Archive - May 2012

There is little doubt what the world's pivot security is for now - Spanish sovereign debt. 5Y Spanish CDS just broke above 600bps for the first time ever and S&P 500 e-mini futures reacted by breaking below 1300. Lots of moving parts in Europe's sovereign markets - Spanish bonds were modestly bid today even as CDS was gapping wider - but if one steps back and looks at the basis (the spread between bonds and CDS) this makes sense as it had reached almost 100bps offering basis traders the opportunity to buy bonds and buy protection. We suspect few are outright shorting Spanish bonds here now and the marginal offer is a long-seller but with basis traders still active, do not focus entirely on bonds as evidence of anything until the basis contracts.

Headline crossing the tape:

• DJ IMF: OPEN TO NEGOTIATING BETTER WAY TO MEET GREECE'S PROGRAM GOALS

Did Syriza, and the Greeks, just win the great blinking war of 2012? If so, Spain may have lost it:

• IMF SAYS FUND NOT DRAFTING ANY PLANS FOR A SPANISH BAILOUT

Perhaps Spain needs to ramp up its defection stance a little more to pull a Greece next time...

The most significant event of yesterday was not the Spanish banking system unlocking the door to the horror chamber and clicking the melt-down button that it found on the wall but what happened at the European Union. Brussels turned, and looking Berlin squarely in the eye, it used impolite words and gestures and essentially said: "Stick it." Brussels has now called for Eurobonds, has called for the ESM to fund the European banks and it a sign of their new felt independence, has thrown all of this squarely in the face of Germany, the Netherlands, Finland et al who are providing the money. The game has changed. It will no longer be push and shove and muddle through but convictions and ideology that are in stark opposition so that surprises and inflamed statements will become the order of the day and not the exception. If it is to be either Germany for the Germans or Germany for the citizens of Athens, make no mistake in your thinking; Berlin will prevail regardless of the outlying costs to either the nation or to the future of the Union that theoretically governs Europe.

Down. ES is testing 1300. Gold pushing back down to $1550 (and the rest of the commodity complex plunging with WTI at $86.60), credit gapping wider, Treasury yields plunging to new records (10Y <1.57%!! and 30Y -20bps this week). FB -2.8%, AAPL -1.2% (down $12 from opening highs), MS -1.3%. JPY below its 200DMA

The latest economic data point comes out, which is the Chicago PMI, not to be confused with the meaninglessly duplicate MarkIt ISM Manufacturing PMI which was released earlier this month, and sure enough it confirms once again we are on a full glideslope to more QE. At 52.7, it collapsed from the prior print of 56.8, and missing expectations of 56.2. This was the lowest print since September of 2009. And scene. NEW QE is now 100% assured.

"Expect the S&P500 to decline decisively below its March 2009, 666 intraday low. All hope will be crushed."

While European credit markets have been a roller-coaster today - returning back to their wides now - there is one thing that has remained constant. The inexorable flood of money into Switzerland. Rather shockingly 2Y Swiss interest rates have dropped to -26bps (yes, no typo - you pay 26bps to allow the Swiss government to borrow your money). These are obviously record lows and suggest that events are unfolding extremely rapidly (and those bets on the unsustainability of the SNB peg may be gathering pace).

Gene Arensberg of the Got Gold Report says that the COT data “suggests that dips for gold and silver should be exceedingly well bid just ahead.  Indeed, the structure of the COT is about as bullish as we have seen it for silver futures.” The supply demand fundamentals remain very sound with gold demand expected to exceed supply again this year, according to the World Gold Council who have said that gold has bottomed or close to bottoming. Gold will extend annual gains for a 12th year as bullion is “near” a bottom and demand will keep exceeding mine output, according to the World Gold Council. Mine production will grow 3% this year from last year’s 2,800 metric tons, while demand may be unchanged or slightly lower from a record 4,400 tons, said Marcus Grubb, managing director of the WGC in an Bloomberg interview in Tokyo. Mine supplies will remain in a deficit “for a foreseeable future,” Grubb said.  Bullion is “near to the bottom at current prices, indicating gold will move back up again,” he said. Recycling has risen to make up for the gap between demand and mine output, he said.  “Some of the drivers of the increase in demand are structured, central banks for example, the rise of Chinese demand and the wealth increase in Asia, including India and China as well as smaller economies,” he said. Central banks have increased gold purchases on concern about the dollar, the euro and the sovereign debts, Grubb said. The banks’ net purchases last year were the most since 1964. In 2010, they turned to a net buyer for the first time in 15 years.

