July 6th, 2012
For a while now we have suggested that, based on the relationship between the Federal Reserve balance sheet and the ECB's, a 'fair' value for EURUSD is around 1.20. The difference, we felt, was inspired by hope for a sizable (~$700bn 'pure' NEW QE). The last month or so has seen that hope fade (as well as European stress rising as ECB rates align with the Fed's ZIRP) as EURUSD now implies the probability of NEW QE now at only 25% (and falling).
European credit markets - sovereign, financial, and corporate - have all slumped dramatically in the last two days - massivley underperforming the ever-hopeful equity markets. Even though broadly European stocks (the BE500 or STOXX) are only retraced by around 25% off their post-summit highs, individual markets (and especially financials) have retraced almost 100% of the gains with Spain's IBEX seeing its biggest 2-day drop in 7 months and closing unch anged from pre-Summit levels. EURUSD is the story though as it plunges to two-year lows at 1.2266 - over 400pips from its post-summit euphoria highs as QE3 hopes are dashed by muddling through US data. The disconnect between US and European equity indices and the rest of the world's more idiosyncratic risk markets remains unsustainable and as we have said before again and again "credit anticipates and equity confirms".
So where does this leave us, knowing that despite all the exuberant highs and depressed lows, we had ended the previous week pretty much in unchanged matter?
Well, after a 10-day period that had not one but 2 bail-outs announced, a EU summit that initially seemed to good to be true, results-wise, and then ended up just being that, and a triplet of Central Bank cuts cum QE supportive measures, things don’t look much better…
And the hits just keep on coming. Just as we said when it first broke, the Lieborgate scandal has considerably more play here and the latest and greatest is, via Bloomberg:
Germany’s Bafin Holding Libor Inquiry on Deutsche Bank: Reuters
The Deutsche Bank ADR has plunged by around 5% so far. Following 'news' this morning that RBC didn't 'collude' but no denial of the actual submission 'efforts' it would not surprise us to see the entire spectrum of LIBOR submitters 'probed'.
It seems IT professionals around the world are #failing as the 'glitch' that affected millions of account holders in the UK has leaped the channel and spread across Europe to infect Sberbank - which just happens to be the largest Russian bank. Via Bloomberg:
- *SBERBANK CARDS NOT WORKING IN RUSSIA, ABROAD, COMPANY SAYS
- *SBERBANK SAYS WORKING TO RESOLVE TECHNICAL MALFUNCTION :SBER RU
and from Interfax:
RUSSIA-SBERBANK-CARDS-MALFUNCTION MOSCOW. July 6. (Interfax) – Sberbank of Russia (RTS: SBER) has suspended credit and debit card operations due to a technical malfunction, the bank told Interfax. “All cards are not being serviced,” it said.
How many times did these glitches occur among the world's largest and likely highest paid IT services groups before the European financial crisis pulled back the curtain and showed the proximity of the liquidty cliff for so many of the 'biggest' banks in the world?
Shots for "fairness", "duty", "fault" and any other crowdsourced suggestions. No shots for "Solyndra", "Choom gang", "Eric Holder" or "record part-time jobs." If recent history is any indication, look for the S&P to slide.
Every government entity that reckoned it was moated from the market economy will be snapped back to "discover" risk and consequence. Let's lay out the dynamic:
1. Every government can only spend what its economy generates in surplus.
2. Every government transfers risk and consequence from itself, its employees and its favored vested interests to the citizenry and taxpayers.
3. Every government collects and distributes the surplus of its private sector to its employees, favored constituencies and vested interests.
4. Since the government (State) promises guaranteed salaries, benefits and entitlements to its employees and favored constituencies, these individuals believe they are living in a risk-free Wonderland that is completely protected from the market economy.
5. Risk cannot be repealed or eliminated, it can only be masked or transferred to others.
As politicians have become more and addicted to the campaign contributions of 'special interest' groups, or as Charles Biderman of TrimTabs analogizes: "The pusher owns the user", so the representatives-of-the-people are no longer. The only solution Charles sees is to change our representative form of government as we "no longer have a government of the people, for the people, by the people". In a July-4th-week inspired rant, Biderman extends from the Gettysburg address to constitutional expectations (and representative law-driven rule as opposed to military force) concluding what many know and yet are afraid to lean against: our government is "of the special interest groups, for the special interest groups, and by the special interest groups".
With today's payroll print hardly bad enough to prompt instantaneous QE (as evidenced by the weakness in gold for now) and increasing truth coming out of Europe which confirms our non-game-changing EU-Summit calls; it seems S&P 500 futures remain confident about something since they have only retraced 38% of the EU-Summit hope rally, while EURUSD is over 100% retraced, European Sovereign bond yields have retraced over 100% of the gains, Italian banks stocks have given up between 75 and 100% of their gains and across all European banks equity prices have given up 50% of their gains. So what is there left for ES? Earnings? (not so much with the number of negative pre-announcements) Housing? (hhm don't think so) Election cycle?
And in the meantime, not a peep about any bank in the US, which is ironic considering JPM, Citi and BofA are BBA member banks, and had among the lowest fixing rates during the period in question, and as Bob Diamond himself said, "everyone did it." One may almost get the impression that US regulators and politicians, gasp, have a motive to not investigate banks for not only criminal but civil malfeasance. And why should they: after all there is unlimited taxpayer money. And if that ends, the US can just print some more.
The chart below is a representation of the Establishment Survey (B.1)showing workers in the Construction of Buildings Space, aka those who, as the name implies, build buildings. At 1,213,500 workers, this was not only the lowest number of 2012, but the lowest since May 2011, and is just 2100 workers above the last decade lows. Perhaps instead of relying on the NAR's self-promotional brochures and Housing Starts data which capture if and when a shovel has met the earth, one should perhaps track how much actual demand there is for building construction workers and how many jobs this critical component of the economy creates. Sadly, as the chart below shows, not much.
UPDATE: Sell-off gathering pace now. WTI lagging a little more now at $84.6 -$1.2 and ES back at this week's lows as Gold has retraced all its knee-jerk gains
The initial knee-jerk reaction is a closing of the hope-gap between stocks and gold as S&P 500 e-mini futures are down 6pts or so from pre-NFP and Gold is up $11. Treasury yields are dropping relatively fast to the lows of their recent range under 1.56%. For now modest reactions in IG and HY credit (but markets are thin there this week). The USD is just a little weaker and WTI crude is limping lower but not spectacularly. European sovereign spreads are back at their highs.
The June Non-farm Payroll number of 80,000 comes below expectations of 100,000. Private payrolls miss even worse, at 84,000 below consensus of 106,000. Unemployment rate prints at 8.2%, inline with expectations. U-6, or broad unemployment rose from 14.8% to 14.9%. According to the household survey, jobs rose by 156,000 S/A and 1,387,000 Not seasonally adjusted. The worst news is that the number is not bad enough for more NEW QE immediately.
With the revised consensus of the NFP number due out in under 30 minutes at precisely 100,000 (because 99,963.333 and 101,492.5 are not quite as round, memorable and thresholdy), we remind readers that in June the average seasonal adjustment over the past decade comes to just over 1 million. These are 1 million jobs that do not exist but are merely added, or in June's average case, subtracted from the actual number, to make them fit a regression pattern. In other words, the marginal number that will determine whether or not we have a NEW QE will be far less than 10% of what the statistical adjustment to the actual June number itself will be.