Archive - Feb 2013 - Story

It would appear sentiment is shifting a little and the BoJ may not get it all their way. While Draghi did his best to avoid explicitly getting into 'Currency War' discussions, recent concerns by Hollande and the ECB Head's 'deflation fears' have been enough to crater EURUSD. The last four days have seen EURUSD drop by the most in almost seven months and EURJPY start to drop significantly with the biggest 2-day drop in seven months.

From a discussion of the Dutch political system being in the pocket of Big Oil to warning that German policy stipulations and the Euro itself could "potentially destroy the European Union," amid rebellion, George Soros has drastically reduced all Euro-related exposure from his portfolio - only a few weeks after his cautious optimism that Europe is 'revived' in Davos. As Open Europe blog notes, Soros fears that "there is a real danger that the [Euro] solution to the financial problem creates a really profound political problem." The interview below with Dutch TV shows Soros grave concerns that the Southern nations are "being pushed unwittingly... into a long lasting depression," as Germany's austerity program is "counter-productive - cannot actually succeed." Just as we recently noted the similarities between the European Union and the Soviet Union, so Soros believes the 'Euro' itself is "bound to break up the European Union." It may take generations, he notes, as a terrible tragedy of "lost political freedom and economic prosperity."

A glance at headlines over the past few months and there is little mention of anything but Europe's periphery struggling but market performance implying that a turnaround is about to occur. Most of this is based on a belief that the core is doing 'well' and that the periphery is gradually becoming more competitive. However, as if elections were not enough to worry Frau Merkel, it turns out, as Diapason's Sean Corrigan notes, Germany's Industrial Production, stymied by a surging EUR, has just suffered its third biggest quarterly decline on record - plunging back to 2007 levels. Furthermore, France's Industrial Production is back at levels first seen in 1997 - also plunging (perhaps explaining Hollande's recent exclamations at EUR strength); as the core is starting to soften significantly.

While the collapse in China-Japan foreign relations (and subsequently, and much more importantly, trade) over a handful of islands in the East China Sea and strategically located near potentially vast maritime oil and gas reserves is by now well-known to everyone, what may come as a surprise is that while Japan is engaged in one mini cold war over disputed rocks with China, none other than Russia tested the waters overnight so to speak, with a fighter jet flyover above yet another set of disputed islands, the Kuriles located in the far north of Japan. From Reuters: "Two Russian fighter jets briefly entered Japan's air space near disputed islands and the northern island of Hokkaido on Thursday, prompting Japan to scramble combat fighters and lodge a protest, Japan's Foreign Ministry said." In other words, Russia is making it very clear that as Japan loses more credibility in the foreign affairs arena, China will not be the only one to gain from Japan's loss, and that Russia has every intention of claiming what it too believes rightfully belongs to Putin. Which begs the question: how far is Japan's far more nationalistic current government willing to go to alienate yet another key trading partner, and was this the plane by the China-Russia axis all along?

Doing his best not to get dragged into the currency war conversation, ECB head Mario Draghi is, however, concerned at the impact of a stronger EUR on inflation (or to be more accurate dis-inflation). Noting not only that there remain downside risks to the economic outlook, as we highlighted previously (an 11% rise in trade-weighted EUR since July), his comments (that have smashed the EURUSD down 120pips so far) appear to be addressing a surging EUR.

• *DRAGHI SAYS EURO AREA GROWTH RISK CONTINUES TO BE ON `DOWNSIDE'
• *DRAGHI: REAL, NOMINAL EXCHANGE RATE NEAR LONG-TERM AVERAGE
• *DRAGHI SAYS ECB WILL MONITOR EURO LEVEL FOR INFLATION RISKS
• *DRAGHI STATEMENT SAYS EURO APPRECIATION RAISES INFLATION RISK (or Deflation)

Yesterday it was rumored buybacks and Bill Miller (long retired following disappointing recent performance) hopium; today David Einhorn moves to beg a "fantastic" Apple not to block paying out juicy new dividends on its preferred. Claiming that the company has a "Cash problem" and a "mentality of depression", his position is basically one of demanding that cash (that we so recently noted is actually not really there - with only 31% of it onshore - and invested) be put to work. Facing increasing losses on his profitable long position, the hedge fund manager is miffed that Apple's management has banned giving sharehodlers dividend-paying preferreds. Of course the stock is surging - even though this is actually an action by Apple that removes the possibility - echo yesterday's ramp and fade... and while we are thinking about Apple, why if the world is indeed doing so well is Apple so 'depression-esque' hording cash (as we have rhetorically asked many times in the past about all firms).

As is the case every Thursday, the BLS reported its weekly initial claims which unlike two weeks ago did not estimate the initial unemployment claims for America's most populous state when the number plunged, and has now missed expectations for two weeks in a row, printing at 366K, on expectations of a 360K number, while last week's 368K was as usual revised upward to 371K. As a result, the Mainspin Media already has its headline: Initial Claims decline by 5,000. Such is life under the US Department of Truth, even as unadjusted initial claims spiked by 16.7K to 386K in the week ended February 2. In other news, people on Extended Unemployment Comp plunged by 288K after soaring in the week prior, and making some wonder just what is going on with the EUC 2008 data series for it to get such massive weekly shifts each week.

