Archive - Jul 2011

It looks like SOVX completely broke down for periods of time yesterday where bid/offer widened, and in spite of that, the index moved on no trades. For a brief period this morning, that looked like it affected MAIN as well. So far U.S. credit markets have been far more stable and the technicals seem better, though I'm not sure how true that would have been if people were trading IG when Main went to 127 bid earlier. Main is back to 120. That is a very large swing. This heightened volatility needs to subside soon, or we will see weakness in the market as investors (particularly hedge funds) are forced to shrink their positions because they do not (cannot) tolerate the P&L volatility from these sorts of moves. Main traded in a 10 bp range (95.75 to 105.75) from March 20th until June 8th. Almost 3 months and the entire range was 10 bps, and most of the time it traded in a tighter band. Today it has traded in a 7 bp range. That level of volatility is unsustainable, but even if we continue at the pace of the past couple of weeks, investors will have to scale back their positions as the only way to manage their P&L. We may continue the bounce, but without real evidence of some new plan, I think the upside is credit is very limited short term.

At least News Corp. shareholders have something to be smiling about (for a few more days). The beleaguered company, which has many more problems in its future, has just announced it will proceed with a $5 billion stock buyback over the next 12 months. Perhaps a legal sinking fund may have been a better use of cash, but who are we to advise one way or another.

Keep your eye on the ball and don't be fooled by all the ugly macro smoke...

When we reported on the record surge in Chinese exports over the weekend we said that "the official read of the US trade deficit which will be reported on
Tuesday, will almost certainly spike, pushing GDP expectations lower yet
again." Sure enough, the US May trade deficit just exploded to $50.2 billion, far above the consensus of $44.1 billion, and much worse than April's revised $43.6 billion. Imports, not surprisingly, surged to an all time high $225.1 billion with exports lagging, even despite the relatively weak dollar in May, which declined modestly to $174.9 billion. From the report: "The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $174.9 billion and imports of $225.1 billion resulted in a goods and services deficit of $50.2 billion, up from $43.6 billion in April, revised. May exports were $1.0 billion less than April exports of $175.8 billion. May imports were $5.6 billion more than April imports of $219.4 billion." Accoding to Bloomberg's Brusuelas, the key culprits were petroleum and industrial supplies. For those wondering what America exports and imports: "In May, the goods deficit increased $6.7 billion from April to $64.9 billion, and the services surplus increased $0.1 billion to $14.7 billion." So why do people care about the manufacturing CPI again? Bottom line: the bean counters will now be forced to revise their Q2 GDP forecasts well lower. And while Q2 is now a scratch, the problem is that this weakness is now continuing into Q3.

Risk-aversion remained the dominant theme during the early European session on the back of fears of contagion to core Eurozone countries from the peripherals. The mood of Eurozone finance ministers tilting towards more flexibility in restructuring of Greek debt, and with the Dutch finance minister not negating a selective default for Greece exacerbated the risk-averse tone. Moreover, an article in the ABC newspaper, citing unnamed sources, that as many as six Spanish banks have failed the European stress tests, including five savings banks and one medium-sized bank, also weighed on sentiment. European equities, led by financials, traded lower in early trade, which supported Bunds as the Italian 10-year bond yield crossed the 6% mark for the first time since 1997. However, a reversal of sentiment was observed as the session progressed, supported by market talk of the ECB and China buying in the European bonds, together with successful T-Bill auctions from Italy and Greece, which observed narrowing of the Eurozone peripheral 10-year government bond yield spreads. Elsewhere, GBP/USD plummeted around 70 pips following lower than expected CPI figures from the UK, which also provided strength to Gilts. Moving into the North American open, markets look ahead to key economic data from the US in the form of trade balance, and IBD/TIPP economic optimism, as well as the FOMC minutes later in the session. In fixed income, USD 32bln 3-year Note auction is also scheduled for later.

