Archive - Sep 2011

While we shared our brief summary of last night's lengthy ARD 1 interview with Angela Merkel, the Chancellor's views bear repeating since we are now just 4 days away from the critical EFSF expansion ratification vote to be held this Thursday in Germany. While expectations are for a prompt passage the downside, as improbable as it appears, bears some attention. Here is Goldman's Dirk Schumacher with a summary of what to expect this week out of Germany.

Wondering what caused the dramatic plunge in gold and silver earlier? Wonder no more: the CME's counterpart in China, the Shanghai Gold Exchange, decided to follow through with an identical, if more substantial, action to that undertaken by the CME on Friday, and announced an increase in the Silver T+D contract margin from 15% to 18%, a 20% bump; the SGE also noted an increase in the price range limit from 12% to 15%, which will be promptly fulfilled, as margin hikes traditionally tend to lead to a sudden spike in vol, contrary to well-meaning expectations. There was a second announcement, slightly more cryptic one, noting that if volatility were to persist, the SGE would outright halt silver trading (although the Google Translation of this previously unseen form announcement is a little sketchy). Expect to see more exchange intervention in precious metals today. Regardless, those who bought silver 15% lower a whopping, oh, two hours ago, courtesy of the out and out sheer panic, are quite grateful to the Chinese.

It may not be quite the Lehman weekend when the first ever Sunday CDS trading allowed pros to get out of Dodge early, but those who can't wait to put some insurance on against the market crash that is currently roiling the world, with everything tumbling in what is becoming a carbon copy replica of 2008, will be able to do so 20 minutes earlier. The CBOE has announced that"beginning on Monday, September 26, the CBOE Volatility Index (VIX) futures contract opening time moves to 7:00 a.m. from 7:20 a.m., pending regulatory approval. The 3:15 p.m. closing time for VIX futures remains unchanged. The earlier opening offers market participants more time to establish or offset VIX futures positions surrounding potential market-moving events - overnight news, banking actions or key economic reports - before the general market opens." Judging by /ES, something tells us the line around the block to put these on will be longer than for the new iPhone if and when it comes.

In the upcoming week, debate and speculation about any “grand” Eurozone plan will certainly dominate FX markets and risk sentiment. Goldman is cautious. On one hand, it continues to believe that USD downside pressures remain the dominating medium trend in FX, and hence the current rise in risk premia creates attractive opportunities to position for renewed US weakness. On the other, it still sees plenty of Eurozone headline risk. For example, the tug-of-war over the next Greek tranche will likely continue for at least another 10 days. And important parliamentary votes are still outstanding in a number of EMU nations, in particular those with unclear majorities to implement the enhanced EFSF.

All you need to read.

While Friday's dramatic skid lower in the precious metals was later blamed somewhat on a leaked margin hike (as well as the simultaneous and anti-empirical sell-off in 30Y), it seems the liquidations that were rumored (whether hedgie or central banker) are in play once again as both gold and silver (the latter very significantly!) are finding little support. After some early weakness (EUR strength), the China news we noted earlier and general lack of any actionable rescue plan or large-scale money-printing has markets in a decidedly risk-off mode for the last few hours as ES shifts into the red and very early credit runs show 2-3bps widening in the front-end of the European indices.

UPDATE: Silver is now -16%!

The markets are signaling price declines all over the place.  Platinum is trading about $40/ounce below gold. This is anomalous. MIT's Billion Prices Project reported price declines in the U.S. in August (see final chart). The Economic Cycle Research Institute on Friday took the rare step of commenting in print that the stock market is at a significant risk for a further decline. Dangerously, Markit's CMBX index (or, more precisely, some of their constituent indices) that tracks mortgage-backed securities broke Friday to yet another new multi-year low.

Right now, the only investment opportunities I see that are both relatively attractive vis-a-vis the alternatives and offer a likelihood of growing nominal capital are investment grade municipal bonds.

It is ugly but with prices still above support, there is hope.

Against a background of 30%-plus falls in bank share prices around the world and growing fears of a severe blow to the European bank sector in the event of a sovereign debt default, Deutsche Bank has produced a lengthy tome that answers 'everything you wanted to know about the global banking sector but were afraid to ask'. A compendium of charts and tables, summarized effectively by 'Danger Maps' designed to highlight countries which face greater (or lesser) stresses for their banking systems is further extended into a country-by-country breakdown for developed and emerging markets. While their findings may not line up perfectly with our more global contagion perspective, they do create a systematic framework for judging relative investment opportunities that sees Japan, Australia, Hong Kong, and the Nordics as the least risky; US and UK about average on macro scores; while unsurprisingly (with the exception of Germany) the Eurozone countries have the highest danger scores. Transmission channels are discussed and they make a critical point on bank valuations that earnings estimates are extremely sensitive now to bad debt charges and credit quality assumptions. We then point out their more trading-focused (and negative stance) on European banks citing long-term funding, short-term liquidity, and capitalization as enormous systemic hurdles to anything other than short-term compressions.

