Archive - May 12, 2014

• Goldman’s Andrew Wilson Says QE in Europe a 2015 Story If at All
  
• European economy would have to weaken significantly before QE comes into play, said Andrew Wilson, co-head of Global Fixed Income and Liquidy management team at Goldman Sachs Asset Management.
• Says Draghi has foreshadowed policy easing at next meeting, expects ECB to cut rates 1-2 times before they look to other methods such as an LTRO
• Says if other methods don’t work it would “ultimately have to be QE”

Across the 137 warehouses that the London Metal Exchange has begun tracking, 2 stand out. Having been at the center of allegations of manipulation of the metals markets - most notably Aluminum - thanks to monopolistic warehousing, the following report from the LME will not entirely shock that none other than Goldman Sachs (and Glencore) have simply incredible waiting times for delivery of the base metal. We discussed the monopolization (thanks to lax Fed regulation) here, here, here, and here and as Reuters reports lengthy logjams at warehouses monitored by the LME, the world's oldest and biggest market for industrial metals, prompted bitter criticism by consumers and sparked a wide-ranging reform program at the exchange. With nearly 2-year-waits for Aluminum delivery by Goldman - we are sure regulators will see nothing wrong at all.

BANZAI7 FOOD AND BEVERAGE WARNING...

After "most shorted" stocks had their best (i.e. worst or biggest loss) week in 2 years last week, it was perhaps not entirely surprising that 'they' would smash VIX and JPY to manufacture a short squeeze bloodbath this morning at the open...

Just a few days ago we highlighted what some had outlined as "Novorossiya" (New Russia) - the new territory being 'created' by the Russian Spring... today we see it from a slightly different angle - on the wall of Denis Pushilin's office - the leader of the new independent Donetsk Republic...

Just as we predicted last week, Crimea 2.0 is here.

• DONETSK PEOPLE'S REPUBLIC DECLARES ITSELF SOVEREIGN STATE: RIA
• UKRAINIAN SEPARATIST LEADER PUSHILIN SAYS ASKING MOSCOW TO CONSIDER THE ABSORBTION OF DONETSK REGION INTO THE RUSSIAN FEDERATION

While Putin has not yet confirmed it will, begrudgingly, annex Donetsk as a reminder earlier today the Kremlin said it "respects" the independence vote and calls for a "civilized implementation." And what could be more civilized than annexing two regions of Ukraine in under two months without firing a single shot?

If there was any confusion about what may be coming next, now that the bulk of the TBTFs are liquidating their commodities trading divisions having been caught manipulating virtually every physical asset under the sun (except for Goldman: the bank will first stage a mutiny at the Fed before it is forced to spin off its legendary J Aron commodity division which spawned such taxpayer generosity recipients as Gary Cohn and Lloyd Blankfein), the most recent events at Swiss commodities giant Mercuria should clarify "next steps." Because after Mercuria last month acquired JPMorgan's physical commodities trading business for $3.5 billion however without the scandal-plagued Blythe Masters, the Geneva commodities group needed someone to fill in the big enough shoes which may now belong to the world's largest, and very much still under the radar, physical commodities trader.  It picked Magid Shenouda, who was co-head of commodities for Goldman until the end of last year.

While US equity markets could not be more excited at the prospect of more bloodshed, more sanctions, and more WWIII, it seems the Ukrainian markets are not amused. Short-dated CDS are spiking, bond yields surging, stock prices tumbling, and the Hyrvnia is back at one-month lows. Ukrainian stocks are now the worst-performing market in the world and with 10Y bond yields back over 10% (and 5Y near 14%), it seems the exuberance for risk in Western markets is not spilling out into a nation that is 'saved' by the IMF loans and western confidence.

Just as Gold was monkey-hammered late last night, we warned in the pre-open that it might happen and sure enough... VIX has been smashed back under 12 this morning, lifting the Dow to new record-er all-time highs and sending the S&P chasing its highs too... why not... Draghi promised to do something, sometime soon (even as the Fed is tapering and China says no more stimulus). What is really helping is USDJPY 102 once again which provided the opening ramp ignition. For all those on the 'healthy' rotation bandwagon.. the Nasdaq and momo names are outperforming (Nasdaq now unchanged for May) - so it's not that. Gold is up $25 from overnight lows and Treasuries are flat to modestly weaker as stocks smash higher.

"If everyone in society is trying to get into the financing business, we may have entered a phase where a fever has started to affect our ability to think," warns one analyst of the bubble-fervor in China... but President Xi Jinping dashed the hopes of stimulus-hunters everywhere (once again) last night amid a slowdown that analysts forecast will lead to the weakest expansion since 1990. As Bloomberg reports, Xi said there will be no major stimulus and commented that "[Chinese] must boost [their] confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded." In other words, keep calm and carry on (oh and don't lever any more carry trades please!).

Every wondered why the rest of the world envied the US middle-class? There were many reasons once, a long time ago and one of them was their affluence, their wealth, their ability to be able to afford whatever they wanted.

This week markets are likely to focus on a few important data prints in DMs, including Philly Fed in the US (expect solid expansionary territory) and 1Q GDP releases in the Euro area (with upside risks). In DMs, the highlights of the week include [on Monday] Japan’s trade balance data and Australia business conditions; [on Tuesday] US retail sales, CPI in Italy and Sweden; [on Wednesday] US PPI, Euro area IP, CPI in France, Germany and Spain; [on Thursday] US Philly Fed, CPI, capacity utilization, Euro area and Japan GDP; and [on Friday] US Univ. of Michigan Confidence. In the US, we expect Philly Fed to print in solidly expansionary territory (at 14, similar to consensus) and to inaugurate what we call the active data period of the month. We also expect CPI inflation to print at 0.3% mom (similar to consensus), and core CPI inflation at 0.18% mom (slightly above consensus).

"Notwithstanding the view that we may see S&P get up to 1950 (+/- a little) over the next fortnight or so, over the rest of Q2 and Q3 we could see a decent correction of up to 20% in the risk-on trade. Low 1700s in the S&P attracts, and thereafter, depending on weekly closes, low 1600s/mid-1500s S&P could be in play. For now, however, the key level to the upside is 2000 as a weekly close on the S&P – if achieved then I would have to revisit my bearish bias for the belly of 2014. To the downside a weekly close below 1770 would, I feel, easily put a 1700 S&P within reach. Beyond that I would need to assess data and price action at the time before highlighting the next set of levels, but I would not be surprised to see policymakers again attempt to boost markets later this year - there should be no surprise if this happens because the reaction function of central bankers has become depressingly predictable."

As previously reported, the key event of the weekend was the east Ukraine independence referendum which, as expected, passed by a landslide. Of course, the outcome of the referendum itself was largely irrelevant: all that mattered was that it happened, and that it gave the Kremlin the necessary and sufficient justification to intervene and enter the eastern territory when so needed. And hours ago, in its first official statement on the referendum, the Kremlin said Monday "it respects the secession referendum in eastern Ukraine and hopes for a "civilized implementation" of the results through talks between Kiev and representatives in the east." In other words, at least in the eyes of Putin, Ukraine no longer has a legitimate claim to remain in east Ukraine.