With 10Y rates under 1.6%, new record low yields, we suspect Bernanke's 'keep rates low to help housing via QE' argument is going to be a tough one. Perhaps its just 'print money to save the world for 3 more months' honesty will just have to come out...

And so the preparation for a disappointing NFP print continues. While the first revision to Q1 GDP came precisely in line with expectations of a 1.9% print, below the first GDP print of 2.2% (which was expected to print at 2.5% on April 27), it is largely irrelevant as it is backward looking. Instead, what matters is today's ADP miss, and the just released initial claims number which as we explained minutes ago has to come in bad to prepare us for a horrible NFP number tomorrow which in turn unleashed the NEW QE, $130 gas, and all those other things which made Einstein define insanity. Sure enough, initial claims printed at 383K, up from the upward revised 373K (370K before), which is a 13K miss of expectations. Continuing claims came at 3242K on expectations of 3250K, and down from an upward revised 3278K. What is odd is that in the week ended May 12 we did not see another weekly plunge in the 60-70K ballpark of those dropping off from EUCs and Extended claims, and instead the number was a tiny positive. Expect the sell-side brigade to cut its NFP forecasts in advance of tomorrow's number even more.

That the ADP would miss today's expectations of 150K is no surprise: after all as we have been explaining for a while, the only way the Fed will have a green light to proceed with NEW QE if it so chooses at the June 19-20 meeting, is if the economic data suddenly turn horrendous. Which means tomorrow's NFP data is make or break: in fact, as far as markets are concerned, the worse the better - should a -1,000,000 NFP print come in, stocks will soar. Which is why the ADP print, which indeed was a miss, of 133K raised eyebrows that it wasn't bigger. Still, 3rd consecutive miss of expectations in a row, and 4th out of the last 5, it gives the BLS enough rope with which to hang itself, and potentially the president, who may have no choice but to sacrifice job creation "momentum" heading into the presidential race, in order to keep stocks higher.

Yesterday's post of the day was the revelation that nationalized Bankia was throwing in the proverbial (free, Spiderman-embossed) towel with every €300 deposit account. To anyone who managed to take advantage of this once in a lifetime offer (the other one of course being Goldman's trade reco to buy stocks and short bonds from March 21, which as noted yesterday has lost 29% in two months): as of today, the offer has been pulled. Did the bank run out of towels? Was it embarrassed at exposing its dirty linen? Or did the bank have to pledge all remaining towels as its only remaining collateral at the ECB for tens of billions in €s? Sadly, we will likely never know.

The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.

• Dublin in final push for EU treaty Yes vote (FT)
• Spain cries for help: is Berlin listening? (Reuters)
• Crisis draws squatters to Spain's empty buildings (Reuters)
• EU World Bank Chief Urges Euro Bonds (WSJ)
• but... EU: Current Plan Is Not To Let ESM Directly Recapitalize Banks (WSJ)
• Graff pulls Hong Kong IPO, latest victim of weak markets (Reuters) - was MS underwriter?
• EU Weighs Direct Aid to Banks as Antidote to Crisis (Bloomberg)
• Dewey's bankruptcy: Let the rumble begin (Dewey)
• More are cutting off Greek trade: Trade credit insurers balk at Greek risk (FT)
• Rosengren wants more Fed easing; Dudley, Fisher don't (Reuters)
• EU throws Spain two potential lifelines (Reuters)
• Fed's Bullard says more quantitative easing unlikely for now, warns on Europe (Reuters)