Archive - Aug 23, 2010 - Story

At a time when the UK banking system is massively underwater, and exists only due to billions in ongoing daily government support, the last thing the country (or any other) needs is a forced locked out from one's bank account. Which is precisely what happened over the weekend in the UK, when Barclays clients were unable to access their accounts, or withdraw cash with no advance notice. Reuters reports that "thousands of Barclays customers in Britain were unable to access their bank accounts or withdraw money from cash machines on Saturday after a system crash caused chaos nationwide." Hopefully no cyberterrorists get whiff of this most easy way to create a nationwide financial panic like no other: with everyone's nerves continuously frayed courtesy of broken capital markets, and investors and savers pulling their money out of stocks and putting it into bonds and mattresses, the last tipping point would be an unexpected "crash" that locked out all ATM machines in America.

Some self-proclaimed pundits have repeatedly, and falsely, stated such a thing as cross-market arbitrage is impossible. They are of course, entitled to their opinions. In the meantime, here is Principal Capital's Jim McCaughan explaining in simple terms how cross-market arbitrage is not only possible, but happens constantly, and can serve as the basis of frontrunning by the HFT crew (the same group of "liquidity providers" that is now being investigated by FINRA for market abuse... presumably for a reason).

Deflation is now officially the norm, as Norfolk Southern prepares to issue $100 Million in 100 Year bonds. Hope you have drank your vitamins and wait to receive proceeds at maturity... in 2105. And just in case you were worried there is no benchmark security to reference these to, don't worry, the US government is likely about to start issuing a 100 Year UST soon (with perpetuals to follow).

Today's special report by Faros Trading summarizes the pathetic, uber-interventionist world we live in "It seems quite obvious that not employing market intervention when the rest of the world is, tends to lead down a lonely path. One where no matter how efficient your technology prowess is, you can never export competitively against the rest of the world. After all, why buy from the US if it is cheaper in Asia? Over time the manufacturing centers of Europe, Japan and the United States have dwindled as jobs have moved overseas. The only way for the US, Europe and Japan to end the spiral of economic pain is for either an end to intervention by developing markets, or for developed markets to join in the physical intervention game. The way this game is played at present can only lead to an unfortunate trade war down the road." Alas, as Michael Pettis pointed out earlier, it is likely too late as Smoot-Hawley for the Central Bank interventionist generation is now just around the corner.

Another day, another stunner from the statistical wizards at Nanex. As readers will recall, in our latest piece we discussed the implications of the temporal arbing of the NBBO between the Consolidated Quote System and proprietary pricing tapes, like NYSE's OpenBook, which indicated a major discrepancy in the pricing data in widely held stocks like GE. In summary, at its peak, at 14:45:55 on May 6, the latency between the CQS and OpenBook pricing hit a high of 24 seconds, making a mockery of the NBBO as all those who had premium access to OpenBook were all too aware that 99% of the investing public were seeing pricing data almost half a minute stale, and could trade accordingly on secondary "dark" venues. At the time we were disgusted with the implications this phenomenon had on the NBBO, as this was nothing less than a full-blown NBBO arbitrage opportunity for the haves vs the have nots. Yet today Nanex takes this observation, and our collective blood pressure, to a whole new level, by not only confirming that there is in fact a trigger threshold in terms of quote saturation which immediately causes a latency arbitrage between the CQS and OpenBook, but closes the circle on the ongoing constant presentation of mysterious "crop circle" quote stuffing data. In essence, what Nanex' data implies is that HFTs can create latency arbitrage on demand between the NYSE pricing data dissemination to the CQS, but not to NYSE's own proprietary product, OpenBook, by pushing the consolidated NYSE quote rate beyond a magic number of 20,000/second. This immediately begs the question: just how much of the NYT's as defined "conspiracy theory" for an "on demand" Flash Crash is theory and how much is fact, if the cause and effect of the May 6 events have been inverted, and the NYSE's Liquidity Replenishment Points failed only as a result of HFT quote bombardment.

Following this weekend's OZ news, Goldman's Daniel Ryan updates clients on the firm's views on the AUDUSD pair, and provides color on how the firm is currently positioned (better seller).

• Whatever you do, don't call it a bubble - Bond Funds Attracting Cash Like Stocks During Dot-Com Boom: Credit Markets (Bloomberg)
• The latest Ponzi spin - Spain using its social security funds to buy up its bond auctions (Fistful of Euros)
• Michael Pettis: The last chance to avoid a global trading war  (FT)
• China Premier Wen Calls for Political Reform: China has to pursue
  political reform to safeguard its economic health, Premier Wen Jiabao
  said during a visit to the booming town of Shenzhen, the official Xinhua
  news agency reporte (Reuters)
  
• China Sets Strict Rules on Off-Book Loans (NYT)
• Andy Xie- Inflation, not deflation, Mr. Bernanke: World divides into ice-cold and red-hot economies (MarketWatch)
• Julia Gillard and Tony Abbott Launch Bids to Secure Power (Australian)
• Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says (Bloomberg)
• Implementation of Affordable Chinese Housing Construction Plan Urged (China Daily)
• Preparing for the next "Black Swan" - Investors Are Flocking to New Strategies Designed to Profit From a Market Calamity. But Will They Fly? (WSJ)
• Time for Napoleon Dynamite to write another paid for report claiming all is well in Ireland: Ireland Needs ‘Sustainable’ Finances for Recovery, Lenihan Says (Business Week)

• Asian stocks fluctuate amid growth concerns; Miners advance.
• Australia set for hung parliament as elections deliver blow to PM.
• China premier: Political reforms needed for growth.
• FDA to find the cause of a salmonella outbreak.
• Mobile operators predict app sales boom; apps expected to outstrip voice services by 2013.
• Nikkei 225 fell to this year's low on European debt concerns.
• Obama considering overhauling 26 troubled federal technology projects valued at $30B.
• Obama admin: Effects of moratorium on deepwater drilling, would cost 23,000 jobs and freeze up to $10.2B in investment.
• Oil rises above $74 in Asia amid hurricane season.
• Weak economy, volatile markets, regulatory upheaval starting to trigger job cuts on Wall St.

According to Moody's semi-annual European Sovereign Outlook report, published earlier, the rating agency is once again on track to destabilize Europe, by firing the latest warning shot. In the report the agency, which at last check is still without a sovereign research head after the current one left some time ago, said that slower economic growth in Europe might spark downgrades to credit ratings for countries on the continent, as any slowdown could weaken the ability of individual countries to absorb additional shocks to the system, as cited by Dow Jones. "The ratings agency said that the fiscal and economic adjustments necessary to stabilize government debt ratios are likely to be difficult and painful." In other words more than magic may be required to keep the insolvent continent together (and for the very unshocking observation that Spain has been using its social security fund to buy up its bond to keep the false impression that all is good, read today's Frontrunning). In other words, the latest currency devaluation race is once again on. And for the time being the AUD seems to be taking its overnight mispricing from much lower fair values in stride.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 23/08/10