Archive - Aug 16, 2012 - Story

Are we about to see a mini-war on UK soil, if and when Britain decides to storm the Ecuadorian embassy, which moments ago announced it has granted asylum to Julian Assange? From Reuters: "Ecuador granted political asylum to Julian Assange on Thursday, ratcheting up tension in a standoff with Britain which has warned it could revoke the diplomatic status of Quito's embassy in London to allow the extradition of the WikiLeaks founder. The high-profile Australian former hacker has been holed up inside the red-brick embassy in central London for eight weeks since he lost a legal battle to avoid extradition to Sweden, where he is wanted for questioning over rape allegations. Ecuadorean Foreign Minister Ricardo Patino said he feared for the safety and rights of Assange which is why he said his country had decided to grant him asylum. "Ecuador has decided to grant political asylum to Julian Assange," Patino told a news conference in Quito. Ecuador's decision takes what has become an international soap opera to new heights since Assange first angered the United States and its allies by publishing secret U.S. diplomatic cables on his WikiLeaks website." The UK, needless to say, is not happy, and the UK foreign ministry has said it will carry out binding obligation to extradite Assange to Sweden. Looks like posturing is about to hit a crescendo and someone will have to do something. Because foreign politics and diplomacy is (luckily) not central planning.

The World Gold Council released its quarterly report today, Q2 2012 Gold Demand Trends Report and can be read in full on the World Gold Council website here. Accumulation of gold bullion from central banks was the bright spot in demand last quarter, as total demand fell 7% globally, which was driven by a 38% fall in consumer demand from India.  Price sensitive Indians have been shunning gold and many have been opting for far cheaper poor man’s gold – silver. Jewellery and investment demand both fell. Jewellery consumption was down 72.3 tonnes at 418.3 tonnes, while investment fell 88.3 tonnes to 302 tonnes. The report shows how while record levels of demand from western markets, China and particularly India have been followed by a decline – the seismic shift that is central banks going from being bet sellers to net buyers has provided a new fundamental pillar of support for the gold market.  Physical demand slowed down in western markets and especially in India in recent months but large buyers continue to accumulate - both hedge funds and central banks and this is providing fundamental support to gold above the $1500 to $1,600/oz level. 2Q total central bank gold purchases were double the level reported a year ago as emerging market sovereign nations sought to diversify away from the dollar and euro and heightened economic insecurity. Gold purchases among central banks hit its highest quarterly levels (157.5 metric tons) since the sector became a net buyer of the yellow metal in 2Q 2009. 

One name comes up again and again when we look back at critical tipping points in the financial system. Whether it is Lehman, WaMu, MFGlobal, or more recently Knight Capital's implosion, the house-of-Dimon is tied directly, in one way or another, to creating the crisis or offering 'help' to fix it. As the WSJ notes, the Knight CEO Thomas Joyce reached out "we're looking for help" and sure enough JPMorgan were more than happy to help (with just the right amount of vigorish of course) especially given their 'complicated' relationship with Knight (and MFGlobal) at the time of distress. Sure enough, after playing hardball for 2 days, they agree terms and Knight is saved (for now) but once again the bank-that-didn't-need-TARP fixes another tempest-in-a-teapot as the squid and the whale battle for global interconnected dominance.

As has now become the norm, last week's initial claims was revised higher (because no algos care about what the real number was with a one week delay) from 361K to 366K (see chart below of cumulative impact when incorporating the next week revision), even as this week saw a modest miss at 366K on expectations of 365K. This "modest" 1K miss will be revised to a 4K miss next week. And while continuing claims also missed expectations by 5K, printing at 3,305K, it was the cliff of extended benefits that continues to bite, with another 64K people no longer collecting Uncle Sam's 99 week free dole in the week ended July 28. This brings the last two weeks' total to nearly 200K: unless this handout was replaced by disability payments, the hit to GDP will be material.

One of the reasons that Europe is so difficult to assess is the tremendous amount of jargon and hype that comes pouring out from all across the Continent. Each separate nation sends out stuff and then Brussels sends out their fluff and then the ECB makes proclamations and there is no harmonization as each group has its own distinct platform. We are bombarded daily with national interests, Federal interests and finally an ECB that supposedly is beholden to no one but is, in fact, beholden to everyone and especially Germany as the paymaster. Almost every day there is a new bandwagon to jump on and a new disappointment to be found some days later as one plan after another does not come to fruition. So to make sense of it all you have to stop, come to a full halt and give due consideration to the totality of what is happening in Europe.

