Archive - May 2010 - Story

The S&P just broke the 200-dma which held as support yesterday and on May 6/7. AUDJPY broke through 76 which was the key support we had bounced off of as well. Put your helmets on if you are long risk here. Unless we have a massive reversal on the day and we close above the key levels mentioned here above: this could open the flood gates for a lot more de-risking. A lot of stops have been triggered when the S&P future crossed 1,100 and anybody still long will probably have to bail out and head for cover. On a side note apparently funding markets in USD remain very difficult to access for most foreign players, and we are going to get to a point where outright FX buying of USD and selling USD denominated assets will be the primary source of funding. This can get very nasty very quickly, especially since corporate flows in FX seem to indicate that corporates are still short USD and keep pushing the amrekt as they try to cover. - Nic Lenoir

The latest market rumor is that Europe is on the verge of instituting a pan-continental naked short-selling ban, primarily focusing on killing CDS trading which Germany has had success in bringing other countries over to her perspective. Incidentally yesterday Greek CDS ended the day 40 bps higher, once again proving that market regulation left in the hands of politicians will always backfire. Also in the rumor column: France to institute 3 year public sector wage freeze. We know what a "storming" of any particular building in Paris tends to result in. Conviction pair trade of the day: long guillotine manufacturers, short Goldman "conviction buys" (the latter is a given natural short hedge to any long trade).

The last time Greeks were shown to be storming their parliament on live TV, we got a 1,000 point drop on the Dow Jones. Today, another 100,000 protesters of austerity are expected to hit the streets as the entire country is essentially shut down. From the BBC: "Much of Greece's transport network has been immobilised, as trade unions stage another 24-hour general strike against austerity measures. Ferries are tied up in port, railway stations shut, and the Labour Ministry occupied by communist protesters. Organisers are hoping that up to 100,000 people will join protests on the streets later. There are fears of renewed violence after protests in Athens two weeks ago led to the deaths of three people. The country's main civil service and public sector unions say they represent some 2.5 million workers. "People are bleeding financially but they will participate in the strike," Ilias Vrettakos, a senior member of the ADEDY union, was quoted as saying by Reuters." And for those who wish to follow the strike and potential Storming Of The Parliament Part 2, here is a live feed from the main Parliament square.

1.    N. Korea denies sinking S. Korea ship, warns that any retaliation will trigger 'all-out' war
2.    White House calls ship sinking a peace-challenging 'act of aggression' by N. Korea
3.    White House says North Korean action is challenge to international peace and violation of armistice pact

RANsquawk 20th May Morning Briefing - Stocks, Bonds, FX etc

There was follow-through selling in trading overnight on Tuesday night into Wednesday morning. Asian and European traders had gone to sleep on Tuesday night (their times) and the DJIA and oil futrures had been higher. When they reawoke on Tuesday night and through Wednesday morning, they found that both markets had turned over and finished in newgative territory. That lent a certain downward momentum to asset markets this morning.
Oil traders also seemed reluctant to buy oil futures based on the bullish components of Tuesday night’s API report. Crude oil and distillate stocks had draws instead of builds, although gasoline stocks had dropped. Refinery use was up 1.0%, and crude imports had their largest increase in memory at 2.5 mln bpd.

Japan just announced its annualized Q1 GDP, which came in at 4.9%, well below the survey consensus of 5.5%. Yet while the country's subpar economic performance was not too surprising, the deflator came in at a massive -3%, indicating that in the second decade after the country first set off to prove that Keynesianism works when public debt is somewhere north of 100% it still have to find success. Our only concern is that Bernanke is all too aware of this data as well, and he will not stop at anything to reflate, even if that means a $5, $15 or $500 trillion Fed balance sheet.

