The FX market reaction may not be catastrophic, given
the limit to the fixed income damage that is likely to be permitted to
emerge, but it would legitimately tax foreign investor patience and lead
to further USD dumping whenever the opportunity arises." Bottom line: the race to the garbage bottom between the USD, EUR and JPY continues in earnest, with nobody yet a solid favorite to win, er, lose first.

• Emerging states working on IMF candidate: South Africa (Reuters)
• Berlin Considers a Shift on Greek Debt (WSJ)
• Housing Sales in China Seen To Fall Over 10% (Shanghai Daily)
• Greece may run out of funds within weeks (Independent)
• Lagarde, on Visit to Brazil, Vows Speedy IMF Reforms (WSJ)
• BlackRock’s Fink Says Europe Problems Go ‘Way Beyond’ Greece (Bloomberg)
• Libya's Goldman Dalliance Ends in Losses, Acrimony (WSJ), or how Goldman lost 98% of Libya laundered money, offered Libya the chance to become one of its biggest shareholders
• Australia Fund Says No to Euro-Zone Rescue Bonds (WSJ)
• Saudi-Iran Feud Draws Sectarian Line Across Mideast Oilfields (Bloomberg)

Concurrent with last night's Moody's reminder that it is about to downgrade the Japanese economy, which we have long been claiming is the marginal global economic wildcard, we get an exportindustry update from the Japan Automobile Manufacturers Association. In short: April car exports were an unprecedented disaster, with the average exporter seeing a 68% drop Y/Y, with some, such as Toyota plunging from 150,118 to only 31,025 cars in April 2011. And while this would be the ideal environment for US carmakers to grab market share, the fact that many are missing critial Made in Japan components in their supply chain means that there is a broad based supply drop. Which is why tomorrow's update of GM's recent channel stuffing practice will be observed with such interest: if the firm reports yet another increase in the cars parked with dealers, then something in the US carmaking space is seriously wrong two months after this Japanese car export free fall.

The euro climbed to a three-week high versus the dollar on speculation Germany and other European nations may pledge more funds to bankrupt Greece and favourable German economic data. This is more a reflection of dollar weakness rather than any great confidence in the euro. The euro at €1,068/oz remains under pressure versus gold and is less than 2% from record nominal highs at €1,088/oz. While the focus, has of late, been on the increasingly ‘unsingle’ single currency, news overnight shows how there are also substantial risks posed to the yen. Moody’s have warned that they may have to downgrade Japan and have warned of a “tipping point” which may lead to a government funding crisis for heavily indebted Japan. The United Nations warned on Wednesday of a possible crisis of confidence in, and even a "collapse" of, the U.S. dollar if its value against other currencies continued to decline. The UN’s mid-year review of the world economy did not get covered widely. The UN economic division said that a crisis of confidence in the dollar, stemming from the falling value of foreign dollar holdings, would imperil the global financial system. This trend, it said, had recently been driven in part by interest rate differentials between the U.S. and other major economies (see table above) and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners including the Chinese government.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 31/05/11

Move over Jack Meyer and David Swensen, there's a new woman on the mighty US endowment block...

Moody's Investors Service has today placed the Government of Japan's Aa2 local and foreign currency bond ratings on review for possible downgrade. The review has been prompted by heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government's ability to fashion and achieve a credible deficit reduction target. Without an effective strategy, government debt will rise inexorably from a level which already is well above that of other advanced economies. Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale. Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.

While Wilfred Hahn's latest Global Spin has some original ideas, the bulk of its reads like the contrarian's guide to the universe, whereby he takes every prevailing "wisdom" theory and disputes it, simply because, well, that's the contrarian thing to do. Which is great, but that in itself does not make conventional wisdom wrong. In fact, flipping a thesis on its head with a less than convincing counterargument only underscores the possibility, however remote, that the crowd may in fact be right. Anyway, Hahn's latest spiel is to compare 5 supposedly accepted views and "Hale Bopp" them or attempt to expose them for the fallacies they are (for those seeking extended contrarian arguments, we urge readers to refer themselves to many of the other true skeptics so frequently highlighted on Zero Hedge). His 5 peeves are: i) China will continue to boom; ii) Emerging markets forever, iii) The world will run out of commodities; iv) An inflationary blow-off is surely underway, and v) The US dollar will fall to oblivion. While we certainly agree with Hahn's prevailing view that a "growth slowdown is underway" we do hope that in his next quarterly review he will take the time to validate and justify why any of the above will in fact not occur instead of merely using the presented strawman arguments which come out of the generic deflationist's handbook.

I recently discovered that famed financial commentator, Mike “Mish” Shedlock published a piece in which he quoted an article I published and proceeded to tear my views (at least what he claims my views were) to pieces.

Following the previously reported news that Germany is sacrificing its political leadership, not to mention credibility, to bailout its banks, futures are currently ripping. As the chart below indicates, ES is surging right now, even as the broader risk basket is left far behind, since the markt realizes the "Brian Sack" pod at Citadel will be double taxpayers doubletime.

Like clockwork, hours before the US market reopens, we get another Greece bailout. Since last week's Chinese white knight "rescue" of Portugal helped the EUR for about 18 hours, it is now time to get the biggest guns possible out: the WSJ reports that Germany, contrary to populist demand which has indicated that another German bailout of Greece would mean the end of Angela Merkel, has decided to allow Greek bailout round two to proceed. Per the WSJ: "Germany is considering dropping its push for an early rescheduling of
Greek bonds in order to facilitate a new package of aid loans for
Greece, according to people familiar with the matter.Berlin's concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece's funding needs before the indebted country runs out of cash in mid-July." The end result: the EURUSD surged by 70 pips from the closing print of 1.4270 to a high of 1.4350, although the half life of even that innuendo appears to have peaked and the pair is now on the way down, as it does absolutely nothing, except to destroy any credibility Merkel may have had, to resolve the impasse which is that, well, Greece is bankrupt.

In a TV slip caught by Al Jazeera, yet another Zero Hedge prediction has been confirmed: namely that it was only a matter of time before NATO "boots on the ground" would promptly replace the CIA's "sandals on the ground" in a fully Western-backed land invastion of Libya. Since it is too early to predict the nationality of the armed invaders, we will assume they are British as Al Jazeera speculates, because otherwise Congress is about to find itself in an unprecedented scandal for completely ignoring its duty to impose the War Powers Act, which in turn would mean that the President now has a unilateral right to enforce the invasion of any country he so chooses. We will leave the bitter implications of what this could mean, as America celebrates, and remembers the lives of so many who died for this once great country, to others.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 30/05/11