European equities opened higher, risk appetite boosted following overnight comments from Chinese Premier Wen that easing inflation in China left more room for monetary stimulus. However, summer thin volumes saw these gains pared, with particular underperformance in the FTSE 100, which currently trades in negative territory, despite stronger than expected UK retail sales for July. European CPI data for July was in line with market expectations, with no reaction seen across the asset classes following the release. Elsewhere, reports that Spain is to accelerate the bank bailout and is about to receive an emergency disbursement from the EUR 100bln bailout failed to support domestic bond market; the Spanish 2-year spread with respect to the German equivalent trading 6bps wider, though the Spanish 10-year spread is tighter on the day by 3.2bps and the 10-year yield is lower on the day,  currently at 6.852%. The Spanish IBEX is outperforming on the back of this news, led by Bankia and Banco Santander.

The market may have found itself in the purgatory of the summer doldrums, where unlike last year this time, not only are volumes over 50% lower, but volatility is non-existent, but that doesn't mean that investors are sleeping easy. In fact, quite the opposite because as the following chart from MS confirms, the lack of market volatility merely mimics the complete chaos and lack of decisiveness in Congress, where each passing day brings America not only closer to the most contentious presidential election in ages, but to another debt ceiling hike debate, and, of course, the fiscal cliff. All of these combined have brought US policy uncertainty to the third all time highest level, on par with September 11 and the collapse of Lehman/TARP, and just short of last year's imminent European collapse, which was only staved off courtesy of the coordinated global central bank intervention on November 30.

• JPMorgan provided rescue financing to Knight (WSJ)
• HSBC hands U.S. more staff names in tax evasion probe (Reuters), HSBC, Credit Suisse Sacrifice Employees to U.S., Lawyers Say (BBG)
• Hong Kong shares slide to two-week closing low, China weak (Reuters)
• Israel Would Strike Iran to Gain a Delay, Oren Says (Businessweek)
• Britain 'threatened to storm Ecuador's London embassy' to arrest Julian Assange (AP)
• You have now entered the collateral-free zone: Spain Said to Speed EU Bank Bailout on Collateral Limits (BBG)
• China Can Meet Growth Target on Positive Signs, Wen Says (BBG)
• Risk Builds as Junk Bonds Boom (NYT)
• Berlin maintains firm line on Greece (FT)
• Brazil unveils $66bn stimulus plan (FT)

As Goldman observed last night, the "metaboring" meme continues, as things go from boringer to boringest. Nothing notable has happened overnight. Some things that did happen was news that Spain is about to receive an emergency disbursement from its €100 billion euro bank bailout because of restriction imposed by the ECB on bank borrowings; Italian banks announced plans to dispose of more bad loans to avoid "potentially bigger losses" (to whom? the ECB?), non-voting Fed member Kocherlakota saying that cutting IOER would have a minimal impact (are you paying attention former visiting Fed advisor David "the Fed will bail everyone out always and forever" Zervos), UK retail sales coming in stronger on bigger gas and food purchases (so aside from being ignored for inflation purposes these are useful when extrapolating economic "growth"), July Eurozone inflation coming in just as expected unchanged at 2.4% Y/Y, China FDI collapsing 8.7% as data revealed the longest run of declining inward investment growth in China since the 2008-09 financial crisis sending local markets to 2 week lows as the MOFCOM said the country's 2H export outlook will be even more grim and Premier Wen said easing inflation (not in food) allows for more room to adjust monetary policy, a statement that had zero impact on domestic stocks. As a result we have seen minimal flattening in Spanish and Italian 2s10s, and a continued gradual drift lower in the EURUSD. And this, aside from another week of initial claims that will have the prior week's data revised higher, and a Philly Fed, may be as good as it gets, as volume is set to plumb another multi-year low, and with the 2s10s flattening again, guarantees that bank profits in Q3 will be atrocious, forcing banks to fire even more (or cause various unnamed market makers to accidentally activate 1000x buy algos).