Archive - Jun 26, 2013

The late 1990s for the resource sector was so challenging that it is now often referred to as the "nuclear winter" of the industry. Some analysts are comparing our current circumstances to that period, while others purport we haven't hit bottom yet...

Three of the most important crisis hit countries in Southern Europe – Italy, Greece and Portugal – have been seeking to make progress under coalition Governments, representing a delicate balance of domestic political forces. In some ways they have been surprisingly successful; the pressure to avoid a more generalised crisis of confidence has pushed traditional opponents to cooperate in the interests of self-preservation. Recent events, as JPMorgan notes, have highlighted some of the existing fragilities however, and serve as a useful reminder that stability is far from guaranteed. In addition, the wounds inflicted by recent political battles may have a cumulative impact, weakening the commitment to cooperation in Government over the medium-term. This invites two questions; can they keep the show on the road, and for how long? The wear and tear of governing has created a series of cumulative pressures, which look a lot like the proverbial straws on the camels back. As JPMorgan concludes, at some point one of them is likely to cause a break (our instinct tells us risks are probably highest in Italy).

Not much good to say about the just completed 5 Year auction but we'll say it anyway: pricing at a yield of 1.484%, in line with the When Issued, this was the highest auction break for 5 Year paper since July 2011, or just before the great debt ceiling Snafu. What's worse, the Bid To Cover tumbled from 2.79 in May and a 2.81 TTM average to a tiny 2.45, the worst and first sub 2.50 bid to cover since September 2009. And worst was that Direct bidders, until recently some of the most vocal auction participants, and who had been responsible for 15.4% of the average allocation in the last 12 auctions (and a whopping 23.3% in the May edition), crashed to a miniscule 3.6% - the lowest since November 2009. Bid-side demand was frankly terrible with just $85.7 billion in interest tendered, compared to an average number just shy of $100 billion in the past year. This was mostly due to a plunge in Direct tenders from $14 billion to $6.7 billion. The resultant "surge" in Indirect bids was not an indication of interest by foreign bidders, but a collapse of interest by all other classes. Like we said: not much to say here...

As shown two months ago, the marginal cost of production of gold (90% percentile) in 2013 was estimated at $1300 including capex. Which means that as of a few days ago, gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1104...

Presented with no comment...

72% of Likely U.S. Voters Know the NSA Has Monitored the Private Communications of Congress, Military Leaders and Judges

Despite the jump in French PMI (though still in contractionary region), the number of French Jobseekers rose once again (up 11.5% year-over-year) to a new all-time record. As the nation struggles with near Depression-era activity, it seems the green shoots that Draghi's jawboning once again provided today remain a long way off in real-world land.

"This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate contracts at the short end of G10 fixed income markets... The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged."

Big Dada is coming...

Ah, the wonderful life of a mainstream media journalist where everything is linear, where everything is perfectly explainable to an overeager public using "as" linkers, and where in the name of propaganda and keeping your editor happy, logic and objectivity is also known as "collateral" damage.

 Anyone who is banking on consumers to continue spending as they have is out of their mind.

Following Putin's colorful description of the no-man's-land that Edward Snowden seems to reside in, Wikileaks has confirmed this morning that "Mr. Snowden is not being 'debriefed' by the FSB. He is well." As Rianovosti notes, there has been widespread skepticism that the presence of the Snowden at a Moscow airport would not have prompted any interest from Russian intelligence officials. Snowden’s ultimate destination is unknown, but Ecuador – which has given refuge to WikiLeaks founder Julian Assange at its embassy in London – has now demanded that, as The South China Morning Post reports, the US must “submit its position” regarding Snowden to the Ecuadorian government in writing as it considers his request for asylum. Ecuador's foreign minister added, "his government could take months to decide whether to grant asylum."

It was bound to happen some might say. We were warned! Chinese banks have stopped lending due to pressure from liquidity deposits. Some branches of the Bank of China and the Industrial and Commercial Bank of China have issued statements in which they announce that they are halting lending for a temporary period.

It is easy to get the impression that the naysayers are wrong on Europe. After all the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France which is retreating into old-fashioned socialism was able to borrow at about 2%, and one of the best performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear when one stands back from all the usual euro-rhetoric that as a threat to the global financial system it is a case of panic over. Well, no. Europe has not recapitalized its banking system the way the US has (at great taxpayer expense, of course). Therefore, it is much more vulnerable. Where European governments and regulators have failed to make their banks more secure it is because they tied their strategy to growth arising from an economic recovery that has failed to materialize. The reality is that the Eurozone GDP levels are only being supported at the moment by the consumption of savings; in orther words, the consumption of personal wealth. Wealth that is not infinite; and held by those not likely to tolerate footing the bill for much longer.

In what is likely to cause a storm of controversy, the Supreme Court ruled against the 17-year-old anti-gay Defense of Marriage Act:

*DEFENSE OF MARRIAGE ACT PROVISION STRUCK DOWN BY TOP U.S. COURT
*SUPREME COURT VOTES 5-4 ON U.S. DEFENSE OF MARRIAGE ACT
*COURT SAYS MARRIAGE LAW VIOLATES EQUAL PROTECTION GUARANTEE

Kennedy: DOMA "humiliates tens of thousands of children now being raised by same-sex couples"

Scalia: "By formally declaring anyone opposed to same-sex marriage an enemy of human decency, the majority arms well every challenger to a state law restricting marriage to its traditional definition,"

"DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment."

Full timeline and opinion below.