Archive - May 2010 - Story

• Britain's 1Q GDP growth revised upward to 0.3 percent from 0.2 percent.
• China cabinet agency urges action against rising food prices as higher inflation lurks.
• China, US sidestep Yuan confrontation as Europe dominates Beijing talks.
• Credit risk soars as Korea tension, Euro slump spook investors.
• Denmark reaches deal to trim public spending by $4.37 billion over 3 years.
• EU economy chief warns Europe will stagnate without major economic reforms
• European banks forced to pay more for short-term dollar borrowings than banks in US, Asia.

Libor is now at 0.53%, eurodollars are plunging, new Fed-ECB rescue facilities are rumored to be imminent, Germany is set to introduce a ban on naked shorting of all stocks, and sovereign risk is exploding: it will be a fun day. Spain, Italy and Korea are all more than 20% wider on the day, as the contagion virus is spreading faster and faster toward the heart of Europe.

The wheels are falling off the liquidity cart. RanSquawk reports that market rumors suggest the Fed is about to expand it Europe rescue FX swap facility. What form the new lifeline will take is still unknown.

The JPY chart says it all.

From Goldman - "On May 14, we published our latest FX Monthly, largely focusing on why we decided to not change our EUR/$ forecasts. We expect EUR/$ to strengthen back to 1.35 and then to stay broadly unchanged in that area." Oops. Read the latest mea culpa and event spin below.

Big picture I keep my long term target of 380 on the S&P 500. Broken record but I stick to my guns one this one. Short term we are still advising to be short but moving in on key supports. Fundamentally my view is that the inventory rebuilding/federal spending is absolutely not anything organic and sustainable we can build a long term growth outlook on. We have renewed balance sheet deflationary forces at work which have triggered a relapse of credit markets and this time sovereign debt is on the table too. There are measures that have been put in place in terms of liquidity but so far the impact on markets has been null with disruption in the funding markets still building up. At this point we think the solution will be for the Fed to step in and reactivate the liquidity facilities they let expire, but that will come only after a heavy political battle. Politicians are slowly finding out that maintaining artificially a market that is bankrupt in every possible way without printing money is quite tricky and they have not found the answer to that riddle yet. An overleveraged system supported by a structurally weak economy can only be maintained by a flooding of central bank liquidity combined with austerity. It will take a solid decade to get balance sheets in good health at the consumer/sovereign level without masive wave of defaults, pick your poison. - Nic Lenoir

In case you have missed the (primary) reason why the world is imploding this morning, and futures are collapsing, from Reuters: "North Korea puts military on combat readiness. North Korean leader Kim Jong-il has ordered his military to be on a combat footing, South Korea's Yonhap news agency said on Tuesday. It quoted a local group of North Korea watchers as saying their sources there had told them Kim's command had been broadcast by a top military official. Tensions have risen sharply on the peninsula after the South inmposed sanctions on its neighbour, which it accuses of sinking a naval ship in March, killing 46 sailors." The Korean Won, and global futures, are plunging on the news.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/05/10

Spreads closed the day weaker after clinging to gains until mid-afternoon and outperforming stocks. A slow-and steady decline in FINLs finally cracked the low activity rally in risk assets but we note IG underperformed HY as stocks sold off helped by the EUR stalling. Cash underperformed synthetic single-name credit once again but the late-day rush for protection suggests investors once again covering with macro overlays - not a good sign for bonds.

Game theory causal relations are now superseding simple myopic "in-a-vacuum" economic variables. Are you prepared for the paradigm shift? David Einhorn is (and so are we).

A must watch two part interview of Eric Sprott by BNN, in which the Canadian asset manager shares his views on the economy, financial markets, sovereign overleverage, industrial commodities, and, of course, gold. The man who created the PHYS index to invest in physical gold, is, not surprisingly, not too excited about perspectives for stocks, and markets in general, which he qualifies as a "financial farce." Sprott is, and has been for a while, confident we will retest the March 2009 666 lows in the S&P. Slowly, more and more "experts" are moving to his camp. He also gives an advance glimpse of the topic of his upcoming May missive for all you Sprott groupies.

