Archive - Aug 12, 2011

July retail sales came in line with expectations at 0.5%, which is to be expected: after all, as Bank of America most recent implosion demonstrates all too vividly suddenly, there is a favorable trade off to millions of Americans not paying their mortgage, and also maxing out their credit cards a unprecedented rates. Naturally, the negative one is that BAC and all other mortgage lenders will need to resort to TARP 2 soon but that's in the unforeseeable future. For now: buy, buy, buy. As expected, futures surge because the ex-cars numbers rose from a revised 0.2% to 0.5%, on expectations of 0.3%. Somehow this minute beat is enough for stocks which blatantly ignored yesterday's trade data which indicates that Q2 GDP will be revised to about 0.6% from 1.3%. But this is the kind of robotic myopia we have all grown to know and love that dominates what was once a carbon-lifeform dominated stock market.

UBS confirm this morning what we have been experiencing in terms of increased customer demand for gold and an increasing preference for allocated gold. UBS note that “the move to real assets such as gold in physical form signifies the heightened state of risk aversion at present.” “The gold market remains underpinned by the movement to physical gold, which has persisted all week    . . .  European demand for small bars particularly, but also coins, remains very strong. As the week has progressed Asian physical demand, outside India, has been noticeably higher.” The Swiss franc has fallen by another 0.4% against gold today and is down 5.7% week to date against gold.  Pegging the franc to the euro would take time and would face steep legal and political hurdles – a change to the Swiss constitution would be necessary to begin with.

Volatility continued across European equities in early trade supported by a short-selling ban imposed by countries including France, Italy, Spain and Belgium. However, prices came under pressure following news that Chancellor Merkel may not be able to keep her promise of getting changes to the EFSF before end-September, together with lower than expected GDP data from France. As the session progressed, appetite for risk emerged as the dominant theme as equities moved higher, led by financials, whereas the Eurozone 10-year government bond yield spreads tightened across the board, with aggressive narrowing witnessed in the French/German spread. This was supported by market talk of the ECB buying in the Italian and Spanish government debts, with the 10-year yield in Italy falling below 5% and France below the 3% level. Elsewhere, CHF weakened across the board partly on the back of market talk that the SNB was conducting currency swap operations via small Swiss corporate banks. Also, a weakening USD-Index supported EUR/USD and GBP/USD, whereas the latter received further boost following an upward revision to the UK's construction output data, which is said to add 0.1% to country's Q2 GDP. The release of Project Merlin data showing an enhanced lending by UK banks in Q2 as compared to Q1 helped the GBP currency further. Moving into the North American open, markets look ahead to key economic data from the US in the form of retail sales, business inventories, and University of Michigan confidence report. Fed's Dudley and President Obama are also scheduled to speak later in the session.

Today's economic docket includes retail sales and consumer sentiment and business inventories. Bill Dudley makes more remarks on iPad edibility although he may provide some critical insight as to what we may expect two weeks from now at Jackson Hole.

• BUNGA BUNGA: -25
• SIESTA: -20
• PORT: -90
• YOGURT: unch
• WAFFLES: -36
• RIOTS: -11
• GUINNESS: -45
• F. FRIED: -21
• ANSTALT: -10
• GERM: -11.5

Earlier today, Europe's fulcrum economy - France - whose AAA rating is all the matters for continued European solvency, as a downgrade would effectively derail the EFSF even before its launch as Zero Hedge has discussed extensively in the past, reported Q2 GDP which not only missed consensus estimates of 0.3% growth, but plunged from Q1's 0.9% down to unchanged or 0.0% for Q2. The worry here is that, as Market Watch observes, "France’s economy, the second largest in the euro zone after Germany, recorded no growth in the second quarter, heightening concerns about the nation’s ability to achieve its deficit-reduction plan. The consumption expenditure of households slumped 0.7% in the second quarter, hurting GDP growth, INSEE said. Imports fell 0.9%, while exports were flat after growing 1.8% in the first quarter." And as those who have been following it know, the only reason why the rating agencies have not touched France's hallowed AAA-rating is due to their expectation that France will have no problem implementing a deficit-reduction plan which will then cut French debt. Alas, following this number which post revision could mean that France has re-entered a recession, concerns about the AAA rating, which is what set off this week's avalanche of fears about SocGen and all other French banks, are set to spike once again. “The flat outturn will not fit well with the current debate we are seeing around France and its ability to retain its triple-A credit rating,” said analysts at FxPro in a note. He was not alone to speculate about the linkage between GDP and rating: "today’s disappointing 2Q GDP data may well reignite" concerns about France’s ability to implement fiscal austerity necessary to maintain AAA rating, also said Daiwa’s Grant Lewis. In this market, which is desperately looking for things to be paranoid about, we expect that this could well become the next big meme, especially with all of Europe slowly rolling back into re-recession once again.

A quick update on market metrics this morning indicates that Europe has so far refused to protest violently against the short covering ban, and is for the time being enjoying the eye of the hurricane. According to the Bloomberg cross asset dashboard there is a sense of modestly improved sentiment in Europe as CDS spreads have mostly tightened for sovereigns and banks, following the French, Italian, Spanish (and Belgian? - they have a stock market? Must be to go with that government of theirs) ban on short sales as evident in:

• Soc CDS for France -14.5 bps, Germany -6.7 bps, Italy -14.6 bps, SPain -14.9 bps, Greece -22.7 bps, Portugal -41.5 bps, and Belgium -27.1.
• French bank CDS: SocGen -3.8 bps (just barely tighted after blowing out), UniCredit -12.6 bps, BNP -6.7 bps, Credit Agricole -11.7 bps
• Bank funding pressures easing as Euribor, Libor/OIS spreads, 1 year euro basis swap moderately improved
• Equities up 1-1.5 standard deviations, led by Euro Stoxx +2.1% on the short-sale ban
• and most EU yield spreads to Germany moderately tighter

Here we go again...