• Markets rocked as debt crisis deepens (FT)
• EU Revives Buyback Idea as Crisis Hits Italy (Bloomberg)
• Italy Fears Jolt Markets (WSJ)
• U.K. Inflation Slows in June on Spending (Bloomberg)
• China Money Supply Growth, New Lending Rebound Even After Cooling Measures (Bloomberg)
• Foreign-Exchange Reserves Jump in China (WSJ)
• Corn Slides for Second Day as USDA May Raise Global Inventories Forecast (Bloomberg)

Busy economic calendar with two notable bond auctions out of the US Treasury.

Deustche Bank's forensics/technicals looked downright ugly. We opined on both about two weeks ago, along with parsing the CEO's warning that all should essentially start running for the hills. Many participants in mother market missed this. Well, DB got crushed in European trading, making both the forensic research and technical trade setup shine like the sun. There's much more to come! Will those triple digit short returns of 2008 come again?

Equities internationally and bonds in Greece, Ireland, Spain and Italy have fallen this morning while gold rose to new record nominal highs in euros and pounds (over EUR1,118/oz GBP980/oz respectively). The Italian 10 year rose above 6% for the first time and the Spanish 10 year yield rose to 6.12%. US stock futures are pointing to losses on the U.S. opening. Irish government bonds have reached a new euro era record high with the 10 year rising to 13.57% - up from 11.6% only 5 days ago. Ireland’s “bail out” is clearly not working as contagion deepens in the eurozone.

As of this morning China has migrated from a purely symbolic European White Knight to an actual one. While overnight trading action was set to recreate the panic from September 15, 2008, suddenly something changed. That something? China. Per Dow Jones: "Bunds give up nearly all of Tuesday's early gains with the September contract just 12 ticks higher on the day at 129.26 after making a spike at 130.91, a gain of 177 ticks from the open. The latest, unconfirmed, rumor pushing bunds lower is that China is behind the supposed ECB enquiries for peripheral debt prices. As yet no official confirmation from market sources of any central bank buying. In the cash space, the 2-year yields 1.235% and the 10-year 2.65%." As China has been actively buying up EURs over the past two months and is now massively underwater on a cost position that may be in the hundreds, but is certainly in the tens of billions of dollars, the ongoing collapse in the EUR currency will now force the PBOC to resort to increasingly more drastic measures to protect its strategic investment. The irony of this is that the Swiss National Bank, which this morning had to watch in horror as the EURCHF plummeted to 1.15 and for the longest time has been fighting the Fed (which loves a strong EUR) has been joined by the PBOC, which is now also trading on its behalf. The First Central Bank War is now officially on.

One of the main catalysts for today's European market action was the Italian 1 year Bill issuance which was supposed to set the tone for Italian bond demand, especially since thanks to ISDA's stupidity (which had made it clear CDS will not trigger in any event as the organization is completely spineless), there is no reason to any longer hedge a negative basis at issuance. Well, Italy did pull it off, although at terms that a month ago would have inspired shock within the market. "The 6.75 billion euro sale was the first test of appetite for Italian paper since a surge in nerves that it will be next to fall in the euro zone's debt crisis due to domestic political tensions and a combination of high public debt and low growth. The gross yield on the 12-month BOT bills rose to 3.67 percent from 2.147 percent at a previous auction in June. This was the highest level since September 2008, according to Reuters calculations on Italian Treasury data. The bid-to-cover ratio fell to 1.55 times from 1.71 in June, when the treasury sold a slightly lower 6 billion euros in total." However, even this data was very suspect after 10 Year Italian-Bund spreads hit a new record wide of 355 bps earlier as the Italian contagion is now fully on. In response, both the ECB and China are now rumored to be scooping up all peripheral bonds in the secondary after a long hiatus as the ECB is on the verge of panicking, side by side with European bond investors, following remarks by Dutch Finance Minister De Jager who said, as predicted yesterday, that a Greek selective default "Is not excluded anymore."

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

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

European Important Charts by www.thetrader.se

All you need to know by www.thetrader.se