Archive - Oct 2011 - Story

• The main focus of the market remained on the EU leaders' summit this weekend and next Wednesday, where participants look ahead for further details on the implementation of the EFSF
• News overnight that the EU leaders are considering to increase the lending capacity of the EFSF to USD 1.3trl boosted risk-appetite
• Fitch managing director, Riley, said that the rating agency has no plans to downgrade France, and the upcoming EU summit outcome is unlikely to trigger review of the Italian and Spanish ratings
• ECB's Nowotny said that the ECB discussed cutting interest rate in its last meeting. Also, IFO’s economist Abberger said that the ECB will likely cut interest rate towards 1%, however the timeframe is unclear
• According to German government sources, Eurozone members could tap IMF credit lines without the EFSF involvement

Gold prices are mixed today as markets remain on edge due to increasing divisions amongst European leaders on how to solve the intractable Eurozone debt crisis. There continues to be very strong demand for physical bullion globally and support is  strong at the $1,600 level due to this demand. The sharp fall of copper yesterday, by 6%, is an indication that the US, Chinese and indeed global economy is very fragile and may soon begin to contract. Physical demand in Asia, mainly India and China, has entered the traditional peak season with Indian festivals and the increasingly important Chinese New Year. This is reflected in premiums in Asia which remain good. There are reports of massive physical buying out of China on gold’s fall close to $1,600 yesterday. The most active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier today. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.

• France Likely to Lose Top Rating: S&P (Bloomberg)
• BNP urges EFSF to issue credit default swaps (FT)
• China municipalities to issue bonds (FT)
• Europe forced into second summit (FT)
• EU Said to Consider Wielding $1.3 Trillion to Break Impasse (Bloomberg)
• Hilsenrath: Fed Is Poised for More Easing (Hilsenrath)
• Fed debate about more easing heats up (Reuters)
• Obama Nominates Former Fed President Hoenig for FDIC Vice Chair (Bloomberg)
• ECB Said to Weigh Bigger Loans for More Collateral Disclosure (Bloomberg)
• Banks face penalties in return for bail-outs (FT)

Following a report overnight from the WSJ that S&P would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession, which many economists say is likely, the entire overnight session was dominated by yet another period of fear and loathing out of Europe, further pressured by escalating uncertainty over EU summit after another meeting is called for Oct. 26. The headline scanning brigade will focus on Belgium where at 2 pm local time EU finance ministers will meet in to hammer out groundwork for the Oct. 23 EU summit. The result of concerns that absolutely nothing is resolved led to spreads for everything blowing out: at one point, France 10-yr Yield was up +6 bps to 3.21% (the widest spread over bunds at 119.01 since 1992), Italy 10-yr yield rose +3 bps to 6.05%, highest since Aug. 5, and the spread over bunds widens to euro-era record of 402 bps or most since 1996 and lastly the 10-yr Spain spread over bunds was +4 bps wider to 5.57%, with the Bund spread at 355, just tight of the August record of 398 bps. Still this was enough for the ECB to intervene and as the chart below shows, to purchase Italian BTPs en masse for the fourth day in a row, this time with a sizable amount, even as it is now confirmed that ECB interventions hav a several hour half life. And since the EURUSD and thus futures are now driven off the BTP price, everything rose when at 4 am Eastern the ECB began its daily intervention. Alas, at this point even 8 year olds realize that these are short-term liquidity measures while the long-term solvency problem is merely getting worse.

This is the boilerplate: "The following is based on remarks at the University Club in New York at the ceremony for the 2011 Lawrence R. Klein Award for the most accurate forecast over the prior four years to the Goldman Sachs US Economics team. The award was sponsored by the W. P. Carey School of Business at Arizona State University and Blue Chip Economic Indicators, Inc., and was presented by Dr. Lawrence H. Summers, Charles W. Eliot Professor of Economics at Harvard University." Hmm. We assume the University Club in New York did not read the following post. No matter. The attached analysis, ignoring that it is from the team that was 100% wrong less than a year ago, and is 120% wrong now with its ridiculous Nominal GDP targetting proposal, does have its "finer points", and as such is worth of mockery by ZH readers.

When we first reported on Bill Gross' massive surge in duration and accelerated purchase of Mortgage Backed Securities a week ago, we said, "That's either what is called betting one's farm on Operation Twist, or, betting one's farm that the next thing to be purchased by the Fed in QE3 or QE4 depending on how one keeps count, will be Mortgage Backed Securities." It was the letter. Confirmation that Bill once again frontran the Fed comes courtesy of Daniel Tarullo who in a speech at Columbia University, talking about the labor market of all things, just said the following: "I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets." And there you go: watch as the market rips on the expectation that the US will bail out China all over again. Oh wait, at this point China couldn't care less what happens to the GSEs stack. So unfortunately as can be expected, this is nothing but yet another bailout of US banks, which lately have been buying up MBS like crazy (Gross is not the only one with the hotline), and expecting to flip right back to Brian Sack: after all something has to be done to save the poor things from a total pancaking of the Treasury curve.

