Archive - Mar 12, 2013

From Europe's close (and end of POMO) yesterday, US equities went into hyperventilate mode as the rest of risk-assets were decidedly unimpressed. This morning, gold has snapped higher (along with other commodities as the USD deteriorates) to catch up to stocks on the week while Treasury yields continue to slide in a more risk-off manner - or did the dismal data overnight drive expectations for moar QE and buying gold, buying bonds, and buying 'protected' stocks is the order of the day? Once again it appears the equity indices (and in that way the entire US equity market of thousands of stocks) are driven by dips and rips in EUR and JPY.

First it was gas prices, then it was food prices, and now it is the turn of basic utilities to see costs surge by double digits. Dow Jones reports that "Japanese utilities, forced to idle their nuclear power plants over the past two years and facing higher fuel costs due to a weak yen, are now looking to push through double-digit rate hikes for their commercial customers." This means less disposable income, less corporate profits, less monetary velocity, less growth and ultimately less "inflation" in other things such as the much desired stock market, which was supposed to be the wealth effect offset to all staples price increases. At least on paper. Of course we explained on various occasions, most recently here, why in Japan a US-style of wealth effect price substitution would never work. Surely nobody could possibly see this coming - "The action comes at a bad time for some Japanese companies that were hoping the fall in the yen and much-trumpeted efforts by the government to turn round the economy would help improve their prospects." Ah hope - the only strategy left.

While the people of France voted for a wealth distributing tax-the-rich Socialist President, it appears Francois Hollande is not living up to his electorate's hope for change as his policies are increasingly seen as simply more of the same as Sarkozy - “often the line is very fine between the two but Hollande must maintain the idea that he is more left wing.” Hollande’s popularity fell in February, leaving him the most unpopular French leader since 1981, a TNS-Sofres poll showed. More than two-thirds of the French and 44% of those who voted for him say they’re disappointed with him. It seems Socialism is not all it's cracked up to be as "the [European] obligation to cut deficits and spending and make reforms... exactly what Sarkozy had to deal with... annuls all measures Hollande wants to impose to boost jobs and growth." Hollande has restated his promise to reverse the unemployment trend and chanted his three mantras "constancy, endurance and hope," but, as Bloomberg notes, the last five opinion surveys have been disastrous for the self-proclaimed 'normal' president but have no fear as the 'old fuddy-duddy' is going back to the people in a charm offensive.

If there is one firm that would know what the arrival of a Goldmanite at the head of the BOE means for the GBP, and specifically EURGBP, it would be Goldman. Moments ago Goldman's Tom Stolper just poured more gas into the EURGBP "parity" fire, sending the EUR spiking. That said, the logical Stolper-contrarians in us say this is precisely the time to fade the relentless move higher in the EURGBP: history is on our side about 93% of the time. After all, Goldman's prop flow desk is now selling the pair to its clients. This is even as we said to short the GBP with both hands and feet in late November when Carney's appointment was announced: a move that has resulted in nearly a +1400 pip gain in the GBPUSD short. Oh well, time to take profits.

Yo Liz:  Subsidies for the zombie banks total more than $3 annually for every dollar in income reported by the industry... 

While FX Reserves may not exactly be freely spendable ready cash, they are often used a proxy for a nation that is 'wealthy'. It seems, however, from the following chart that in fact the FX reserves of the world shows a different picture than Americans might like to consider. The highest level of reserves are split between currency manipulators and resource-rich nations. China and Japan top the table, according to Bloomberg, and Saudi Arabia and Russia are rising fast up the league tables of FX horders. Just as notable is that China's FX reserves have swelled to $3.31 trillion at the end of 2012 from $286.4 billion a decade ago, representing a pace of $829 million per day. The problem is that recently China has hardly had the same appetite for the USD it exhibited in prior years. With the world apparently devaluing against a more stoic inflation-anxious China, it would seem Japan's 'horde' will dwindle fast if they ever do anything but jawbone.

