Archive - Jun 2011

As HFT algos continue to increasingly encroach on commodity trading, the most recent example of which was the berserk Nat Gas algo documented previously, the ICE has taken yet more steps to protect itself from "parasitic" algorithmic traders (a topic that has been beaten to death on Zero Hedge since the spring of 2009). From Reuters: "ICE Futures U.S. will increase its ability to adjust trade prices in softs futures, the latest in a series of changes it has made to deal with volatility in its coffee, cocoa, cotton and sugar markets. The amended rules will be effective July 1 and follow a series of changes to reduce unwarranted volatility in 2011, following the "flash crash" in equity markets in May 2010 that was exacerbated by high-frequency trading. In January, ICE delayed its attempt to mitigate cascading stops in the softs complex following feedback from market participants." Basically, the exchange has now decided to override the "market" at its sole discretion. ICE will be able to adjust trades made in coffee "C", cotton No. 2, cocoa, frozen concentrated orange juice and sugar No. 16 futures contracts. It will do this if "the exchange determines the original price of the trade does not represent the market value of the specific futures or options contract at the time of the trade," a notice states." Expect to see comparable approaches to ignoring what HFT quotes say as mini flash crashes become a now daily occurrence.

Markets lacked any firm direction in today’s session as participants looked ahead to tomorrow’s key austerity vote in the Greek parliament. Comments from EU’s Almunia that the Greek crisis may seriously impact growth in Europe dented appetite for risk. Elsewhere, GBP came under pressure following a decline in final first quarter year-by-year GDP reading from the UK, however did receive some support on the back of hawkish comments from BoE’s Tucker. Moving into the North American open, markets look ahead to key US economic data in the form of consumer confidence and Richmond Fed manufacturing report. In fixed income, there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Aug’18 – May’21, with a purchase target of USD 4-5bln, allied with USD 35bln 5-year Note auction.

Specialist hedge fund consultants are at “the leading edge of the phenomenon of many pension plans, especially public plans, moving to direct hedge fund investment,” said David Harmston, partner and global head of Albourne Partners' client group. Is he right?

• Greek Unions Strike as Papandreou Seeks Support (Bloomberg)
• Massive Strike Set for U.K. (WSJ)
• U.S. Money Funds Risk Losses From Europe Crisis (Bloomberg) - Mainstream media finally wakes up
• Dubai Denies Emirate Neighbors Fuel in Struggle to Pay Debt (Bloomberg) The untold story
• Europe looks for contingency plan B (FT)
• Plan B Budget Emerges in California (WSJ)
• Greek woes may eclipse Lehman: Ackermann (Reuters)
• Italian, Spanish Bonds Advance Before Sale on Greek Optimism (Bloomberg)
• China, U.K. Forge New Trade Deals (WSJ)
• Confidence in Canada Economy at Two-Year Low, Nanos Poll Shows (Bloomberg)

In the current market environment, many investors are positioned in what they perceive to be ‘defensive’ market segments, such as healthcare, telecoms, staples and utilities. To us, this is the wrong choice!

Even as everyone is glued to webcasts out of Athens, there will be some secondary data in the US, first of which is the Case-Shiller index, as usual about 3 months delayed, and thus very much irrelevant, and second is the circular loop of an indicator that is the Conference Board (it's up when the market is up, it's up when the market is down but when the respondents are Wall Street CEOs, it's up when stocks plunge but when gas is down a cent, and in fact, it is never down). More importantly, the third to last POMO in QE2 will be completed at 11 am. Lastly, $35 billion in 5 year notes will be "sold" to Primary Dealers.

The first piece of red herring news out of Europe is already on the tape, after Reuters reports that 15 out of 91 banks are expected to fail the second round of stress tests: "Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. Euro zone sources said the European Banking Authority is set to announce within weeks that between 10 and 15 of the 91 banks being tested had failed the tests, with casualties expected in Greece, Germany, Portugal and Spain. In the drive to ensure the credibility of the bank assessments, the European Banking Authority (EBA), which runs the tests and the European Central Bank, which sets the macroeconomic scenarios, are pushing for a higher number of banks to fail than last year's seven. "How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source." Of course, the reason why this is total non-news is that while the EBA will huff and puff, the end result, just like last year, will be absolutely no failures, as Europe has no failsafe mechanisms to deal with the aftereffects of a bank failure chain reaction. Expect futures, which dipped briefly on this news to more than rebound, as this merely confirms that the ECB will inject even more money to keep the SS Ponzi afloat for a few more months.

