Archive - Aug 16, 2011 - Story

Plan seems long on big picture idea, short on details and short on other member states being consulted. Feels like more concrete, immediate action, was already priced in. If anything, seems like they are going to start taking money from banks to pay for bailouts of banks. Makes sense in a weird way, if you believe banks should be bailed out, but don't think that was the "support" the market was looking for. With all the short covering, and high expectations, I think market will end up the day disappointed.

Here are the key highlights for now:

• And fade: Sarkozy says "Maybe" Eurobonds imaginable one day
• Sarkozy says not enough integration for eurobonds now
• Eurobonds have no democratic legitimacy now, Sarkozy says
• French president Sarkozy says proposal would elect a Eurozone president for two and a half years
  
• Van Rompuy Proposed as Head of Euro Council
• Merkel says debt brake to be anchored in German, French law. And so the take over of europe by the new axis countries: France and Germany, is complete.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

Over the weekend, following the Iowa straw poll result, we posed a simple question: why does the media continue to ignore Ron Paul (on both the left and right)? We followed up with none other than Paul's own response to this curious status quo. A few days later, it appears that the media itself has finally caught on to this ironic 'house of mirrors' effect, and while Paul is still not a household name, the self-effacing sarcasm this topic has garnered, has been captured best by none other than Jon Stewart in this entertaining clip that mocks the established mindset of the legacy media to not dare disturb the status quo, confirming that everyone, left and right, are really all just the same. For those who have not seen it yet, this is a hilarious must watch.

For those wondering why gold just surged by about $20 dollars, and why Gartman's cab driver once again proves to be far more astute than his passenger, we bring to your attention  a report just released by Goldman's Francesco Garzarelli which is appropriately titled "The Price of Slower Growth" - appropriately, because in it Goldman slashes the firm's outlook on global policy rates across the board, slashes to cut its 10 Year bond yield outlook from 3.75% to 2.75% in 2011 and from 4.25% to 3.50%, slashes 2012 US GDP from 3.0% to 2.10%, and once again makes it all too clear that QE3 is coming, and not only coming but is already priced in (to the tune of about $300-400 billion): "In previous work, we have estimated that every US$1trn in purchases, if maintained, decreases 10-yr Treasury yields by 25bp-50bp. If our subjective assessment that market participants now assign a greater-than-even chance of ‘QE3’ is correct, and considering that the expected ‘unsterilized’ size of these purchases is in the region of US$600-800bn, this would equate to as much as 20bp being already ‘in the price’. Clearly, these magnitudes are unobservable, and thus subject to great uncertainty. Nevertheless, our calculations would suggest that the bond market is already discounting a mild recession and the chance of a Fed reaction to it." Translation (and this is nothing new to ZH readers): Bill Dudley has his marching orders from Jan Hatzius: GS now sees deflation as the broader risk, and anything and everything must be done to make sure Wall Street has another record bonus season round, pardon, deflation must be halted.

Over the weekend, we presented the suddenly very pessimistic outlook by Morgan Stanley's equity strategist team which stated in no uncertain terms that it "assigns a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic" adding that it "continues to assign a higher probability to the bear case than the bull case, and believe the recent price action increases the probability of the bear case." Yesterday, the firm's Credit Strategy team joined the call for a bearish outcome, when in a conference call it stated its case for why its "bearish strategic view is based on long-term structural and valuation issues." Two key metrics watched by MS: i) The unsustainable DM credit super-cycle may be approaching a difficult dénouement, and ii) based on long-term P/E valuation measures, US and UK equities are still expensive. MS warns that "a larger correction in risk assets is likely if a recession occurs, more so for equities" a topic discussed by the equity strategy team over the weekend which believes that the probability of a recession has surged (and continues to be confirmed by leading indicators such as yesterday's Empire State Fed survey). Morgan Stanley's concluding advice to clients: "look to reduce risk in Developed Markets  in Counter-Trend rallies." Luckily, any time volume trickles to a halt, the counter-trend rally should present itself providing ample opportunities for selling into it.

A French-owned rating agency (the same country that currently has a short-selling ban) just did all it can not to tip the boat. What can one say but "truly a gutsy call." Unlike S&P which looks at such obsolete things as fundamentals and realistic projections, Fitch instead relies on something far more intangible: "its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base." In other words, it's rated AAA... because it is rated AAA. Somehow we doubt Fitch will take the initiative to be the first to downgrade France... That said even Fitch had some pseudo-harsh words: "Despite its exceptional creditworthiness, the fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to 'AAA' peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst 'AAA' sovereigns. However, federal government indebtedness is lower than in other major 'AAA'-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK ('AAA') and France ('AAA')." So, record debt for a AAA-rated country, check, but... AAA-rated. So all is good.

