Archive - Aug 30, 2011

August consumer confidence plummets from 59.2 to 44.2, far below consensus of 52, dropping to its lowest level since April 2009. But, but, two insolvent Greek banks merged yesterday to make a really big insolvent Greek bank. Oh well: Americans don't care. And even uglier is the 6 month outlook chart which collapsed from 74.9 to 51.9, one of the biggest monthly drops in history. This sets the stage for the ISM, for NFP, for further GDP cuts, and for September 21.

I love Swiss chocolate, but it’s not that good. The Swiss franc has been driven up to absurd levels by a safe haven bid. This is the next “short gold” trade. It is far easier to weaken a currency than to strengthen them

The much delayed Case Shiller update for June is out, and it is both worse and better than expectations: year over year, the number printed at a -4.5% decline, slightly better than consensus of -4.6%, while the month over month change was -0.1%, on expectations of an unchanged print. Stripping aside the noise means that the housing market is crawling along the bottom after double dipping months ago but at least it is not imploding. And since this report is nearly 3 months old, it does very little to indicate what is actually happening with the economy.

Who would think that all it takes for gold to surge by $40 in under an hour is for the Fed to resume the old song and dance. Yet that is precisely what happened: ever since Chicago Fed president Evans sat down with Steve Liesman to discuss that he would be in favor of more easing, and saying he believes in "room for accommodation" and that we "still need to do more on monetary policy", gold soared from under $1790 to over $1830. And confirming that gold will go far higher is his statement that "Fed policy was not a driver of the commodity price surge." In other words, these buffoons have not learned anything, and the commodity price shock is coming. However, as usual, it will be blamed on speculators. Luckily the CME can hold them in their tracks with a relentless series of margin hikes. Or not. When will the CME finally hike margins on printer toner cartridges?

• German Chancellor Angela Merkel faces growing resistance within her ruling coalition over expanding the powers of the EFSF, according to WSJ. Meanwhile, a senior German government lawmaker insisted that the parliament should have a greater say in future Eurozone bailouts
• According to S&P, slow growth increases risk of a double-dip recession in Europe
• The appetite for risk was dented further after a 10-year BTP auction from Italy registered above 5% average yield
• The International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt
• Strength was observed in USD and JPY amid risk-averse trade

Quiet day with FOMC minutes due out in the afternoon, Case Shiller confirming more worsening in housing, and Conference Board consumer confidence plunging in August. European headlines may once again reappear.

The UBS daily note reports that “the mood among gold investors appears to be to buy the dip rather than chase the market, which is understandable given last week's volatility.” UBS conclude that the “violent sell-off hasn't done any lasting damage to gold, and the reasons investors bought gold in recent months remain valid. Our one-month forecast of $1950 remains in place.” UBS three month price view is $2,100 per ounce. Very significant demand being seen for bullion internationally and especially in Asia means that gold’s correction is likely to again be of short duration. Indeed, the scale of demand suggests that gold may not need a long period of consolidation and could again surprise to the upside.  Bank of America-Merrill Lynch said in a research note it was revising its 12-month gold target to $2,000 an ounce. JPMorgan said that gold could reach over $2,500 per ounce prior to year end. The recent sell off has not seen banks and analysts revise down their price forecasts. 

• IASB criticises Greek debt writedowns (FT)
• ECB to reassess inflation risks (FT)
• Pimco's Gross rues US debt 'mistake' (FT)
• Trichet and Rehn defend Europe’s banks (FT)
• Japan Parliament Confirms Noda as Prime Minister (WSJ)
• Sino-Forest is Second Time Chan Loses Company (Bloomberg)
• US authorities assess hurricane’s aftermath (FT)
• Solar Purge Drives Weakest Into Buyouts (Bloomberg)
• Republicans to Unveil Bill to Force Major Changes at the UN (Bloomberg)

All eyes were on Italy early this morning when the country auctioned off €2.99 billion of 4.25% BTPs due July 2014 and €3.75 billion in 5% bonds due 2022, because the ECB, unlike in the secondary market, is not allowed to buy bonds at primary issuance. While it would have been unrealistic to expect a bond failure, the bond levels were watched very closely for signs of deterioration despite over €40 billion of SMP purchases by the ESB in the past 3 weeks. And judging by the reaction (+11 bps in the Italian Bund spread), the market was not very happy with the yields of 3.87% (4.8% previously) and 5.22% (5.77% previously) or the Bids to Cover of 1.32 and 1.27 on the 3 and 10 years, as both slipped following the auction in a market that was very disappointed to see a 5 handle yield on the 10 year. This has set a negative  tone to early European trading, with pronounced weakness across markets, and the EURUSD, which has dropped to under 1.44 overnight after trading in the 1.45's late last night. The concern is that even with the ECB buying debt in the secondary market (effectively monetizing), the tail is unable to wag the dog strongly enough, and if the EFSF is not activated soon enough, and expanded significantly, we expect to see the market test the ECB once again, and SMP purchases to soar very soon.

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

All you need to read