It's time for your daily Syntagma (not to be confused with Stigmata...yet) square live video feed, where things already are starting to have a far more violent tone compared to the primarily peaceful protests so far this year, courtesy of a substantially larger police presence as over 5,000 cops are expected to join the festivities. The protest marks the first day of the previously reported 48 hour general strike which will culminate with tomorrow's decision on the 5 year mid-term austerity plan.

Despite UK inflation being 4.5% in May, more than twice the Bank of England's target, the BOE’s Posen’s ultra dovish comments are leading to speculation that zero percent interest rates and ultra loose monetary policy will continue for the foreseeable future. This poses risks to those on fixed incomes in the UK, savers, the poor and the elderly, and to countries that export to the UK such as Ireland. Posen said that the Bank of International Settlements (BIS) call for central banks to raise interest rates was “nonsense”. Posen also said there is little risk of a repeat of 1970s-style stagflation. His comments are odd given the fact that the UK is already experiencing high inflation and declining economic growth and looks on the verge of a contraction in economic growth and another recession and possibly a depression. Posen’s lack of appreciation of the real risk of inflation and stagflation both of which the UK is already experiencing leave him open to the accusation that he is talking “nonsense”. These real risks and the BOE’s ultra loose monetary policy will likely result in sterling continuing to weaken in the coming months.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

You discussed it here yesterday. Today, Glenn Beck takes it to a whole new level...

Indeed, this 2009-2011 recovery and cyclical bull market has been as artificial as the 2003-07 expansion. That last one was fuelled by financial engineering in the financial sector. This one is being underpinned by unprecedented government intrusion in the credit markets. As of this quarter, your government has replaced the private sector as the largest source of outstanding mortgage market and consumer-related credit (see front page of the Investor's Business Daily). So not only is the U.S.A. turning Japanese in many respects, it is also now resembling China where the government also redirects the flow of private sector credit. When we said capitalism went on a sabbatical three years ago, we didn't expect this to be a permanent vacation.

The Fed is not backing off of its desire to stimulate the economy, all it is doing is backing off of its policy of steadily adding to that stimulus. The air is not, on net, leaking from the tire, it is still in the balloon. That stimulus is still working and the key question is how effective it has been and will be.

Last week, many, Zero Hedge among them, blasted the decision by the IEA to released 60 million barrels of crude in what was perceived as a last ditch effort to lower the price of gas in exchange for brownie points, while ignoring the fact that the crude would have to repurchased at some point in the future almost certainly at a higher price, and that it puts OPEC in a position of potential retaliation that could have far more adverse price repercussions than the IEA's opening salvo. Then again perhaps the move was not as misguided as the skeptics believe. Below we present the view from Emad Mostaque of Religare Capital Markets who provides a different spin on things: "Market consensus following the IEA release of strategic reserves last week has been quite negative on fears of OPEC/Saudi retaliation, erosion of the all-important buffer and accusations of political pandering. We are more positive and see this as positive for market transparency and function. GCC and IEA objectives are aligned: Neither the GCC or IEA want oil prices over $100 or market distortions. The remainder of OPEC has no room to retaliate and we are likely to see more cooperation to reduce volatility. IEA targeting shortages, GCC price: This is essentially an oil swap agreement addressing the lack of light, sweet Libyan crude in the European market and the ridiculous Brent-WTI spread. The GCC will continue to pump heavier crude at market value and will defend prices in the $85-100 range. As a result, we do not believe reserves will fall to dangerous levels. Fundamentals and Libya: While we have been negative on the short-term oil price since the start of May and have been looking at the lower end of our $90-100 range for the summer, we are still constructive long-term and believe consensus estimates are reasonable. We also see a potential resolution in Libya as increasingly likely, with no increase in MENA violence."

There may be those among the less than brainwashed lemmingerati out there who have noticed what, as we have pointed out for the past month when reporting on the various manufacturing and regional Fed indices, has been an epic collapse in the appropriate data series. As John Lohman so kindly demonstrates, the two month implosion has been beyond epic, and while certainly the biggest drop in the past decade, may also be the all time worst ever. To the point of this post: the last time we had an economic contraction of this magnitude was back in February of 2008, which was two months into the most acute recession in post-depression history. We are confident that once the groupthink wraps its head around the fact that the auto production based renaissance is not coming, and the economy officially tumbles into the commode of Ben Bernanke's fiat dungeon, the NBER will determine (with an appropriate 12-18 month delay), that the current recession started in April of 2011.