Chart of the Week Video: 10 Year Treasury Yields and Housing

Today is the day all Robert Langdon fans have been feverishly waiting for: the 115 voting cardinals of the Catholic church begin today their secret conclave to choose the successor to Pope Benedict XVI. As Bloomberg puts it succinctly, "he who enters the conclave a pope exits as a cardinal" and it is notoriously tricky to try to handicap the papal vote. In processional next steps, the Cardinals will gather in the Sistine Chapel, hailing from as far as the Philippines, and may hold a single vote today with as many as four ballots on succeeding days. Politically, this conclave has been presented as a "struggle between cardinals looking to overhaul the Vatican bureaucracy known as the Curia, and those trying to maintain its influence, according to Vatican analysts. Electing a non-European, while a novelty, would not necessarily presage a change of course for the millennia-old institution shaken by the abdication of German-born Benedict." Realistically, it will be a free for all for the scandal-riven church, and it is very much an open question who the next pope will be. So while we await the puffs of white smoke, courtesy of Bloomberg here are brief biographies of some of the men who may be in the running, based on betting websites and consulting Vatican watchers.

Glorious words in many ways. They begin the preamble to the United States Constitution as America threw off the chains of tyranny and became a country. However it must be said that Americans are not the only “We the People” country on the planet. This declaration is to be found in democracies everywhere and should be cherished and praised as citizens of each nation get to make the choices appended to self-determination. I point all of this out this morning because there is change afoot on the Continent and to not take note of it may well be an expensive mistake. Business of late, business as usual, may not be the business of tomorrow as the citizens of various countries, not in open revolt or not in the streets, are beginning to wave a different banner and it is decidedly nationalistic and a potential new definition of just whom “We the People” are; in fact. Recently, in poll after poll, the citizens of Germany, Britain and other countries in Europe are gathering around their own flags and seemingly rejecting the imposed commonality.

Average daily trading combined volumes on the three main gold contracts on the Shanghai Gold Exchange in the first two months of the year jumped 24% on the year, according to Reuter’s calculations.  "The strong physical demand in China is the main reason behind gold's resilience," a Beijing-based trader told Reuters. Physical demand prospects out of China remain positive in the weeks ahead, UBS AG said  according to Bloomberg. China is very vulnerable to a property crash and its own economic crisis. The Chinese stock market has performed very poorly in recent years and Chinese people realise the importance of gold as a store of value.

The eye of the hurricane over Southeast Europe may soon be shifting, exposing Greece to the same 150 mph gale turmoil everyone has grown to love and expect over the past three years as soon as this month, when a new proposal by Greece is due on how to cut a massive 150,000 public sector jobs: a move which will result in an immediate surge in public unrest, and an exponential jump in strike activity. As Bloomberg reports, "Greece is locked in talks with international creditors in Athens about shrinking the government workforce by enough to keep bailout payments flowing. Identifying redundant positions and putting in place a system that will lead to mandatory exits for about 150,000 civil servants by 2015 is a so-called milestone that will determine whether the country gets a 2.8 billion-euro ($3.6 billion) aid installment due this month. More than a week of talks on that has so far failed to clinch an agreement."

• Cardinals head to conclave to elect pope for troubled Church (Reuters)
• Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
• Ryan Plan Revives '12 Election Issues (WSJ)
• Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
• Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
• CIA Ramps Up Role in Iraq (WSJ)
• Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
• SEC testing customized punishments (Reuters)
• Judge Cans Soda Ban  (WSJ)
• Hungary Lawmakers Rebuff EU, U.S. (WSJ)
• Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
• Funding for Lending ‘put on steroids’ (FT)
• Investigators Narrow Focus in Dreamliner Probe (WSJ)
• With new group, Obama team seeks answer to Karl Rove (Reuters)

When we first reported on China's "hogwash" yesterday, the number of floating pigs in Shanghai's water supplying Huangpu River was a "modest" 1200. It has since tripled to 3300. From SCMP: "The agriculture and environmental protection departments in Shanghai's Songjiang district have pulled more than 3,300 dead pigs out of the Huangpu River, which flows through the municipality, in the past week." What is worse is that at least one pig-related virus has been found in a water sample: "Porcine circovirus, a common hog disease that is not known to be infectious to humans, was found in a sample taken from the water, Shanghai's animal disease control department was quoted as saying by eastday.com a major Shanghai news portal." The good news is that tests by the Shanghai Animal Disease Prevention and Control Centre on five sets of internal organs taken from the dead pigs has ruled out five other diseases including foot-and-mouth, hog cholera and blue-ear. Of course, this is China, whose disclosure record is second only to Japan, where as a reminder the government said the radiation level was under control days after the Fukushima explosion, even as the reality was far grimmer.

Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading. To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.