Archive - Nov 21, 2013

When the Taper Talk sign is on, beware. The sign is now brightly lit.

With the US shale revolution set to make America the largest exporter of crude, however briefly, the influence of Saudi oil is rapidly declining. This has been felt most recently in the cold shoulder the US gave Saudi Arabia and Qatar first over the Syrian debacle, and subsequently in its overtures to break the ice with Iran over the stern objections of Israel and the Saudi lobby (for a good example of this the most recent soundbites by Prince bin Talal ). But despite the shifting commodity winds and the superficial political jawboning, the reality is that nothing threatens the US dollar's hegemony in what many claim is the biggest pillar of the currency's reserve status - the petrodollar, which literally makes the USD the only currency in which energy-strapped countries can transact in to purchase energy. This may be changing soon following news that the Shanghai Futures Exchange could price its crude oil futures contract in yuan, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.

There are increasing signs of deflationary risks in the developed world, suggesting bonds are set for a comeback. 

As we recently noted, thanks to the overwhelming dominance of the BoJ, the Japanese government bond market is "for all intent and purpose" dead. As the chart below shows, that is the lesson that Europe has learned also. Since the Greek bailout, bond trading volumes (and thus liquidity) has collapsed to practically zero. Of course, this is ignored by the mainstream media, instead focusing on the 'low' yields of that nation's debt as indicative of 'recovery' around the corner and a market that knows better. Instead it is simply a measure of the domestic banks meager pricing at the margin of a bond market that reflects nothing but a shell of its former self. The pattern is similar (though not so terrible) for Spanish and Italian debt as the entire European bond market devolves into OMT-driven farce.

• When it fails, do more of it - Bank of Japan hints at extending ultra-loose monetary policy (FT)
• PBOC Says No Longer in China’s Interest to Increase Reserves (BBG)
• Fed casts about for endgame on easy-money policy  (Hilsenrath)
• Big trucks still rule Detroit in energy-conscious era (Reuters)
• Debt Limit Rise May Not Be Needed Until June, CBO Says (BBG)
• Some Insurance Regulators Turn Down White House Invitation (WSJ)
• Say Goodbye to the Car Salesman (WSJ)
• U.S. drone kills senior militant in Pakistani seminary (Reuters)
• French business sector contracts sharply (FT)
• How Germany's taxman used stolen data to squeeze Switzerland (Reuters)
• Fed casts about for endgame on easy-money policy (WSJ)
• France, Italy call for full-time Eurogroup chief (Reuters)

Following yesterday's latest Taper Tantrum, it was critical to get a smattering of bad global overnight news to provide the ammunition for the algos that not all in the world is fine and the easy monetary policy will continue indefinitely pushing stocks ever higher at the expense of the global economy. Sure enough first China, and then Europe complied, following the biggest China Flash PMI miss and drop in 6 months, followed shortly thereafter by a miss and a drop in the Eurozone Composite PMI down from 51.9 to 51.5, below expectations of an increase to 52.0, primarily on the back of a decline in the Service PMI from 51.6 to 50.9, with 51.9 expected even as the Mfg PMI rose modestly from 51.3 to 51.5. The country breakdown showed a significant deterioration in France and an improvement in Germany. But the biggest overnight driver by a wide margin was the Yen, which tumbled nearly 100 pips and the USDJPY hit an overnight high of just over 100.90, which pushed the Nikkei up by almost 2%, and kept the futures well bid. However, what has confused algos in recent trading is the expected denial by Draghi of a negative interest rate, which while good for the EURJPY that drives the ES, what is the flipside is that this means less easing by the ECB, and thus interpreting the data does not result in a clear BTFD signal. Which may be a problem because should stocks close red today it will be the first 4 day drop in who knows how long.

Yesterday when a "source" released a rumor about a possible -0.1% European deposite rate, we had a quick assessment: "30-60 minutes until ECB sources denies everything." We were a little off on the timing, but once again spot on in principle, and moments ago Mario Draghi just said that negative rates were discussed in the last policy meeting and there was no news since then, that a rate cut has raised "some concers" and that certainly one should not infer negative rates. In other words, just like in May speculation is one thing, enactment of NIRP - something totally different. And just like that our other assessment of yesterday's "leak" was also confirmed: "This is what is called a "rumor-based" market test." And so now the ECB knows that the most it can get out of the EUR on a NIRP rumor is about 100-150 pips.

When the US shutdown sent shivers and ripples through the financial markets in October with the fear that the federal government would end up defaulting on the repayment of its debts, the banks decided to set up contingency plans.

CBO estimates that U.S. may be able to push the debt ceiling deadline to as late as June of next year, but OECD is already freaking out about the prospect of a U.S. debt ceiling bind....