Archive - Aug 19, 2011

More on the biggest market moving story from last night. According to a blast from Bloomberg, minutes ago SNB spokesman Werner Abegg announced that a bank sought USD through the SNB FX swap with the FRBNY, via a repo operation. Abegg added that the repo has already been unwound. But, but, it was only $200 million so what's the big deal? There is no stigmata to micro amounts... Oh wait there is stigmata to any amounts. And sorry, this is just the first of many times that not only the SNB but all other central banks will very soon be scrambling to the Fed to bail out their dollar collateral short banks. Unfortunately, the 2008 redux is only just starting.

Today, Sandra Pianalto, president of the most irrelevant Fed in the US, the Cleveland one, confirmed why when it comes to economic predictions, one may want to take anything uttered by the rocket scientists at the Fed with a pinch of salt... and why in general anytime an economist speaks it is best to run away. Specifically, in her prepared remarks to whoever it is that is dumb enough to listen, she just said that she expects the US economy to grow by 2% in 2011. Funny, because a simple google search reveals the following glaring headline from those long ago days of June 1, 2011...

• Inflation May Embolden Foes of Fed Stimulus (Bloomberg)
• July inflation spike won’t stop QE3 (Reuters)
• Clamour for amendments to Italian austerity (FT)
• Biden seeks to reassure China on U.S. debt (Reuters)... fails
• Japan Forex Chief Meets BOJ Officials to Talk Yen (WSJ)
• BofA’s Moynihan Says to Expect 3,500 Job Cuts (Bloomberg)
• France Eases Ban on Short Selling Before Index Futures Expire (Bloomberg)

The news media will eventually figure out the truth — that stocks got pulped yesterday simply because they are in a bear market. The Mother of All Bears, quite possibly.  The Dow finished the day down 419 points after trading more than a hundred points lower than that intraday.  The selloff was attributed to the usual suspects: “fears” over Europe’s shaky financial condition, and America’s apparent relapse into recession. Although both concerns have been with us in spades for more than a little while, they seem, suddenly, to have become overwhelming and unmanageable now that the world’s stock markets are imploding. 

• European equities remained under pressure during the session weighed upon by growing signs of a faltering global economic growth together with August options expiry in the European indices
• CHF and JPY remained the major beneficiaries of risk-aversion, whereas commodity-linked currencies generally traded lower
• After breaching the key USD 1,800 per ounce level yesterday, spot Gold continued its ascent towards the USD 1,900 technical level amid risk-aversion
• EU's Rehn said the EU may draft legislation for joint Eurobonds, however gave no timetable for the draft legislation
• EU Commission said collateral agreement between Finland and Greece is being examined by the Eurozone, adding that Finland is the only country to request Greece collateral. Meanwhile, Austrian finance minister said the Finnish deal to get a 20% cash collateral on Greek loans is unacceptable

There is a small degree of backwardation developing in the gold market with certain near term futures contracts now trading at higher prices than longer term contracts. The near term August ’11 contract was trading at $1871.40/oz while June ’12 contract is trading at $1,870/oz (1216 GMT). The spread between spot and longer term contracts has fallen suggesting that gold may soon join silver in backwardation. The possibility of backwardation in gold suggests that major investors are concerned about the supply of physical gold. Buyers are concerned about securing supply in the future and are willing to pay a premium for spot or immediate delivery. It could indicate that the short squeeze anticipated by many is taking place and we could see a sharp upward move in gold prices. This would not be surprising considering the very small size of the physical bullion markets versus the size of the overall financial and currency markets and considering the high demand coming from investors and central banks globally. It is worth remembering what happened when silver went into backwardation some months ago. It led to a price surge from $30/oz to over $50/oz in 10 weeks. Backwardation rarely happens in the gold and silver bullion markets. Since gold futures first started to be traded in 1972 (on the Winnipeg Commodity Exchange), there have only been momentary backwardations of a few hours. It suggests that larger gold bars are difficult to acquire in volume and that the physical market is becoming stressed and less liquid.

Relevant News

When all breaks, the food shall still remain:

• STROMBOLI +7
• PAELLA +2
• COZIDO +6
• GUINESS +6
• TZATZIKI   +2
• FRIES +10
• SNAILS+3
• WIENER SCHNITZEL+3
• FISH AND CHIPS +4
• SPAETZLE+4

...Is waking up in the morning. The pain trade is making decisions in a market where moves that should take days or weeks to play out, occur in hours. Going for a coffee at the wrong time can cost you to miss a 2% move. Leaving a stop while going for coffee can get you triggered out in a move that completely reverses in a few minutes. The markets are broken. That is the pain trade. Trying to treat the markets as normal is the pain trade.

When we first presented yesterday that the SNB had used $200 million in FX swaps with the New York Fed, we speculated that this "means that it is not some usual PIIGS suspect, but one of the two "big ones." Obviously by this we meant Credit Suisse or UBS. It took the banks about 12 hours to come out and deny officially that it had been either of them. Well, it simply it is someone else, and hence someone with far less in deposit-based capital buffers. And then, of course, you know what they say about official denials... Anyway, whoever it was, Europe is not waiting to find out: this morning most European bourses are down between 2 and 4%, Dax down 3.7%, CAC down 2.8% and the FTSE down 2.8% at last check, as the specter of a pan-European bank run is back. The net result: spam continues to be a drag in the gold-canned food pair trade, hitting a new old time high of $1878 in the spot market minutes ago, and just $122 away from $2000. Should the market rout persist, we may well see $2000 in the next 48 market hours.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.

If you have ever wondered how we can fight back against the financial insanity that Central Bankers are attempting to impose upon us, implement these three steps, and we’ll be off to a solid start.