Archive - Jan 27, 2011 - Story

Durable goods, pending home sales, and the usual weekly diet of claims and Fed data….Expect the Fed to monetize $4 – $6 billion of recently auctioned off 2 Year bonds in today's POMO

From S&P: "The downgrade reflects our appraisal that Japan's government debt ratios--already among the highest for rated sovereigns--will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/01/11

Recently there has been much speculation about the nature of the notable divergence between WTI and Brent. Explanations range from the now traditional Cushing syndrome, to Hess attempting to corner the BFOE, to correlation desks blowing up, to the ludicrous, which includes HFT (as much as it is trendy to blame parasitic HFT for everything, is not responsible for correlation trades, especially not in markets that do not have endogenous liquidity at least 1,000 times above that needed for HFT to actually add value). Probably the best explanation to date comes from JPM's Lawrence Eagles who in a just released note asks "Is Brent-WTI wide enough." His lede: "Brent and WTI have been trading increasingly as entirely separate commodities in recent weeks, driven by decidedly different fundamentals. Yet this is an important spread, which tells us a lot about regional Midwest and international crude economics and will, over time, drive investment that will ‘normalize’ price discrepancies." In other words, it is not the spread's wideness that is the outlier: it is the fact that it was overlapping for so long that is peculiar. In time, Eagles claims, speculation may drive the spread so wide that the economic incentive to close the gaping infrastructure holes will be large enough and the discounting of this act will bring the spreads back to parity. In the meantime, the spread will likely persist. Not only that, but he also believes that the 2012 calendar dated differential, currently trading at a far more reasonable $2.50, will likely also diverge, as two years is insufficient time for the required changes to transpire. Furthermore, the last straw that convinces us that it is likely early to bet on a convergence, is Goldman's just released commodities report which has a WTI target $2 above Brent. By now everyone should know what they say about trading Goldman recommendations...