Archive - Apr 23, 2013

Despite rising (and record) unemployment, non-performing loans at record levels crushing the banking system's balance sheets, pension funds all-in, and their Italian neighbor now expecting more budget cuts of almost 1% of GDP in 2015-17 (and further downside risks to the GDP forecasts); Italian and Spanish bond spreads are pressing below critically 'positive' levels. While Italy remains above recent low spreads, Spain has just breached the 300bps (spread to Bunds) level; last seen in November 2011. The last 3 days have been the best run in Spanish bonds for six months. This level has been significant resistance a number of times since the European crisis began, but this time it's different, since the BoJ is seemingly blind to 'risk' and only sees 'return'. With the market telling the politicians that Europe is fixed, is it any wonder they are all asking for a stop to austerity? Or is bad once again good, as it forces Draghi's hand to follow his BoE, BoJ, Fed compatriots down the rabbit hole?

Welcome to America and its stupid politics.

We know it is early in the day for a divergence chart, but the inexorable bid for US equities overnight (amid dismal global economic data from China and Europe) juxtaposed against the seemingly rational response of US Treasuries to drift lower in yield as growth expectations fade just leaves us saying WTF...

Just about a year and a half after the bankruptcy filing of MF Global, the first real lawsuit that directly names former MF Global (and Goldman) CEO Jon Corzine and his cronies, has hit the docket with MFG Holdings bankruptcy trustee Louis Freeh as plaintiff. The complaint: breach of fiduciary duty. Of course, when one is a bundler for the president, such trivial concepts as duty to anyone else, be it fiduciary or otherwise, naturally does not exist.

Asia is seeing a new gold rush. Demand for gold bars, coins and jewellery has soared as bargain hunters try to capitalize on the dip in prices. In Hong Kong and Beijing customers lined up outside banks and jewellery shops to make purchases and in some instances there was not enough physical metal to meet the demand. The Shanghai Gold Exchange’s cash contract hit a new record high yesterday (43 metric tonnes, up from 30.4 on April 19th) while gold coin sales at the U.S. Mint have nearly tripled in April against last month’s figures.  Joni Teves of UBS research said, “Physical markets have responded to the much cheaper gold price levels,” and “our physical flows to Asia have been particularly elevated this week.” Asian investors demand for the physical yellow metal has supported the gold price, rallying it up 8.1% from last week’s low.

"While I think this policy is fundamentally right, I think [austerity] has reached its limits," was EU President Barroso's firestarter comment yesterday. As the WSJ reports, the IMF also said last week that  the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing that its belt-tightening is holding back the global economic recovery and could end up being self-defeating. Of course, the beggars are once again trying to be choosers as Spain's de Guindos pushes his agenda along this 'growth vs austerity' path, "What we are going to do now is strike a better balance between deficit reduction and economic growth," but it is the bagholders (or money-men) of Europe that has the last word. As we noted yesterday, Merkel's expectations are no more money without ceding sovereignty, this morning it is German MPs who are up in arms as Nobert Barthle condemns Barroso's statements on austerity and Hans Michelbach flatly rejects this path of no resistance as it "undermines fiscal consolidation efforts." Perhaps the most clear message was from Volker Wissing who added, "demanding more money or time would send a 'fatal' signal to financial markets on reforms." With German PMIs so bad this morning, we are reminded of Bill Blain's comment, that ultimately growth is about confidence - and right now, Europe is a very unhappy place.

Yet another round of less than impressive macroeconomic data from China and Eurozone failed to deter equity bulls and heading into the North American crossover, stocks in Europe are seen higher, with tech and financials as best performers. The disappointing PMI data from Germany, where the Services component fell below the expansionary 50, underpins the view that the ECB will likely cut the benchmark interest rates next month and may even indicate that it is prepared to provide additional support via LTROs. As a result, the EONIA curve bull flattened and the 2/10s German spread flattened by almost 3bps to levels not seen since June 2012. In turn, Bund future hit YTD peak at 146.77 and the next technical level to note is 146.89, 1st June 2012 high. However it is worth noting that the upside traction is also being supported by large coupon payments and redemptions from France, the second highest net market inflow for 2013.

This is the beginning of War and those on the losing side don't even realize they're in battle. Remember, Merkel has already declared the EU to give up sovereign authority for the greater good, the United Germanic Republic of Europe! This is how she will do it.

We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.

• China’s Recovery Falters as Manufacturing Growth Cools (BBG)
• Gloomy eurozone output points to rate cut (FT)
• Limit Austerity, EU appartchik Barroso Says (WSJ)
• Regulators Get Banks to Rein In Bonus Pay (WSJ)
• SEC looks to ease rules for launching ETFs (Reuters)
• Easy come, easy go: U.S. Seizes $21 Million From Electric Car Maker Fisker (WSJ)
• Japan nationalists near disputed isles (Reuters)
• OECD in fresh warning on Japan debt (FT)
• S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics (Reuters)

If there was any debate about the global economic contraction, driven largely due to pundits confusing manipulated stock market levitation with this anachronistic thing called the "economy" and fundamentals for the fourth year in a row, all doubts were removed after this morning's manufacturing PMI data out of China, which as reported previously was a big disappointment (sending the Composite firmly into the red for the year down 2.57% to 2184.5) only to be followed by just as disappointing manufacturing and services PMI data out of Germany, which tumbled from 49 and 50.9 to 47.9 and 49.2, respectively, missing estimates of 49.and 51. The composite German PMI tumbled to a 6-month low of 48.8 as a result, meaning the European economic deterioration is just getting started, and at the worst possible time for Merkel several months ahead of her reelection campaign. The end result was a miss in the blended Eurozone Mfg PMI, which dropped from 46.8 to 46.5, even as the less relevant Services component eaked out a small gain from 46.4 to 46.6, on the back of a dead cat bounce in French economic indicators. Bottom line: a contraction in both European manufacturing and services for the 15th consecutive month. Some "recovery."