Following 'no change' in policy, we assume we will be treated to a plethora of confidence-building market-implied views of just how great everything is in Europe (apart from fundamentally). Of course, the Q&A is what we want to hear and his involvement in the Monti Paschi debacle, his view on Anglo Irish, his ignorance of currency wars ("I do not talk about currencies"), and just how great the repayment of LTRO funds are (even as European stocks and bonds move into the red for the year)...

*DRAGHI SAYS DATA SIGNAL FURTHER WEAKNESS IN EARLY 2013
*DRAGHI SAYS RISKS TO OUTLOOK REMAIN ON DOWNSIDE
*DRAGHI SEES UPSIDE PRICE RISKS FROM OIL PRICES, INDIRECT TAXES
*DRAGHI SAYS ECB WILL MONITOR MONEY-MARKET CONDITIONS

There was some hope that Greece, which for the past few months was desperately trying to show it has a primary surplus when in fact it was merely shoving unpaid bills under the rug, was at least getting its runaway deficit situation under control. This, despite what many sensible people pointed out was the return of nearly daily strikes, which meant zero government revenue as zero taxes could be levied on zero wages. Turns out the sensible people were again right, and the Greek and European propaganda machine has failed once more as the Greek Finance Ministry just reported that despite big tax hikes demanded as part of austerity measures by international lenders, tax revenues fell precipitously in January, with the Greek Finance Ministry reporting a 16 percent decrease from a year earlier, and a loss of 775 million euros, or $1.05 billion in one month. It is all downhill from here as the feedback loop of more spending cuts is activated to offset declining revenues, leading to even less revenue, and culminating with the complete collapse of Greek society.

As expected by most, the ECB just announced its three key interest rates unchanged, meaning the surge in the trade- weighted EUR will continue to weigh on European exports.

• Bersani's lead over Berlusconi continues to erode, now just 3.6 Pts, or inside error margin, in Tecne Poll
• Spain gears up for U.S. debt investor meetings (Reuters)
• PBOC Set for Record Weekly Liquidity Injection (WSJ)
• RBS Trader Helped UBS’s Hayes With Libor Bribes, Regulators Say (BBG)
• ECB, Ireland reach bank debt deal (Reuters)
• AMR-US Airways Near Merger Agreement (WSJ)
• Monte Paschi says no more derivatives losses (Reuters) ... remember this
• Harvard’s Gopinath Helps France Beat Euro Straitjacket (BBG) - by sliding into recession?
• Obama Relents on Secret Drone Memo (WSJ)
• Brennan to face questions on interrogations, drones and leaks (Reuters)
• Wall Street Success With Germans Boomerangs (BBG)
• Khamenei rebuffs U.S. offer of direct talks (Reuters)
• Boeing Preps Redesign to Get 787 Flying  (WSJ)

It has been another quiet overnight session, with macro data decidedly mixed and "adjusted", because while the key German December Industrial Production number came in sequentially at 0.3% on expectations of a 0.2% rise, it fell more than expected on an unadjusted Y/Y basis, dropping 1.1%, on expectations of just a 0.5% drop. On the other hand, Spain's industrial output not unexpectedly stagnated for a 16th consecutive month, plunging by 6.9% in December in line with expectations, and sliding by a whopping 8.5% Y/Y. In bond auction news, Spain sold some €4.61 billion in 2015, 2018 and 2029 bonds, all pricing with yields substantially higher than recent January auctions, which in turn sent the Spanish 10 Year to 2 month highs of 5.52% after the auction, however it has since regained most of the losses.

When it comes to "get rich quick" housing schemes, one can be a bank prop trading desk or a hedge fund, with access to the Federal "REO-To-Rent" program which grants a costless purchase of distressed real estate with zero cash down, in order to facilitate the subsidized removal of housing inventory from the market, or, if one is not too big to fail, one can simply pull off an Andre Barbosa, the infamous Boca Raton squatter who used the "adverse possession" loophole to claim title to a multi-million mansion. Or, as it turns out now, one can take advantage of the latter and lever it up even more, by renting out other people's foreclosed property without ever being present, while claiming ownership rights through "adverse possession", keeping the inbound cash flow while having someone else on the hook should the cops come knocking.

Thursday’s ECB meeting is important in the context of recent market moves and statements regarding the level of the euro. Citi notes that the rise in short-dated vol indicates considerable investor focus on the meeting. Expectations have been building that ECB President Draghi may offer a more cautious tone to ‘talk down’ the moves seen in the short-term rates and FX. In light of President Hollande’s advocation of an exchange rate policy aimed at ‘safeguarding competitiveness’, Draghi will likely face further questioning on FX. However, Citi does not believe that he will reverse his position and explicitly talk the currency down. Goldman also notes that while 'Taylor-Rule' users might infer a 30-50bps lowering of rates (thanks to growth, FX, and inflation) the improvement in 'fiscal risk premium' balances that dovishness leaving Draghi likely on hold. However, he is unlikely to stand 'idly by' without some comment on the ensuing currency wars.