A week ago the FRBNY's Task Force On Tri-Party Infrastructure came out with an exhaustive must read report discussing its concerns about the massive $1.7 trillion US tri-party repo market, and specifically proposing several ideas that could prevent a bank run on a shadow market that is second in size only to the money-market $2+ trillion US money market. Incidentally, both markets were on the verge in the days after Lehman. Their day of reckoning may be coming again soon, and with the FRBNY task force's explicit attention on Tri-Party repos, all is probably not well. In fact even Moody's today agreed that until the proposed fixes are implemented (likely many months, if not years away), the tri-party repo "market will remain a major source of systemic risk, especially given the current market volatility and the fact that the Federal Reserve’s primary dealer emergency lending facilities are no longer in place." This should be another bright red flashing warning to those who still have to realize that the liquidity situation from a month ago and now are diametrically opposite.

Despite a better Friday, European sovereign risk and US financial reform continue to weigh on markets, causing some to connect the dots from these sorts of concerns to broader questions about the health and sustainability of the global cycle. Our baseline view remains that these fears are overdone. Indeed, in Wednesday’s Global Economics Weekly, Jim O’Neill argued that the world remains “Better than you think” with the needed austerity in peripheral Europe posing only minimal challenges to our above consensus global real GDP growth view. Importantly, conclusive economic evidence of a shift in the business cycle has yet to materialize. However, there are some faint signs of fraying around the edges of the evolving macro data set, and, especially in the US, we continue to expect a second half slowdown. US retail spending continued to grow in April, but the acceleration in spending has paused. Weekly UI claims have stalled, and shown no improvement for several months. The Philly Fed survey inched up by a tenth of a point in May, but key leading subcomponents (New Orders less Inventories in particular) failed to make headway, as has been the case for several months. Euroland PMI fell in May, though it remains solidly in expansionary territory, indicating a slowdown in the rate of growth but not a shift in direction, as did German PMI after a blowout reading in April. - Goldman's Noah "Top Trades For 2010" Weisberger

Following an ongoing outcry over opacity in the dark pool markets, a topic discussed to death on Zero Hedge, six investment banks have finally started providing some modicum of transparency into how much trading actually occurs in their dark pool venues. Today, MarkIt will start disclosing European trades matched in the internal crossing engines of Citigroup, Morgan Stanley, Credit Suisse, JPMorgan, UBS and Deutsche Bank. The first ever report of this kind can be read on the following MarkIt site. The data will be published on a T+1 basis. As MarkIt notes, "The aim of the Markit BCS (Broker Crossing System) product is to provide the market with greater visibility of the total volume crossed within their systems by the reporting brokers." Europe is a good place to start with such disclosure, as estimates on European dark pool trading are extremely wide: as Bloomberg notes, "The U.K.’s Financial Services Authority says the pools account for 1.25 percent of trades, whereas the Federation of European Securities Exchanges, which represents exchanges, estimates the figure is closer to 40 percent. The lack of reliable information on volumes and pricing of securities in dark pools has posed a problem for regulators trying to keep pace with market innovation." Curiously, this major development in dark pool opacity comes on the heels of the announcement that non-investment bank dark pools, those of Chi-X and BATS, will curb market data disclosure. Again Bloomberg: "Chi-X Europe Ltd., the region’s biggest alternative stock-trading system, began suppressing some market data from its dark pool after customer concern about information leaks led to a decline in business. Starting today, London-based Chi-X Europe will no longer disclose customer identification or order numbers in Chi-Delta, its dark pool. Bats Europe, the second-largest multilateral trading facility, will impose similar controls on May 24." We believe this is a byproduct of accelerating cannibalization between investment bank and 3rd party ATS venues (not to mention dinosaurs such as NYSE-ARCA), as margins continue to dwindle in the rapid evolution to a zero margin trading business, be it exchange or dark pool based. In their pursuit of the fastest, biggest, newest, market participants are destroying each other in the process, and further destabilizing market structure in the process.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/05/10