Archive - Sep 10, 2012 - Story

Last August, a 400 point move in the DJIA was the norm. This August, a 50+ point drop in the second coming of the "Balls to the Wall" DJIA was the green light for sheer market panic. While unknown if it is the cause, or effect, of this collapse in volatility, the NYSE just reported that August cash volumes imploded by exactly 50% from last year, one thing is certain: for banks, which no longer make money on net interest margin courtesy of ZNIRP, and $1.6 trillion in inert reserves, the bulk of which are used to buy TSYs, then promptly repo them back to the Fed and use the cash proceeds to buy 200x+ P/E stocks, imploding stock volumes mean only one thing - a collapse in revenues and profits, terminations of entire divisions, collapse in tax revenues for the US Treasury, an increase in deficit, the need for more debt issuance, and a green light for the Fed to monetizing even more supply. And just to avoid the noise from "unseasonal" Y/Y comparisons, in August total ADV dropped by 12.6% from July. ETF volume imploded by two thirds from last year, and 14% from last month. Cue the financial earnings forecast reductions ahead of Q3 results.

Dante would be proud; the Baltic Dry Shipping Index has now plunged through at least eight levels of hell on its way to record lows as it drops to 666 today. This is the lowest since Feb 2012's Chinese New Year lows and is a stunning 55 percentage points lower than the normal seasonal shift in the global aggregate trade indicator (and down 69% from its Oct 2011 swing high). Whether its over-supply, under-demand, or too many Chinese New Years, it is unarguably the next level of hell for the global economy - that will surely bring all the bottom-callers out as this time is different.

On Wednesday the German constitutional court, aka the KKK (Krimson Kardinals Of Karlsruhe, any association with other acronyms is purely accidental), will decide if Europe stays or goes. There is some possibility Karlsruhe may delay the September 12 decision even further, following a new complaint by a Merkel conservative, Peter Gauweiler who said in a statement on Sunday the fund should not be ratified unless the ECB rowed back on its plans to make unlimited purchases of sovereign bonds, since that he said, posed a major risk to Germany's own national budget. The Constitutional court is expected to opine on this latest hurdle today or tomorrow at the latest. However we doubt it. So what does the binary outcome ahead of Wednesday look like? Here are some Wall Street pundits opining. Curiously, while the market is also pricing perfection as the outcome to this event, there may be gray skies forming.

There is a Transfer Union underway in Europe. While Germany has tried to avoid this at all costs, Europe, has found a clever way of implementing such a program and keeping it under the radar from the German citizens. In Greece, Spain, Portugal and Italy the ECB has implemented a program where the sovereign guarantees some bank’s bonds. The bank then pledges them as collateral at the ECB and gets cash. The bank then turns around and lends the money back to the sovereign nation and provides liquidity and economic sustenance. The Transfer Union is completed as Germany guarantees 22% of the ECB and the European Central Bank is nothing more than a conduit to lend money to the various nations. This contrivance is also not sterilized so that the ECB is, in fact, printing money. In a very real sense the ECB is the only fully operational part of the European construct at present as the European Union does not have the “political will” to carry out its mandate.

Gold has risen to new record highs in euro terms overnight in Asia when gold consolidated on last week’s 3% gains and rose above €1,360/oz for the first time.  Significant consolidation has been seen in the last year between €1,200/oz and the previous record high at €1,359.01/oz. This record high was seen almost exactly a year ago on September 9th 2011. Gold is being supported by the unrest in South Africa which continues to destabilise the mining sector. Gold Fields said this morning that some 15,000 workers were still on strike at one of its gold mines outside of Johannesburg. The tally of workers on strike at the West Section of the KDC Gold Mine is about 3,000 higher than last week. All production at the mine has been brought to a standstill. With the US job growth contracting significantly in August, investors see that the Fed will be inclined to announce QE3 at this week’s policy meeting on the 12th & 13th. US gold futures and options climbed to 6-month high 144,775 contracts in the week ended September 4, according to data from the U.S. Commodity Futures Trading Commission. Gold ETF’s grew to a record high of 72.125 million ounces on Friday. Also, Hong Kong's July gold shipments to China was almost double on the year and exports for the first 11 months were greater than 2011, suggesting China will overtake India as the world's top gold consumer.

Stocks in Europe traded lower throughout the session, as market participants reacted to another round of weak data from Asia. In particular, China’s imports fell 2.6% on the year in  August vs. Exp. 3.5%, underpinning the need for policy easing measures from the People's Bank Of China. Some of the weakness in equity space was also attributed to profit taking following last week’s gains. Spanish bonds continued to benefit from the ongoing speculation that the government will seek a full scale bailout. As a result, SP/GE 10y bond yield spread is tighter even though there is an outside chance that the constitutional court vote in Germany will delay this. On the other hand, IT/GE and NE/GE bond yield spreads are wider, reflective the upcoming issuance, as well as elections. EUR/USD and GBP/USD, both seen lower on the back of touted profit taking, as well as pre-positioning into near-term risk events mentioned above. Commodity linked currencies are also weaker, weighed on by the weaker data from China, which also showed that imports of crude oil hit a 22-month low. In terms of notable stocks news, Glencore said it will not improve its offer for Xstrata after the company raised offer for Xstrata to 3.05 from 2.8.

Perhaps one of the best advance indicators of the market respite that took place in August was the slowdown in Bundesbank TARGET2 claims, which until then had been rising at an exponential pace, only to see its first monthly sequential decline since 2011, dropping €1.4 billion. Now that August is gone, and the vacation that brought Europe to a merciful halt is over, the time to resume sucking Germany dry in order to fund current account (and other) deficits is back, and sure enough the just reported Bundesbank August update of TARGET2 claims shows that the increase is back. At a record €751.4 billion (or just shy of $1 trillion at today's exchange rate), Germany funded the periphery, mostly Spain with record €415Bn in liabilities, Italy with a record €280Bn, Greece at €105Bn, via the transfer of public risk to private sector benefit (sunk "public" Buba costs are a concurrent benefit to the German export sector) to the tune of over €1 billion each work day, with a total monthly increase of €24 billion in August. Look for this number to resume its astronomic rise as the periphery realizes its inventories needs restocking and that it needs to import German stuff using Bundesbank liabilities that will never be satisfied.

• China Output Growth Slows as Leadership Handover Looms (Bloomberg); Weak China trade data raises Beijing spending stakes (Reuters)
• Italy Q2 GDP revised down to -0.8% year-on-year on weak domestic demand (Economic Times)
• Troika disagreed with €2 billion in Greek "cuts" (Reuters)
• No Greek bottom in sight yet: Greek IP, Manufacturing Output plunge compared to year earlier (WSJ)
• France's Hollande sees 2013 growth forecast about 0.8 pct (Reuters), France plots tax hikes of up to 20 bln euros (Reuters)
• Euro Crisis Faces Tests in German Court, Greek Infighting (Bloomberg)
• Geithner sells more AIG stock (FT)
• Japan infuriates China by agreeing to buy disputed isles (Reuters)
• Euro crisis to worsen, Greece could exit euro: Swedish FinMin Anders Borg (Economic Times)
• ‘Lead or leave euro’, Soros tells Germany (FT)
• German MP makes new court complaint against euro plans (Reuters)
• Obama super-Pac in push to raise $150m (FT)

Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.