Archive - Jul 2011 - Story

While others huff and puff, and threaten to do what had to be done ages ago, the one truly independent and capable NRSRO, Egan-Jones, downgraded the US from AAA to AA+ over the weekend.

Remember when car sales where supposed to boost industrial production when all they did was boost GM's dealer channel stuffing to a new all time record? Today, courtesy of Stone McCarthy we transpose the observation about what is really happening in the car space (i.e., not adding to GDP) to airplane orders as an indication of how airlines view the future of the global economic "recovery." Boeing, which recently completed its stint at the seminal Paris air show, reported just 48 orders in June. This is the worst air show showing for the bellweather airplane maker in the last 6 years with the exception of 2009 when the global economy was in freefall. Bottom line: upcoming durable goods reports will likely be weaker than expected due to a drop in Boeing bookings, and while this is a volatile series, it ultimately is money that enters, or not as the case may be, the US economy. More importantly, if the Paris Air Show is any indication, one can write off the thesis of increased infrastructure CapEx spending in H2. So much for the hockeystick economic growth in the second half of 2011.

The Treasury released its May Treasury International Capital data today, which confirms recent trends: while China, both domestically and through the UK, and Japan both added to their gross exposure of US debt in May, Russia's holdings continued to tumble in line with warnings out of Moscow discussed previously and with the continued Kremlin rotation out of Treasurys and into gold. And while Putin has obviously had enough with shenanigans in the US, the same can not be said for his posturing colleagues in China (and Japan) who at least two months ago, brought their holdings of US to 2011 (and record) highs of $1159.8MM and $912.4MM respectively. So much for China dumping bonds. Another source of Treasury demand: petrodollars, which saw their UST holdings in May hit an all time high of $229.8 billion. Overall, gross purchases of Long-Term US securities by official and private foreign buyers declined modestly to $44.6 billion from $44.8 billion. Netting out foreign securities purchased of $21 billion, yields net flows of $23.6 billion on expectations of $40 billion, or in other words May saw a modestly lower inflationary impact due to an influx in foreign capital in the US economy. Also when netting out US purchases of foreign securities as well as changes in bank dollar-denominated liabilities the net number was -$67.5 billion.

Still don't have your playbill for the latest installment of beltway Kabuki? Confused by what each actor's motivations are in the "great compromise" farce? Here is The Hill with a summary of who wants what so that the race for this year's Nobel prize in most dramatic on screen teleprompted performance is no longer confusing to anyone, especially since the Treasury Secretary is applying for the Nobel prize for most clueless assorter hanger on, with his "we have no Plan B" approach to worst case contingencies.

The picture portrayed by last week’s EBA’s stress test results on the European banks failed to re-ignite appetite for risk today, as many market participants questioned the validity of the tests, which ignored a potential Greek default scenario. Moreover, markets remained apprehensive about any concrete outcome from the Eurozone leaders’ summit this Thursday, and together with concern surrounding the successful passage of a raft of supply from Eurozone countries, such as Spain, later this week promoted risk-aversion. This prompted European equities to trade under pressure, led by financials, whereas marginal widening was observed in the Eurozone peripheral 10-year government bond yield spreads. Elsewhere, strength in the USD-index weighed upon EUR/USD, GBP/USD, and commodity-linked currencies. Moving into the North American open, the economic calendar remains thin, however the TIC flows data and NAHB housing market report from the US are due later in the session. Markets also look ahead to corporate earning results from IBM, whereas in fixed-income, French T-Bill auctions are scheduled for later.

• Reid, McConnell Push Revised Debt Measure as Obama Seeks to Avoid Default (Bloomberg)
• Fallback plan gains momentum in debt talks (RTRS)... aka the "change nothing" plan, and raise debt ceiling by $2.5 trillion
• China house price inflation slows in June (FT)
• Riksbank Members Fear Greek Failure Could Spark Real Crisis (Market News)
• European Stocks Retreat for Third Day After Bank Stress Tests (Bloomberg)
• ECB would reject defaulted Greek bonds as collateral (RTRS)
• Greek debt cut won't solve problem - ECB's Weidmann (RTRS)
• An Arrest and Scotland Yard Resignation Roil Britain (NYT)
• Japan set to ban Fukushima cattle shipments after radioactive meat scare (Guardian)
• Spain and Italy top results in stress tests (FT)