While one of the biggest complaints of #OccupyWallStreet protesters, and much of the balance of middle-class America, continues to be the burden of student loans, the paradox is that, as the USA Today reports once again on one of its favorite subjects, student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt. "The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards." What explains this insatiable demand for this kind of debt? Well, it's cheap, it's easily accessible (the collateral is education), and it is fungible - a student can take out a loan, yet use part or all of the balance for tangential purchases (that iPhone 4S sure would make me cool). But this, like every other debt, comes at a price.

While once upon a time, retail equity capital flows would be a perfect coincident indicator to the overall market, with any notable spike in the S&P promptly matched by inflows into domestic equity mutual funds, this is no longer the case. As ICI reports, in the week ended July 12, equity mutual funds saw their 8th consecutive outflow, amounting to $5.9 billion, the largest outflow since the debt ceiling and US downgrade fiasco in August, and a number which brings the total year to date outflow to ($99) billion. True to form, the capital rotated once again out of stock and into bonds with $4 billion in inflows for the week. More than anything this confirms that retail no longer chases day to day market performance out of a profound skepticism for market structure, and the record volatility and well-documented near 100% correlation across all asset classes has driven out all but the bravest. Unfortunately, news like this just released report by Reuters that the Nasdaq hackers from February, also "installed malicious software on the exchange's computers that allowed them to spy on scores of directors of publicly held companies, according to two people familiar with an investigation into the matter." Hardly the stuff that build up confidence in fair and efficient markets.

For a week in which Europe was supposed to be healing, and certainly not provoking the curiosity of forensic capital chasers, it sure did a bad job. In the week ended October 19, the Fed disclosed that not only did it roll its $500 million 7 Day facility (at 1.08%) with the ECB, but it also entered into a new 84-Day 1.09% facility (this is about 60 bps more than 3M USD Libor, confirming just how ridiculous and meaningless the 3 month USD Libor market is). It is of course unclear which bank ends up being on the ECB's receiving end, but one thing is certain: the dollar shortage in Europe is now as bad as it was just after the first Greece insolvency, when nobody was prepared for the bank lockup that followed. Additionally, with deposit loans at the ECB soaring to €182 billion, a runrate which will promptly surpass last month's high, it is once again all too clear that there is no free liquidity in Europe, and that the thesis presented by Zero Hedge over the weekend, that the only reason for the persistent high level of the EUR is due to the sale of USD assets by French banks and subsequent FX repatriation, is what explains the ongoing schism between the European market, which is driven by wholesale asset sell offs by French banks, and the American one, which is electronically trading with 100% correlation to the EURUSD which is sending a completly false "all clear" signal to the market.

The reason the liberal mainstream corporate media demonized the Tea Party is because it threatens the status quo.  The reason the conservative corporate mainstream media demonizes Occupy Wall Street is because it threatens the status quo.  These are textbook divide and conquer strategies being used on the American people.  Do not fall for it.  Yesterday I read a really interesting gallup poll that stated: “Not surprisingly, Americans who consider themselves supporters of the Occupy Wall Street movement (26% of all Americans) are more likely to blame Wall Street than the federal government for the nation's economic problems. Supporters of the Tea Party movement (22% of Americans) are overwhelmingly likely to blame the government.”  What is most compelling to me is that 26%+22% = 48% so basically almost a majority.  All we need to do is teach people that Washington D.C. and Wall Street are now the same corrupt entity.  They are one gigantic rogue trader sucking the lifeblood out of America.  If we can unite these forces, which I can say with certainty agree on the important issues, we can put an end to the status quo and free ourselves of this bondage. 

It's one thing for China to have a rather embarrassing episode during a boat launch, or even when demonstrating the pride of its airforce. But when a part of the Great Wall Of China itself collapses, literally, you know the proponents of the Chinese Soft-Landing scenario (leaving aside that copper is now down 10% for the week) may want to reassess their thesis. From China Daily, "The damaged portion of the Great Wall is located in a remote area near the county of Laiyuan in Hebei Province, about 200 kilometers southwest of Beijing. The area is home to a dozen small mines, with some operating as close as 100 meters to the centuries-old wall. Villagers and local cultural heritage protection officials told Xinhua that about 700 meters of the wall, which was built during the reign of Emperor Wanli during the Ming Dynasty (1573-1620), had already collapsed, and more walls and even towers are likely to collapse if the mining continues unchecked." And while this is admittedly a symbolic development, we follow up this news with a piece from SocGen's Albert Edwards who has some quite factual observations on why China is now in stall speed and has little hope of a Hollywood ending.

Because nothing says "Nobel Peace Prize" better than discussing the "deposition" of a dictator you shook hands with two short years ago, by a bloodthirsty lynch mob.

Siebert on the tape:

• GERMANY'S SEIBERT SAYS MORE WORK IS REQUIRED ON EURO PACKAGE
• GERMANY'S SEIBERT SAYS EU AIMS TO REACH ACCORD IN TWO STAGES
• GERMANY'S SEIBERT SAYS EU AIMS FOR EURO AGREEMENT `NEXT WEEK'
• SEIBERT SAYS `APPROPRIATE' GERMAN LAWMAKER PARTICIPATION NEEDED

And this, because the German parliament is not worthy:

• SEIBERT SAYS MERKEL TO INFORM PARLIAMENT AT `APPROPRIATE TIME'

More promises; more future tense, more uncertainty and more complete chaos.  Should be good for 50 EURUSD pips higher.