Archive - Jun 2, 2011

• Fed mouthpiece Hilsenrath speaks: No QE3 for now - Fed Holds Steady as Economy Slows (WSJ)
• Fed May Signal Balance Sheet Will Stay at Record (Bloomberg)
• Fed Owes U.S. Stakeholders Accounting on Loans as People’s Bank (Bloomberg)
• China will have to tackle local govt debt (Reuters)
• Biggest HFT firm in the world to sell HFT counter-measures: Getco Expands Client Business, Offers Algorithm to Funds (Bloomberg)
• Greece Is in Line For a New Loan (WSJ)
• E.coli outbreak in Europe caused by new toxic strain (Reuters)
• The Chanos thesis is delayed: Banking regulator plans to shift 2-3 trillion yuan ($300-$470 billion) in debt off the books of local governments (Shanghai Daily)
• Kan: Ready to Step Down After Finishing Quake Work (WSJ)

Today the market moving economic data will be initial claims, productivity and labor costs, and Q2 impacting factory orders.

Spot gold and silver prices rose slightly again this morning after hitting a one-month high yesterday as equity markets internationally came under selling pressure. The Moody's downgrade of Greece and worryingly poor US economic data again pushed investors to seek the safe haven of bullion. Gold reached new record nominal highs in sterling yesterday (£945.62/oz) as the pound fell on concerns about the UK economy. The supply situation in the silver market gets more interesting by the day. Registered COMEX silver inventories have fallen to multiyear lows at 29,631,268 ounces. In the last 5 days they fell from 32,132,903 ounces to Tuesday’s holdings of 29,631,268 ounces. As can be seen in the table below registered silver inventories fell every single day last week leading to a sharp fall of 8.4% in 5 days. Registered silver inventories are down a sharp 38.5% in just two weeks – from 41,044,280 to 29,631,268. The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real. However it would be very difficult to corner the silver market due to the very small nature of the silver bullion market. A COMEX default remains a risk as does a massive short squeeze which could see silver surge as it did in the 1970s and again recently leading to silver targeting the inflation adjusted record high of $140/oz.

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

Following years of inactivity it has now become cool to be the first rating agency to pull the trigger on another insolvent sovereign. After yesterday's downgrade of Greece by Moody's to Caa1, today Dagong decided to one up its American counterparts and downgrade the country with the 250% debt/GDP: Japan. From Xinhua: "Chinese ratings provider Dagong Global Credit Rating Co. Ltd., on Thursday cut its rating for Japan's local and foreign currency sovereign credit by one level to A+ and AA- respectively. The rating agency said the downgrade took into consideration Japan's political situation, economy, fiscal revenue and expenditure, as well as debt revenue. Expecting a mild recovery of the Japanese economy and no significant deterioration of Japan's sovereign debt financing within the next 12 months, Dagong put the country's credit outlook as "stable."" As Richard Koo noted yesterday, the probability that the Japnese economic situation will deteriorate absent stimulus is very high. Unfortunately, the problem is that since there is little to no spare money available "out there" the ability to kick the can down the road with another Keynesian band aid is severly limited. Expect to see many more downgrades of Japan, and not just Dagong, before the year is over. 

Risk is solidly bid this morning as the EURUSD has jumped to overnight highs of just under 1.45, and the DXY has just dropped to a one month low, following two Spanish bond auctions which saw yields surge yet came at far higher bids to cover than previously. From Reuters: "Spain saw strong demand for 3.95 billion euros ($5.67 billion) of medium-term bonds on Thursday, though a broad drop in risk appetite and lingering uncertainty over how talks on fresh aid for Greece will pan out kept yields high. In a litmus test of investor appetite for peripheral euro zone debt as policymakers thrash out a plan to avert a Greek default, the 2014 bond, with a 3.4 percent coupon, sold 2.75 billion euros at an average yield of 4.037 percent. That compared with 3.568 percent at the previous auction in April, while the bid to cover rate rose to 2.5 compared with 1.8. The 2015 bond, last issued in September of last year and with a coupon of 3 percent, sold 1.2 billion euros at an average yield of 4.230 percent, slightly lower than yields on the secondary market. The bond was 2.9 times subscribed after being 1.6 times subscribed at its last auction. "Since the (2014) launch early April, we've had an escalation on the peripheral side, so a firm selling since then, which is why (the yield) jumped so much," economist at 4Cast Jo Tomkins said. "You'll see plenty of buyers coming in at that level, especially since the Greek deal seems to be moving in a positive direction." Also adding to the risk appetite are statements from Trichet that in the longer term, he could suggest forming a finance ministry of the European Union, adding there is no crisis in the EUR. Lastly, he added that if aid programs fail, as a second stage he could consider deeper integration of economic policy, more central command of domestic policies. Of course they will: once all is plundered, the ECB will become the defacto "protector" of its colonies. And falling solidly into the trap is Greece where according to a government source the privatization plans may run faster than expected.

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