July industrial production came in slightly better than consensus expectatins of 0.5%, printing at 0.9% for the biggest rise of 2011 to date. This followed an upward revised June of 0.4%, up from 0.2%. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent, the biggest driver for the spike, and production elsewhere moved up 0.3 percent. Some other details from the report: "The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level." As for capacity utilization, the total industry rate climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972--2010) average."

Throughout the PIIGS crisis, it has been a given that the German juggernaut economy would provide the strength for the rest of Europe to rely on. Last week's weak French GDP number highlighted concerns about the ability of France to retain its AAA rating. Today's weak German GDP numbers will make it even harder for Merkel to convince German's that they need to spend even more money fixing problems abroad. Certainly some opposition members are likely to use the weakness as a sign that she has had her eye of the ball and the domestic economy is suffering at the expense of all her bailout jaunts. I think this potential weakness in the core of Europe is a new addition to the growing list of problems facing the global economy. Empire manufacturing, a relatively minor data point, was awful yesterday. Stocks were able to ignore that yesterday, just as they ignored the extremely weak consumer confidence number on Friday. It feels like a lot of hedges were cut yesterday and the bullishness that was inspired by the strength of stocks has been replaced with doubt again. So far people aren't rushing to put on hedges, but the tone has become decidedly negative.

So much for the end of inflation importing. After dropping by the most in 2011, or 0.6% in June, import prices once again increased firmly, rising by 0.3% in July, on expectations of a -0.1% decline. So much for that commodity drop "cooling" with fuel imports increasing 0.4%, and non-fuel imports up 0.2%. The take home: "Import prices rose 14.0 percent for the year ended in July, the largest 12-month advance since the index increased 18.1 percent for the year ended in August 2008." The picture is far uglier on the export side, where prices posted the first drop since July 2010. "The downturn was led by a decline in the price index for agricultural commodities, which was partially offset by an advance in  nonagricultural prices. Export prices rose 9.8 percent over the past 12 months, down from the 10.1 percent change for the year ended in June, which was the largest year-over-year increase in export prices since a 10.2 percent advance between July 2007 and July 2008." In other words: the US is now importing inflation and exporting deflation. What does that mean if you are a chairman of the Fed reserve? Why, that you want to return the favor of course, and as soon as possible at that, as this implies ongoing GDP contraction due to terms of trade.

Housing starts, industrial production and import prices. The only real market driving event is the massively overhyped 12:30pm MerkOzy press conference.

We are not sure just how many times the same piece of news can be recycled and spun off as new, but here goes. After we reported back in July that "Merkel faces a German revolt over the Greek bailout", a sentiment broadly indicative of what will happen today should the 12:30 pm EDT MerkOzy summit actually not disappoint markets (and it well), here is Ambrose Evans-Pritchard with the latest speculation on the mutiny that awaits Frau Merkel should she proceed with putting doomed common currency over the interests of her people. From the Telegraph: "The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP). Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future." And to think a few short days ago we were ridiculing Die Welt's media propaganda approach to make it seem that the Eurobonds were a done deal...

Well, that short-selling ban sure worked for 48 hours.

• EURO Bnks: +doub digits on avg across the board

As for Sovereigns, + means bad:

• LIMONCELLO: +2
• GALICIAN: +10
• MOSCATEL: +14
• OUZO: +1
• DUBBEL: +1
• GREY GOOSE: -1
• ZIPFER: +1
• NEWCASTLE: -1.5
• GUINNESS: +20
• KOLSCH: +1

• High pressure on Sarkozy-Merkel talks (Reuters)
• Noda to "watch" "one-sided moves" in the USDJPY to parity soon enough - Yen to Reach Record Amid ‘Downfall’ of West, Sakakibara Says (Bloomberg)
• Eurobond Debate Rises in Germany, France (WSJ)
• China official paper calls for widening of yuan trading band (Reuters)
• China Economy Slowing ‘Significantly,’ Conference Board Says (Bloomberg)
• BOE's Miles: No Need for More QE (WSJ)
• Christine Lagarde: Don’t let fiscal brakes stall global recovery (FT)
• Zoellick: Governments should deal with global debt woes (Reuters)
• On Midwest Bus Tour, Obama Jabs at GOP (WSJ)
• U.S. debt still safest place for China reserves: top banker (Reuters)