As if a global solvency crisis and a possible rekindling of the only middle-east conflict that matters were not enough, here is China to remind everyone that keeping 1.3 billion people happy is not very easy. According to AP, "Several attackers, a policeman and three others were killed Monday during an attack on a police station in China's far western Xinjiang region, state media reported. It said other police rushed to the scene and shot dead "a number of thugs." One policeman, two hostages and a civilian were also killed, Xinhua said. A woman from the information office of Xinjiang Public Security Department in Urumqi confirmed the attack, but would not give any details. As is common with Chinese officials, she refused to give her name." To be sure the official explanation is one that breaks down the conflict along ethnic lines: the last thing the Chinese need is a spark to realize that the unhappiness they may feel (especially those without access to off balance sheet bank loans to fuel their gambling habits), is all too real.

Homebuilder sentiment and capital inflows data. And lots and lots of European and other headlines.

Absolute bloodbath in Europe:

• Italian 10-Year Bonds Extend Drop; Yield Climbs to 6 Percent
• Spain 10-Year Bond Yield Surges to Euro-Era Record 6.31 Percent

And more from Bloomberg...

As expected, gold is now over $1,600, after fears about Italy are back, the EUR is tumbling, and questions over the sustainability of fiat and Keynesianism are once again front and center. Elsewhere, silver is over $40. Unless a miracle appears out of nowhere to save the Eurozone and its fake paper currency, we expect $2,000 by the end of the year in gold, while silver should promptly regain its all time nominal highs of just over $50.

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

And we thought we were harsh on the EBA's second farce of so-called 'stress tests'. Enter SocGen's Hank Calenti and team: "The test does not reflect current reality, in our view; even if GIIPS sovereign are further stressed within this test, a €22bn shortfall and a relatively healthy average 6.2% core Tier 1 appear. The European banking sector is captive to politics at the moment. A political error can trigger a freeze in money markets, and a liquidity crisis could quickly turn into a solvency crisis. Only improved governance would avoid such a nasty scenario." We wonder what Calenti would say about the US in this case...

Next week is light on data, thus developments in the European and US fiscal tensions are likely to remain high on the agenda. The Eurogroup heads of state will meet on Thursday to discuss European financial stability and further aid for Greece. Expectations are for an increase in the Greek financial rescue package, alongside some form of voluntary ‘bail in’ for holders of Greek debt. More comprehensive solutions to stem contagion risk, such as secondary market purchases of EMU government bonds by the EFSF, are said to be also on the cards, but uncertainty is very large. Ahead of the statement resulting from the summit, the market may remain caught in the headlights of headline risk. Discussions over raising the debt ceiling in the US will continue. On the data front, the business surveys will be key to watch. Towards the end of the week the HSBC flash PMI for China, the Euroland flash PMIs and the Philadelphia Fed Survey will all be published. The Euroland surveys are expected to decline slightly, but the Philadelphia Fed survey is expected to rise although our forecast is for a notably smaller rise than that of the consensus.

With the market's attention over the past year exclusively focused on bank holdings of insolvent European sovereign debt, which as is now well known had been declining for months, many if not all forgot that banks also have credit exposure via far simpler conduits: retail and commercial debt. And as an analysis of the full disclosure in the EBA's second stress test exposes, banks are on the hook for literally trillions in various plain-vanilla commercial and retail loans to individuals and businesses. WSJ's David Enrich summarizes it best: "Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow." Oops.

From Friday: "The Treasury may be ceasing the incremental funding for its market
manipulative ESF.... but not quite yet. Presenting the E-mini surge on absolutely no
volume. According to Chicago floor traders, at least one bank bought
150 S&P contracts at very the close with one obvious purpose: ramp
the stock market into the weekend. Luckily, for the observant ones this
is merely another free money opportunity: the ES-RISK spread just soared
and presents the latest compression opportunity." As of a few minutes ago, the free money opportunity, courtesy of Brian Sack and the now legendary stupidity of momentum chasers (yes, we'll gladly take their money) has just been cashed in, and brings us to n out of n profitable ES-Spread compressions.