Archive - May 2012

No need for much commentary here, suffice to say that those who thought Italy's massive drop in PMI from 47.9 to 43.9 in April was bad, apparently have not seen Hungary, Australia, Norway or Switzerland. The good news? Turkey is doing well to quite well... which likely explains why they are trying to confiscate the people's gold.

We have said, for months now, that Europe and the United States were heading in two different directions. That became quite clear today as the manufacturing numbers for Europe were dismal while unemployment for the entire Eurozone reached 10.9% which is up 9.1% from last year. The entire Continent is in a recession, with the exception of Germany, and we think their next release, in mid May, will show that they have joined the rest of their brethern. Austerity has its costs and two of them are increased unemployment and a decline in demand for goods and services which is then exacerbated by the drop in the number of people that are working. In the months ahead, for both political and economic reasons, we will see a flight back to American assets as the picture in Europe becomes both clearer and obviously worse. All of this, however, will affect American corporations and our banks so that expectations should be lowered in coming quarters for American earnings and profits. As “no man is an island,” no region of the world will be exempt from the European recession just as Europe was not exempt from our financial crisis.

Those hoping Goldman's NFP forecast of 125,000, well below consensus, is wrong, may have to reassess their thesis following the just released ADP number which came as a big disappointment to consensus of 170,000, instead printing at only +119,000, to 110,590. (The previous improvement was also downward revised from +209K to +201K). This was the lowest sequential change since September 2011, and confirms once again, the declining trends last seen in... 2011. It was also the biggest miss in 11 months. Luckily, as the scatterplot below shows, ADP is completely meaningless when predicting NFP so our gut reaction would be to expect a beat in NFP based on this print considering the whole Schrodinger economy and what not (see China). However, on an apples to apples basis, one thing is certain: record warm winter payback is a bitch. And finally, that whole Obama export renaissance is not doing all too hot: goods producing sector: -4,000 in April, while manufacturing jobs declined by -5,000. But, but, the soaring ISM..... oh forget it.

In the early hours of the European session, continental markets opened higher, reacting to yesterday’s positive performance in the US. Sentiment quickly turned as continental Europe released its respective Manufacturing PMI figures, with even the core European nations recording declines in the sector and lower-than-expected readings. Despite the poor data, some major cash markets are clinging on to positive territory, as the CAC and DAX indices both trade higher. The Spanish and Italian markets, however, tell a different story. With both their respective PMIs recording significant declines, both now trade lower by around 2% apiece. Against the flow of bad Eurozone news, the UK has released an expectation-beating Construction PMI figure, going somewhat against last week’s breakdown of the official GDP statistics. Markit research cites strength in commercial work and new orders as the main driver for the growth. The downbeat data from Europe has taken its toll on EUR/USD, currently trading lower by over 90 pips, but the pair has come off the lows in recent trade. GBP/USD has mirrored the moves in the EUR and trades lower by over 40 pips, however some support has been gained from the strong Construction PMI.

Americans feel “gold is the safest long term investment” today, a Gallup survey has found. Gold was favoured over four other types of investments perceived as the best long term choice for American investors today. 28% of the American public choose gold as their favoured investment of choice today.  Real estate followed in second place, with 20% seeing it as the best long term investment. Paper  assets were less popular with savings accounts and certificates of deposits (CDs) tied with stocks and mutual funds at 19%. Bonds came last at 8%.  This suggests that the American public may not be as uninformed when it comes to investing as is often suggested. According to Gallup, "investing in gold has gained in popularity in recent years as low interest rates have made traditional savings instruments less attractive, and instability in the stock and real estate markets has undermined the mass appeal of those options."  "Meanwhile, the rising trajectory of the price of gold over the past several years apparently offers more of the returns and stability investors seek." While some may find the Gallup poll findings worrisome from a contrarian perspective, it is not.

The question for investors is how likely Draghi unleashes some new money and gives the market another brief relief rally? I’m not sure he is able to do anything meaningful and right now I believe the market will fade over the course of the day as realization sets in that not much can be done. I’m not quite ready to put this trade on, but am looking closely at going long Spanish stocks versus short German stocks. The belief that Germany will be fine while Spain is a disaster seems too common and priced in. I’m not quite there on that trade, but it is only that am looking at very closely.

For those who follow the overnight session and know very well that the only factor there is whether Europe is open or closed (like yesterday), we have three words: Europe was open. As BofA summarizes: "Yesterday's stronger than expected ISM manufacturing sparked a solid rally in the S&P 500. Around mid-day the index was up about 1.2%; however, the markets slowly faded throughout the rest of the day ending up 0.6%. Our equity strategy team things that the S&P is roughly at its fair value given the macroeconomic backdrop and the continued troubles in the Euro area." It is hardly rocket science that Europe will continue to drag on the world. The only question is how long before this nexus of global trade drags everyone else down, because as hard as they try the US and the BRICs simply can not pull away from the tractor beam of the European black hole.

The Swiss have the edge today. But for how long?

• European Unemployment Rate Rises to Highest in Almost 15 Years (Bloomberg)
• Chinese Activist Leaves U.S. Embassy (WSJ)
• China April bank loans slide 30 pct from March-paper (Reuters)
• Moody's warns against lack of tax hike in Japan (Reuters)
• RIM CEO Bets on BlackBerry Without Keyboard to Challenge Apple (Bloomberg)
• European visits focus on boosting trade (China Daily)
• Martin Wolf- After the bonfire of the verities (FT)
• German Jobless Unexpectedly Up in April as Crisis Flared (Bloomberg)
• Romney Refuses to See China Progress on Yuan (Bloomberg)
• Bolivia Following Argentine Takeover Deepens Regional Divide (Bloomberg)
• Plosser Says Fed Must Guard Against Long-Term Inflation (Bloomberg)

Yesterday we poked fun of Goldman for suggesting that the reason for the late-day sell off was "Prudent profit-taking as folks remember Europe isn’t closed tomorrow." Turns out Goldman could not have been more right: around 4 am Eastern this morning Europe reported a series of economic updates which showed that the European economy continues to be nothing but a slow motion trainwreck and is getting far worse. Starting with final April Eurozone Manufacturing PMI which printed at 45.9 vs an initial print of 46.0, a 9 month low with a core breakdown is as follows:  Italian manufacturing PMI 43.8 at a 6 month low, est 47.1 (prior 47.9), German manufacturing PMI at a 33 month low 46.2 vs initial 46.3 (prior 48.4), France manufacturing PMI 46.9 vs initial 47.3 (prior 46.7), which also followed Italy by recording sharpest drop in manufacturing new orders in 3 yrs in April, and so on as can be seen in the chart below. As every sellsider who has opined so far this morning, these numbers are all "hugely disappointing."

All you need to read and some more.

Gold’s London AM fix this morning was USD 1,661.25, EUR 1,253.02, and GBP 1,024.70 per ounce. Yesterday's AM fix was USD 1,662.50, EUR 1,256.61 and GBP 1,021.44 per ounce.

Silver is trading at $30.85/oz, €23.37/oz and £19.10/oz. Platinum is trading at $1,570.00/oz, palladium at $677.60/oz and rhodium at $1,350/oz.

In the shady underground world of banking, doing wrong means doing right, up is down, and left is right.