Archive - Jul 25, 2011 - Story

Despite frantic efforts to reach an agreement to raise the US debt ceiling, no concrete measures emerged during the weekend, which allied with Moody's downgrade of Greece's sovereign rating by three notches today, promoted risk-aversion in the market. European equities traded under pressure, weighed upon by financials, which in turn provided support to Bunds, whereas the Eurozone peripheral 10-year government bond yield spreads widened across the board. Particular widening was observed in the Belgian/German spread leading up to the bond auctions from Belgium, however the spread narrowed somewhat after they went through successfully. Elsewhere, CHF and JPY emerged as major beneficiaries of the risk-averse trade, whereas commodity-linked currencies traded lower. Moving into the North American open, the economic calendar remains thin, however Chicago Fed National Activity and Dallas Fed Manufacturing reports are scheduled for later in the session. Also, Texas Instruments, and Anadarko Petroleum are among some of the companies reporting their corporate earnings today.

Goldman performs the now traditional compilation of key global events and catalysts in the week ahead although there is really just one day that everyone is focusing on: Thursday: "House takes up Senate package, and potentially alters it. Under its rules, the House normally requires a bill to be publicly available for three days before voting on it, but might be able to bend the rules given the deadline. If support is lacking for the McConnell-Reid plan, as appears possible, the House may vote on an alternative package that pairs $300-$500bn in spending cuts with a debt limit increase of the same size. If it becomes clear during the Senate debate early next week that the Senate approach will not gain adequate Republican support in the House, House Republican leaders might move preemptively to pass a shorter extension rather than waiting to receive the Senate bill." Today the market did not crash, which foiled Obama's shock and awe plans (thank you Bernanke Put). However, if there is nothing by Thursday, then even the meanreversionbots will be powerless to just sit back and observe the massive carnage.

We posted this on Friday, but with the Norway news and all the headline distractions from Congress, many may have missed it, so here it is again. Stone McCarthy (one of the very best rates shops on Wall Street) has compiled the daily projected cash flow balances for the US Treasury. Here it is.

Gold surged 1.4% ($23) from $1,600.90/oz to a new record nominal of $1,624.07/oz within an hour of the open in Asia. Gold reached new highs due to continuing uncertainty and theatre regarding the debt ceiling negotiations in Washington. Gold is higher in all currencies except the Swiss franc as the Swiss currency is also continuing to see flows. Silver surged 2% on the open from $39.69/oz to $40.48/oz and is higher in all currencies including the Swissie. There was some unusual selling in the electronic market prior to the open which saw prices fall from the close on Friday at $40.05/oz to $39.69/oz prior to the surge on the open. Asian indices fell with the Chinese indices in particular down sharply (CSI 300 -3.25%) on the U.S. debt impasse concerns. The high speed train crash may have contributed to the larger losses in China but there are also growing concerns about the Chinese financial system and economy. European indices have recovered from an initial sell off and peripheral Eurozone debt markets have seen some selling. Markets are spooked by the political theatre which continued in Washington over the weekend. An eleventh-hour solution is expected before next Tuesday’s August 2 deadline when the U.S. Treasury has said that it would not be able to borrow any more funds. At the same time, investors have cut their exposure to risky assets and the appalling fiscal situation in the U.S. is positive for gold and silver – whether the politicians come to an agreement or not.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc. Market Recaps to help improve your Trading and Global knowledge

The perfect storm in risk off continues, as not only have European peripheral spreads once again commenced their trek wider, but FX flight to Swiss safety has resumed with a vengeance, with the USDCHF tumbling to a new all time low just above the 79 handle. The EURCHF is just above lows set a week earlier, following Moody's cutting Greece to Ca from Caa1, with a developing outlook, and the resulting final outcome of which will be a default of some nature. Also weaker are various peripheral spreads with Spanish, Portuguese and Italian Bund spreads and CDS pushing wider this morning. Another notable development is that Austria has decided to skip its August auction supposedly as "funding has been advanced already" although we all know what the real reason is. In Asia, markets closed broadly lower and the USDJPY continues to trade near all time lows, save for the flash crash plunge from March 17. According to Lee Hardman of BOTM-UFJ, "verbal jawboning by Japanese authorities of concerns over yen strength unlikely to be backed up by actions to weaken yen." Any attempt likely to be unsuccessful at present, he adds. The bottom line, which incidentally is always cash, and in this case the amount of it held in Greek banks can be seen by the chart below. We fully expect Greek bank deposit to decline by another €5 billion in the most recent period when the data is released.