Archive - Jun 2013

From the moment China opened last night, precious metals were under pressure; this accelerated during the middle of the European day, recovered modestly into the US open (on crappy data and implicitly no taper) and then slid lower for the rest of the day ending at its lows (gold -4.3%, silver -5.6%). Stocks were loving it - but again we saw the opening spike in homebuilders sold all day and Staples and Utilities outperforming (not really risk-on?). Treasuries never looked back and rallied all day (belly -7bps) to leave rates practically unchanged on the week (while S&P is up 20 points). The USD is up 0.7% on the week having rallied all day today - led by EUR weakness (and notably AUDJPY once again recoupled with stocks this afternoon). Credit modestly underperformed but rallied technically (more below) as the cash S&P 500 regained the all-important 1,600 level but Trannies rolled over into the close (and stocks remain down around 3% from FOMC levels). Oh, and AAPL <$400

Both the absolute levels and the implied volatility of credit markets are significantly divergent from the recovering exuberance in stocks. As we discussed here and here, this cannot last. If you 'believe' that Bernanke was bluffing and the taper is off then credit is grossly cheaper than stocks; if not, equity shorts seem an appropriate position into Q3.

Another faux-hawk takes the dovish tone and walks back the new normal 'template-less' Taper tantrum that Bernanke created...

• LACKER SAYS FED NOT 'ANYWHERE NEAR' CUTTING BALANCE SHEET SIZE
• LACKER SAYS 'MAYBE MARKETS GOT A LITTLE BIT AHEAD OF US' ON QE

So no tightening (duh). But Lacker, once upon a time a hawk too, just like Plosser and Kosher-Lakota (sic), tries to regain some credibility as follows:

• LACKER SAYS HE WOULD BE `FINE' WITH FOMC TAPERING QE NOW
  
• LACKER SAYS HE WOULD LIKE TO SEE FED BALANCE SHEET DECREASE

Equities jerked higher by 3-4 S&P points (bonds didn't) - so it looks like the impact of the jawboning is fading.

As we pointed out here, the impact on both 'real' housing affordability of surging mortgage rates is extremely significant for the so-called 'housing recovery' but as Charles Hugh-Smith notes, there is a more insidious (inflation-like) effect (aside from the consumer-confidence sapping one we described here). Rising mortgage rates reduce household purchasing power just like higher taxes and inflation. That means there is less household income to spend on other things, and that's not good for "growth."

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.