With deflation tightening its choke-hold on the global economy, we thought we’d drop in on our supposed nemesis, Gonzalo Lira, to see how he was coping in these very un-hyperinflationary times. 

The man who singlehandedly took "I would recommend you panic" and made it into one of the catch phrases of the year (if not decade), and who has recently been in a self-imposed media blackout, had a rare media appearance when late last week he appeared on the BBC show The Bottom Line Evan together with Guy Berruyer, chief executive of global business software supplier Sage Group; and internet entrepreneur Brent Hoberman, founder of online interior decoration business mydeco.com. Obviously we were mostly interested in what Hugh would say, and luckily he did say quite a lot, if nothing too shocking for those familiar with his generally cheery outlook on the world.  Among the snazzy soundbites was his explanation that the UK is not in a recession, but a depression, something Zero Hedge has been saying about the entire, never mind England, for the past 2.5 years, and the proceeds to give the rational breakdown of the Greek situation, which as everyone knows is that it is purely due to political power grabbing and banker greed and financial innovation allowing the masking of reality. As for the outcome, we all know it: Greece defaults, creditors take major haircuts, speculators get blamed, etc.

Finally, little by little, the fog of toddler-like euphoria over any and every most recent European bailout plan is starting to lift, this time with the S&P finally speaking up and reminding everyone of what they already know: namely that an expansion of that now-daily deux ex machina, the EFSF, will "potentially trigger credit rating downgrades in the region, a top Standard & Poor's official warned. David Beers, the head of S&P's sovereign rating group, said it is still too soon to know how European policymakers will boost the European Financial Stability Facility, how effective that will be and its possible credit implications....But he said the various alternatives could have "potential credit implications in different ways," including for leading euro zone countries such as France and Germany." Get that? As Zero Hedge said back on July 21, the European bailout Catch 22 is now once again front and center, namely that any expansion in the EFSF will lead to a downgrade in one of the two Eurocore countries, France or Germany, and should France get cut from AAA (which it will), the entire burden of footing the European bailout bill will fall on Germany. And if Germany is also downgraded to AA, kiss your SPV CDO goodbye, and with it Europe. Which means that while we will hear many more threats by both and against S&P, more posturing that the EFSF will be enhanced to tens if not hundreds of trillions with virtually unlimited leverage, however idiotic those may be, the end result is just one: whether or not Germany risks a full blown government collapse by instituting the only thing that has a chance of containing the crisis - EuroBonds. Of course, shoul those come to be, the German Pirate party will very soon have an absolute majority in the German parliament... and shortly thereafter in various previously unheard of beer halls.

In a surprisingly candid yet traditionally schizophrenic interview on ARD 1 show GuntherJauch, Angela Merkel once again sent the same mixed messages that have forced Berlusconi to smile to her face while saying less than flattering things, ahem, behind (no punt intended) her. While on one hand she said that default is an option under the post-2013 Euro rescue fund and emphasized that a euro-area sovereign insolvency can not be ruled out, she also made it clear that Europe continues to have no Plan B. According to Reuters, "allowing Greece to default on its debt now would destroy investor confidence in the euro zone and might spark contagion like that experienced after the bankruptcy of Lehman Brothers in 2008, German Chancellor Angela Merkel said on Sunday." Obviously this is not new, and our humble interpretation is to continue to telegraph to the market how unstable the Eurozone is so there are very little expectations and more EUR short squeezes can be accomplished, as well as not pricing in anticipation that emergency liquidity conduits, currently being implemented, actually succeed in case they actually do. Of course, should Europe really succeed in ejecting Greece without Europe imploding which is the interim end game here that would certainly send the EURUSD to well over 1.50. Alas, we put chances of that happening at about 1%.

Strange series of events in Cyprus.

EURUSD opened down 80pips, to below Friday's lows, but has somewhat rapidly recovered those losses shifting into the green now in very early (and thin) trading. We assume this means the market has still not processed the latest news from China, which officially refutes, for the third time, rumors of an imminent Chinese bailout. From Bloomberg: "It’s “too early” to determine how emerging economies can further help the euro area overcome its sovereign debt crisis because reforms are still under way, China’s Central Bank Governor Zhou Xiaochuan said. “We need to first see if euro-zone countries can implement their July 21 decision,” Zhou told reporters at the International Monetary Fund in Washington on Sept. 24, referring to a pledge by European leaders to expand the powers of a regional rescue fund. He doesn’t expect Greece will default on its debt and anticipates Europe will be able to overcome its crisis through reform, he told reporters." So, first the bank recap rumor refuted, and now the China bailout one... Perfect: it means that the upcoming week will see brand "new" rumors talking about... bank recaps and a Chinese bailout of Europe.