Archive - Sep 3, 2013 - Story

Now that the All Time High (ATH) in the S&P is a distant memory (at least until the Syrian war becomes a widespread conflict involving all global powers and the US suddenly has to issue, and monetize, a few extra trillion) there are those momentum chasers who have an itch to BTFATH. To all of them we have a message: don't despair, and merely set your sights a little lower, on the globe that is, to Venezuela where the local stock market keeps crushing every upside resistance level and hitting new all time highs day after day after day, resulting in a YTD return of nearly 200%!

The petrodollar regime - that oil is bought and sold globally in U.S. dollars - is easy to understand. It boils down to these two principles: 1. Petroleum is the lifeblood of the global economy; and 2. Any nation that can print its own currency and trade the conjured money for oil has an extraordinary advantage over nations that cannot trade freshly created money for oil. This is why many analysts trace much of America's foreign policy back to defending the petrodollar regime. America's energy boom is creating consequences for the value of the dollar.

"The Big Three" will take the stage in front of the US Senate Committee on Foreign Relations to make the case for "the authorization of the use of force in Syria." Given the volume of 'supportive' leadership comments this morning already, it seems that John Kerry (Secretary of State), Chuck Hagel (Secretary of Defense), and General Martin Dempsey (Chairman of the Joint Chiefs of Staff) will not get too much push-back though earlier comments that the scope of the strike "was too narrow" may become a sticking point.

Spot gold prices have surged over $40 from Sunday's knee-jerk lows as once again lower prices have encouraged demand. Gold had shfted back to unchanged from Friday's close before Boehner spoke but since then has accelerated over $20 higher. Gold shorts in the futures and options markets have dropped for 6 of the last 7 weeks. The 60% drop in the non-commercial short position represents a massive 81,700 contracts (8,170,000 ounces or ~$10.6 billion worth of notional 'paper' gold). Gold's 21% rise from the lows in the last 2 months is among the fastest rises since 1999; and GLD holdings have risen for the last 6 days in a row.

It seems that the reason why Obama has been such a staunch supporter of a Syrian campaign without a land component, is because US-armed and trained Qatari mercenaries, also known elsewhere in the media as "rebels", are about to take to the battlefield (ignoring for a moment prior reports that American, Israeli and other troops have already long operated on Syrian territory). The Telegraph reports that "the first cell of Syrian rebels trained and armed by the CIA is making its way to the battlefield, President Barack Obama has reportedly told senators. During a meeting at the White House, the president assured Senator John McCain that after months of delay the US was meeting its commitment to back moderate elements of the opposition. Mr Obama said that a 50-man cell, believed to have been trained by US special forces in Jordan."

It was overall a fairly dismal month for most assets as Deutsche's Jim Reid notes sentiment was weighed down by a) ongoing tapering fears, b) a further shakeup in EM assets and currencies, and later during the month c) the escalating tension in Syria. Clearly returns in fixed income and the broader emerging market space were tapered down further by tapering concerns but DM equities were also not immune to the softer risk backdrop. The biggest loser in August were EM bonds, followed by Wheat and the S&P 500. The biggest gainer in Auguest was Silver followed by Brent crude and Chinese stocks.

While gold, silver, and crude oil prices had already recovered their initial knee-jerk losses from the "war-off" moves Sunday night, US equities were sticking to their BTFD guns until Boehner, Pelosi, Cantor, and Levin came out behind President Obama's Syria strike plan. S&P futures slumped to Sunday night's open, vacillated, then the Dow dumped over 120 points from its pre-ISM highs to break red (followed by Trannies and the S&P). Treasuries have been slow to react; holding on to losses (30Y +12bps) until the decision was clear from stocks, and then yields fell more significantly as investors greatly rotated back to safety. The USD is not moving much but JPY strength (carry-off) is driving it modestly lower. VIX is back over 17%.

With utmost firmness I condemn the use of chemical weapons.

— Pope Francis (@Pontifex) September 3, 2013

On a purely humanitarian basis, Syria’s tragedy is exceeded by many conflicts that the US abstained from participating in. So when thinking about civil wars and how the US defines its national interest, one has to ask why Syria would qualify for direct intervention while others conflicts did not.

