Archive - Jul 22, 2011

US Stock futures turned negative following a disappointing earnings report from Caterpillar. The company missed Wall Street projections for the quarter but raised its full year guidance. Corporate earnings remain the catalyst for investors, but they will keep a watchful eye on the European debt situation and the domestic debt ceiling talks which are likely to remain centre stage today with a light economic data calendar.

• Debt talks begin critical phase (Reuters)
• Obama and Boehner Advance Toward Deal to Cut Deficit  (WSJ)
• Democrats Balk at Potential U.S. Debt-Limit Deal (Bloomberg)
• Debt Ceiling Uncertainty Puts States at Risk (NYT)
• Chinese manufacturing set to contract (FT)
• Questions on Holdings at the Fed (WSJ)
• China Banking Regulator Steps Up Risk Controls on Local Government Loans (Bloomberg)
• IEA calls halt to emergency oil release (FT)
• EU leaders agree €109bn Greek bail-out (FT)
• EU May Accept Greek Default as Crisis Fight Intensifies (Bloomberg)
• The Lesser Depression (Krugman)
• Barnier seeks to soothe UK over banks (FT)

Don't hold your breath on this one.

With all eyes on Brussels, myopia has returned to markets particularly with regard to the serious fiscal and monetary challenges continuing in Washington. Another sign of silver’s move from the fringe of hard money advocates and more risk averse investors and savers to the mainstream is seen in Citigroup technical analysis of the silver market which was picked up by Bloomberg. Citigroup Global Markets Inc. have said that if silver follows similar patterns as seen in silver’s last bull market from 1971 to 1980 than silver could double to over $100 per ounce. “If the final rally in the last bull market repeated then we can expect $100 over the long term,” Tom Fitzpatrick and two other analysts wrote. “While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet.” Most institutional players and Wall Street banks have been bearish on silver and have called the silver market wrong for years.

While futures are still drunk on the euphoria from Europe's bailout, and the EURUSD has rebased modestly higher by 200 pips to 1.44, the actual "cash flow" issues that are at the base of every modern problem are once again resurfacing, this time at key EFSF guarantor Germany, whose July Ifo business climate index, based on a monthly survey of some 7,000 firms, plunged to 112.9 from 114.5, well below expectations of 113.8, a nine month low in this closely watched indicator. "Germany has been the star performer in the industrialised world since the end of the financial crisis, and economists were split on whether Friday's data points to a sharp slowdown or just a moderate easing from unsustainably strong growth in the first part of 2011." Coming on the heels of yesterday's sharp decline in European PMIs confirms that while Europe has perfected the art of wealth redirection, primarily in the direction of bank balance sheets, it may need to soon grapple with the far more difficult task of stimulating the best performing industrial economy since the GFC. Because all it would take for the latest European "bailout" to fold would be for a rating agency to say that they are now shifting their attention to the creditworthiness of Europe backstopper supreme: Germany.

Still confused about why nobody is calling the EFSF expansion Europe's TARP, aside from the fact that this latest European bailout is exactly Europe's TARP? Need a one page summary tearsheet on the European Council Decision as pertains to Greece now and all the other European countries later? Have no fear, because Goldman's Francesco Garzarelli is here again, explaining all you need to know about the ongoing taxpayer-to-insolvent nation-to-bank capital transfer.

Earlier today, Fitch announced it would be the first rating agency to declare Greece has defaulted, albeit on an interim basis. According to Reuters, Fitch Ratings will declare Greece in restricted default on its debt due to the steps taken in a new euro zone rescue package but will likely assign new ratings of a low speculative grade once a bond exchange is completed, the agency said on Friday. The agency said that the reduction in interest rates Greece is paying on its debts and extension of maturities gave it a chance of regaining solvency and would support its rating. "Fitch will assign new post-default ratings to Greece and to the new debt instruments once the default event is cured with the issue of new securities to participating bondholders," the agency said. "The new ratings will likely be low speculative-grade." Elsewhere, confirming that now that Greece is an explicit ward of the EFSF, read Germany and France its rating do not matter, Greek CDS tumbled the most ever, tightening by 500 bps to 1,500 in hours. However, since Greece now exists in a state of limbo when it comes to capital markets and since without the explicit support of the EFSF the country would be insolvent, there is little sense to look at its "risk" through the lens of fixed income any more. Lastly, as the following selection of analyst commentary indicates, there is nothing about this "solution" that is actually beneficial in the long run.

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