Archive - Nov 11, 2011 - Story

Presented with little comment - except a reminder that:

"every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year."

Time to sell the EURUSD with both hands and feet, not to mention with MF Global-type leverage: that uber-contrarian FX indicator, Goldman's Thomas Stolper, who has not had a notable call correct in the past 2 years, just came out with a long EURUSD call, calling for a 1.40 target and a 1.35 stop loss. Yes, this means Goldman is now selling EURUSD until 1.40 and will begin buying it at 1.35. As a reminder here is how Stolper's last EUR/$ recommendation ended.

The IMF has released the report it prepared for last week's futile G-20 session, which incidentally saw the IMF being shut out of bailing out the Eurozone: a development which was adverse at the time but now is largely irrelevant: after all Greece has a new parliament, if still no ink to print tax forms. So what did the IMF say? Here are some key soundbites.

With the market enjoying a 30% below average volume rally this morning, as European debt spreads pull back to where they were 2 days ago, the University of Michigan survey of Consumer Confidence Sentiment rose to 64.2 from 60.9 beating expectations of 61.5. The bond-less equity market managed a short-lived rally in this wonderful news until a few realities hit home. Contextually, this number remains 25% below its average of the last 33years, the 3 month change in the outlook (or 'hope') sub-index jumped the most since June 2009, and 5Y inflation expectations are as low as they were Q1 2009 (and the second lowest print ever). As always, regarding the headline figure is often misleading as the reality of these surveys is often far more interesting and realistic under the surface.

And there they go again with that word out of place. Just out of Reuters:

• SLOVAKIA'S PRIME MINISTER SAYS EURO ZONE SPLIT MAY BE NECESSARY, DE FACTO SPLIT ALREADY EXISTS

Expect Barroso and Van Stock Ramp to come out with denials and allegations of nuances lost in translation shortly.

With the buying frenzy resuming on the lack of "headlines" out of Europe, it bears reminding that while risk on and off will be the theme of the day for a while, the entire Eurozone rescue, with the ECB refusing to participate directly, continues to be predicated on the EFSF and its ability to purchase the hundreds of billions of bonds rolling in the next 12 months from PIIGS, but mostly Italy, and now France. Which is why we are surprised that the news that the EFSF has now officially been "haircut" has not been quite noted. As Reuters reports, "political turmoil in Italy and Greece is complicating efforts to increase the firepower of the euro zone's bailout vehicle to 1 trillion euros, an official at the European Financial Stability Facility said on Friday. Euro zone countries had hoped to increase the EFSF's lending capacity by December, combining bond insurance with investment vehicles. But after the government in Athens fell and bond markets pushed Rome to the brink of a bailout that the euro zone cannot afford to give, the Luxembourg-based EFSF thinks it may be more realistic to aim for less leverage." In other words: kiss the full capacity bailout goodbye. And as the chart below shows, kiss any hope that the EFSF will be able to participate meaningfully in any European "renaissance" - while BTPs and OATs have seen some modest tightening on this "risk on" day, the yield on the EFSF has done absolutely nothing and remaind glued to record wides. 

"We are all FX traders these days" - that is what we said yesterday, and unfortunately courtesy of record risk correlations to the EURUSD persisting, this is what will likely be the case until the end of the year and into 2012. As such, fundamentals go out of the window, and the only thing that matters is beta and the various FX pairs, with the EURUSD by far the most critical. Which brings us to what Goldman believes will be the key highlights in FX trading until the end of the year in 9 convenient bullets. As a word of caution: few have ever made money being across the table from Goldman; usually it is much wiser to be axed the same way Goldman's flow desk is position, i.e., doing the opposite of what the firm advises its clients.

It is not often that we see an official admission by a company to its regulators that oops, 'it just may have embezzled' hundreds of millions of dollars from its clients. Today, courtesy of the WSJ, we do, namely that of MF Global advising the SEC that it has "discovered a significant shortfall in its segregated funds account." Expect to see this revalation in countless investor lawsuits against the company. Also, expect to see all bonuses paid to MFG's employees the day before the company filed to be clawed back in the form of fraudulent conveyance lawsuits, so to any former MF workers: our advice is don't spend all that client money just yet. Incidentally, the primary SEC supervisor for MF Global is Michael Macchiaroli at macchiarolim@sec.gov - let's all take a minute to personally thank him for being on top of this whole bankruptcy like a hawk.

Whatever the European experiment once was, it has morphed almost beyond recognition.  The policy responses have made the problem worse, not better, and it is becoming more complex.  The contagion is spreading because every policy is linking the countries more closely,  not in a controlled and thoughtful way but in a haphazard poorly thought out way. Making things more complex primarily in reaction to previous moves with limited understanding of what you are getting into is a recipe for disaster, and Europe has followed this policy for years now, it is a shame they don't see it before it is too late to fix.