It is not a good time for Janet Yellen. The one time Bernanke-replacement favorite who many were confident would be the next Fed chair, and whose odds in the initial stages of the Fed race were 75%, is so far out of the running one can almost ignore her candidacy. At least if the market makers behind Paddy Power, and the Fed Chair market betting participants have it right. As of today, her odds have slumped to the lowest in the life of the contract, or 29.4%, below the 36.4% from mid August. The leader by an even greater margin: Larry Summers whose 2/5 odds, or 70%, mean that absent a material change in rhetoric, will be the person Obama announces as Fed chairman replacement over the next month.

Gold and silver prices are jumping, bonds are bid off their high yields, and US equities have dropped to the lows of the day as Boehner gets behind Obama:

BOEHNER SAYS WILL SUPPORT OBAMA'S CALL FOR ACTION IN SYRIA, BELIEVES COLLEAGUES SHOULD DO THE SAME
BOEHNER SAYS `ONLY THE UNITED STATES' CAN RESPOND TO SYRIA
BOEHNER SAYS UN, NATO UNLIKELY TO TAKE ACTION ON SYRIA

Not surprisingly, Boehner's call is promptly supported by both Cantor and Pelosi.

Of course, given the military's moves over the weekend, was there really any de-escalation (as we warned Friday)?

After a modestly weak start, India's FX and stock markets accelerated lower overnight in the currency's second biggest daily collapse in 17 years, and stocks second biggest daily plunge in 2 years. Rubbing further salt into an already gaping wound of capital outflows, S&P re-iterated its downgrade threat overnight following India dismal PMI print and this appears to have pushed the Indian government to Plan D. Following the failure to halt outflows of Plan A (status quo and blame it on the Fed/Speculators), Plan B (well something is up so 'capital controls' on FX and tariffs on gold), Plan C (that's not working so let's confiscate people's gold), the Indian government is trial-ballooning Plan D - ditch the USD for trade-payments (especially oil which is up 50% in INR terms in 4 months).

Whether it is growth hopes or Taper fears, good-news was bad-news for bond bulls this morning as better-than-expected ISM and construction spending data jarred bond yields from already rising levels to their biggest jump in two months. With the 30Y up 11bps and back over 3.8% and the 10Y pushing 10bps higher in yield to 2.89%, the line in the sand level of 3.00% grows ever closer. Equity markets are unsure of what to make of it but appear to have a bias to the downside on this good-news-is-bad-news data but gold, silver, and crude oil is rising.

What is the best way to avoid a veiled threat? Unveil it.

• ISRAELI PRESIDENT PERES COMMENTS SENT IN E-MAILED STATEMENT
• PERES SAYS HE ADMIRES OBAMA'S EXAMINING `EVERY POSSIBILITY'
• PERES SAYS `ASSAD WILL DISAPPEAR ONE WAY OR THE OTHER'

Truly a great line for any Hollywood action movie, which is what the whole staged conflict in the middle east resembles more and more with every passing day.

Unless this Friday's NFP number plummets, the taper is now assured. Moments ago the US joined the rest of the world in its "manufacturing renaissance" spurt reported over the past two months, with the Manufacturing ISM headline number rising from 55.4 to 55.7, beating expectations of a 54.0 print, and printing the highest number since April 2011 and the biggest beat since August 2011. The components which posted a notable increase were New Orders, which rose from 58.3 to 63.2, recording the largest 3 month rise in 4 years, Prices jumped the most or 5 from 49.0 to 54.0, while exports also rose by 2.0 to 55.5 as it appears everyone is exporting more to everyone else at the same time: hopefully someone is reminded that trade just happens to be a zero sum game. Among the decliners, the most notable one was Employment which dropped from 54.4 to 53.3, Production down 2.6 to 62.4, and  Customer Inventories down 5 to 42.5. Maybe there is a reason why customers are rapidly destocking despite the the ramp up of production at the material stage.