Earlier today we disclosed what were not one but several massive central bank interventions in the Euro-Swiss Franc exchange rate. The intervention was large enough to push the rate up by 300 pips, a gargantuan amount in a world where applied leverage is often in the thousands. The amount of capital required to achieve this was likely unprecedented. Yet what bothered us was why would the SNB so glaringly intervene in the FX market not once but three or even more times. Thanks to the Telegraph we find out that the reason was a massive €9.5 billion capital flight from Germany into Swiss deposit accounts just this morning, according to BNP. Unfortunately for Germany this is only the beginning of capital reallocation from the country into neighboring Switzerland. And the technical bounce in the EUR today was in fact an even greater sign of weakness: in fact, as the IMF's Tim Kingdon pointed out, the money run in Club Med banks last week resulted in a massive €56 billion of interbank lending as the move from the periphery to the core accelerated. Now that the next stage of the run is from the core, Europe will very soon find itself with depleted depository capital very soon. Because if money is fleeing Germany, it is certain that France, Italy and the UK can not be far behind.

For the 4th week in a row, the UK is a top derisking name not just in sovereigns but in all DTCC tracked names. With $385 million in net notional derisking, in 227 contracts, the UK was the top 2 derisking name, with the surprising appearance of Brazil in the top spot at $460 million. Far less surprising was the 3rd name on the list: France continues to be in the top 5 derisking names week after week. Other notable names that complete the top 10 deriskers: Argentina, Germany, Australia, Korea and Japan. And the proof that corporates are now secondary to gambling in sovereigns, the top corporate derisking name, Enel SPA came in at a mere 191 million in notional, a ways away from the top three, all consisting of sovereigns. The same is true on the rerisking side, where of all 1000 names, the top 5 reriskers were all sovereigns (Italy, Spain, Portugal, Greece and Austria).

We read a Bloomberg article today that dissected the poor performance of Goldman’s trade recommendations to their clients: "Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who followed the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday." We thought it was appropriate to dig up a previous guest post in our Commodity Intelligence series dealing with the moral hazards of flow trading.

Q. With gold and gold stocks on a tear, does Casey Research still recommend holding 1/3 of a portfolio in cash?

A. The answer depends, of course, on what country you are currently sitting in. Were I sitting in the eurozone, I would have already moved much of my safe-harbor cash into the “resource” currencies such as Canada and Norway… i.e., countries that are rich in the natural resources that the world needs and will always need.

If my derrière were resting in a seat planted on U.S. soil, as it is, and I didn’t plan on doing any significant overseas spending, then I would feel relatively comfortable – for the time being, with a larger than usual allocation to the dollar. But I would have been diversifying into the resource currencies as well.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/05/10

A few days we notified readers about Goldman's conference call with the Koolaidy title of "Why the world is better than you think" that sought to soothe the frayed nerves of investors. Now that we are a few hundred DJIA points lower, Goldman's permabullish Jim O'Neill has shared the presentation that goes with the call. So in case you need a little pick-me-up in these days when China is rolling over, Europe is bailing itself out, carry traders are carted out head first, the US is generating record delinquencies, and the HFT marauders may soon be out of a job, here is Goldman with "Why the world i better than you think."

As I have suggested a few days ago, there are not that many reasons to want to own German Bunds yielding 2.75%. The Euro currency is dropping faster than Britney Spears' career, the yield is not exactly attractive, and the Bundesbank is one of the central banks that has been diluting its balance sheet in last week's sovereign bonds buying in Europe. Overall Bunds are not exactly a winner for long term investors it seems at these levels. Then you have the confidence inspired by a market you cannot short... 60% of the time banning short selling works all the time. Except that it never works. Yesterday's actions by Germany only highlight one thing: no one in Europe has a clue as to what do. Again we think the options are simple: dissolution of the Euro or currency debasement. But we can surely expect a lot of shenanigans before either conclusion materializes as politicians are trying to save the European dream. - Nic Lenoir

ICI has reported the most recent fund flow data, and it's a doozy. In the week following the flash crash, domestic equity funds saw a whopping $8.6 billion in outflows. As a result, the YTD outflow is over $9 billion, so in essence after almost going back to breakeven before May 6, equity funds are now once again solidly in the red, even as Primary Dealers and HFTs continue to play "hot potato market" with each other. In addition to the carnage in domestic equities, all other mutual funds saw an outflow in the prior week, including foreign equities ($3.7) billion, Hybrid ($0.7) billion, and total bond funds ($1.0) billion, for the first total net outflow across all products in over a year.We will bring you AMG/Lipper fund data once we get it, although we do not expect any notable discrepancies.