• Trading volume remains thin as Veterans Day in the US and Armistice Day in Europe is being observed
• The new Greek government, led by ex-ECB vice president Papademos, is expected to be sworn in at 1400GMT today
• The Italian Senate approves budget measures. According to the PM’s office, Italy’s cabinet will meet on Saturday evening at around 1700GMT, after the lower house votes on a financial stability law
• Market talk that the ECB is buying the Italian and Spanish government debt
• Merkel's CDU party's general secretary said that the party is poised to back a motion at its annual party congress on November 13th-15th to offer states a "voluntary" means of leaving the Eurozone

The chart below is the perfect summary of the dilemma facing traders and investors: that primary marginal risk setter, the EURUSD (recall the all time record correlation between the 250x levered EURUSD and the ES), is trading inbetween the Italian-Bund spread, which following the massive ECB intervention in the past two days, is largely "fake" and thus irrelevant for price discovery purposes, and the French-Bund spread which is ineligible for ECB intervention as noted yesterday, and hence presents the real risk perspective in Europe. Naturally, with optimism and a bullish bias (bonds are closed today so momos and robots are in charge) ruling the day, the EURUSD is well bid toward the "fake" side of the spectrum. However, unless the key question at the heart of the European dilemma, the math of the Italian bailout is answered, expect the French spreads to continue slipping ever wider, and the EURUSD to eventually catch up once this latest bout of optimism expires. That is, unless of course, Sarko tips his hand and demands an ECB bailout, an action which will unleash the endgame as vigilantes put France in rearview mirror and head, from every possible direction, right for Frankfurt and the German spread (with itself) directly.

• ECB as Last-Resort Lender Will End Crisis: Silva (Bloomberg) just don't tell the ECB that
• Crude Futures Head for Longest Run of Weekly Gains in New York Since 2009 (Bloomberg) - QE X coming
• China central bank to legalise part of private loans (Reuters)
• Bini Smaghi’s Resignation From ECB Opens Board Seat for France (Bloomberg)
• Goldman Sachs in China: Best Investment Ever? (WSJ)
• Europe Rebuked Over Crisis by Asia-Pacific Nations Seeing Expansion Weaken (Bloomberg)
• China ‘Big Four’ Banks Lent CNY240 Bln Loans In Oct (MNI)
• Progress Amid the US Deficit-Cut Noise (Reuters)

With Italian bonds giddy at the prospect of changing one worthless political muppet with another, if only for a few hours, and especially with the stern and long overdue assistance of the ECB (we will find out how many bonds Mario Draghi bought this week to preserve the price stabeeleetee next Monday - we expect the SMP cumulative total to pass €200 billion, a number which will delight Germany), it is becoming increasingly clear that France needs to be urgently added to the list of countries eligible for ECB secondary market "sponsorship", because while Italy yields are gapping in, Franch Bund spreads have since blown out back to record levels, following some modest tightening earlier in the morning. And unlike yesterday, this time there are no downgrade rumors to be blamed. At least not yet.

Minutes ago the Italian Senate, in a vote that passed 156 to 12, approved a key budget bill, paving the way for final passage tomorrow in
the Chamber of Deputies that will lead to Prime Minister Silvio Berlusconi’s resignation. The market reaction as judged by the EURUSD has been oddly muted with just 15 pips the immediate move higher, implying this has been largely priced in. The question, is noted previously, is whether Mario Monti will be able to form a unity government or if the country will proceed with drawn out elections in which Silvio himself will participate as well.

Spreads across Europe are tighter today, and stocks higher, as investors hope that a power shuffle at the top in Greece and Italy, where the placement of two Fed and ECB puppet rulers, would change decades of flawed fiscal planning and destructive habits. Of note, the catalysts inducing a substantial rise in French, Italian, Belgian and Irish bonds, is the expectation of a new Greek government as well as the Italian Senate voting on approving the 2012 budget and passing austerity measures (which it has already done before, and nothing happened) such as increasing the retirement age by 2 years in 15 years. The vote itself is a symbolic ouster to Berlusconi who has previously said he would retire the second the budget is passed. The question remains what happens after Berlusconi falls: elections or a new technocratic consensus government, headed by Mario Monti, and whether the ECB will support whatever course Italy takes. So needless to say prepare for vicious 50-100 pip moves in the EURUSD, and with every pip amounting to 1-3 DJIA point, the volatility in the market today will be significant. Buckle in. In other news, the one fundamental question that needs some answer before all this is over, namely how Italy will fund €300 billion in debt maturities and interest payments over the next year, with the EFSF now a formal dud, remains unanswered, and will, as there is no answer.