This may be a sign that the current sharp rally may have reached its zenith as neither bank has a great track record regarding short term trading calls on commodity markets. In the short term there is the risk of a correction as gold’s rise is now becoming front page (on front page of FT today) and headline news. The fact that silver has fallen in recent days and remains below $40/oz and the fact that gold mining equities have also not risen may also be a warning signal. Gold has risen from below $1,500/oz to nearly $1,800/oz in 5 weeks (since the start of July) and is up nearly 18% in dollar terms. Therefore, in conventional terms gold is most certainly overbought. However, we are not living in conventional or normal times and the ongoing global market crash and global currency debasement means that there is a chance that gold will go parabolic as it did in the 1970’s.
- Rogoff: Fed Will Embark on QE3, Act ‘Decisively’ (Bloomberg)
- China Inflation Quickens to 6.5%, Limits Policy Response to Global Crisis (Bloomberg)
- ECB Puts Pressure on Italy (WSJ)
- Chinese Fault Beijing Over Foreign Reserves (NYT)
- Senate to probe S&P downgrade (FT)
- Cameron Back to U.K. for Emergency Meeting on Riots (Bloomberg)
- Trichet Turns ‘President of Europe’ as Debt Crisis Stuns Political Leaders (Bloomberg)
- Hong Kong Sells Land 33% Below Surveyors’ Estimates Amid Market Turmoil (Bloomberg)
Markets witnessed a mood of risk-aversion today on the back of growing concerns about a global economic slowdown on the back of a recent US sovereign downgrade, together with ongoing contagion fears in the Eurozone. European equities traded lower during the session, following lower closes to the US and Asian bourses, which triggered market talk of a Euro-wide ban on short selling. The FTSE-100 index breached the key 5000 level to the downside, and registered a 20% drop since Feb’10, as it entered a bear market. Meanwhile, Spot Gold printed a record high at USD 1780.10 per ounce as investors opted for safety of a more tangible asset. Elsewhere, the USD-Index weakened ahead of the FOMC rate-decision later in the session, weighed upon by prospects for further monetary easing by the central bank. Fresh all time lows were observed in USD/CHF and EUR/CHF at 0.7383 and 1.0480, respectively, whereas USD/JPY tested a key level of 76.96, which saw the previous intervention by the BoJ. Weakness in the USD-Index helped EUR/USD and GBP/USD to print session highs, however GBP/USD came under pressure following weaker than expected industrial/manufacturing production data from the UK. In fixed income, the Eurozone 10-year government bond yield spreads observed tightening across the board on renewed market talk of the ECB buying in the Italian and Spanish bonds, which also weighed on Bunds. Moving into the North American open, the focus remains on the FOMC rate-decision to see if the Fed delivers a verdict of further monetary easing owing to the recent S&P rating action on the US, together with low growth prospects in the country. In fixed income, USD 32bln 3-year Note auction is also scheduled for later in the session.
BAC default risk at 265-270 bps as of this morning. About 30 tighter from yesterday's epic rout which saw the final bid/asl around 290/310, or well over 100 wider on the day. The longer BAC keeps mum, the worse this will get, and we expect the bleed wider to resume shortly, slowly at first, then very fast if no curve steepening QE3 Operation Twist is announced.
Bloomberg has come out with the most succinct and descriptive chart summarizing the "Central Bankers' dilemma" in which everyone is currently caught in either of four states: inflation, stagflation, recession and debt trap. Nobody wants to be in the lower left or the top right. Unfortunately, America's future is precisely one of the two, and anything the Fed does will only accelerate America's adverse transition appropriately.
The much awaited cut by S&P of thousands of municipal bonds following its August 5 downgrade of the US has arrived. Per Bloomberg: "The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn’t provide a dollar figure on the affected debt. “It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”" Well, Bud, if you really have so few acquaintances, we suggest you go out more. There are some fun bars on Ventura: give us a call for the low down. As for people who do go out more, here's one: "Chris Mier, a managing director at Loop Capital Markets LLC in Chicago who follows the municipal bond market, said the downgrades made sense, given the federal rating cut. “In order to keep the system logical and coherent, there are going to be a lot of downgrades,” Mier said in a conference call with reporters and clients." Matt Fabian, a managing director of Concord, Massachusetts- based Municipal Market Advisors, a financial research company, said in a telephone interview that he expected “hundreds and hundreds of municipal downgrades,” which may hurt investor confidence. “Treasuries may be able to shake off a real impact from the downgrade,” he said. “Munis, I’m less sure about." That's ok, while nobody has any idea what is coming, that won't stop 99.9% of those on Comcast's financial comedy channel from opining anyway.
Two Previews The FOMC Rate Decision Later Today, In Which Goldman Says "A Little More Easing May Be Needed"Submitted by Tyler Durden on 08/09/2011 - 06:56
For today's preview of the FOMC rate decision (which should really be called a QE3 decision), we go to RanSquawk which highlights the push and pull mechanics of today's events, and to Goldman which once again makes the explicit clarification that it needs QE3 with the statement that "A bit more easing might be needed in the near term." Yes Goldie, we know you want another year of record bonuses.
Yesterday Greece, today Korea, tomorrow the world. The traditionally last ditch attempt by a regulator losing control of events: making short selling illegal, is starting to appear in random places, first showing up in Greece, and now in South Korea, where the capital markets commissioner just said no most shorting for 3 months. South Korea’s Financial Services Commission will also temporarily ease daily limit on amount of shares companies can buy back. This latest short selling ban has put many on edge, and following Italy's move to ban naked short selling several weeks ago it is now expected that at least several more European countries will follow in these footsteps, further eliminating price discovery and destabilizing market confidence and more.
A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge
Anyone just waking up and noticing futures trading just barely below the closing print may get the impression that things are fine. They are not. Here is what has happened overnight as the global central planning cartel does everything in its power to prevent the global market rout, which has so far wiped out $7.8 trillion in market value around the world, from morphing into the catalyst that ends the status quo. To wit: ECB resumes buying Italian and Spanish bonds (UniCredit says the bank is losing a “game of chicken” with lawmakers by not holding out for budget cuts and higher taxes, and may eventually need to print money), the G-20 is prepared to take joint measures to stem a global crisis, Brazilian Finance Minister Guido Mantega said. Greece’s securities regulator banned all short-selling on the Athens exchange for two months starting today. Taiwan’s government bought stocks yesterday and this morning through four funds it controls. South Korea’s regulator asked pension funds, brokerages and asset-management companies to step up efforts to stabilize the market. South Korea also bans short selling for three months starting August 10. And lastly, rumors of an emergency Fed announcement are ripe. So... after all this global cartel intervention, is it any wonder that futures staged a near vertical move up overnight?
Frank Barbera, respected precious metal mining stock expert and editor of the Gold Stock Technician newsletter, has a viewpoint that will likely surprise many. While extremely bullish in the longer term, Frank sees too many risks in the near term and advises smart money to wait. He cautions: "I’ve been watching the mining stocks since 1983 so a fair amount of time that I spent watching the group. I have a wide variety of unique technical indicators on the sector and as I started to see the stock market topping out over the last two to three weeks I wrote my readers a note to say the mining stocks are also very overbought. Mid July we saw one of the second most overbought readings on the XAU, on the arms index in five years. And that kind of reading is a big warning and so I’m not surprised to see them going down. The last letter I put out I told subscribers that I thought the mining stocks could get cut in half in here and I’m going to stick with that. I think we’re looking at a 30 to 50 percent decline over the next six months. The XAU, which recently peaked out at around 220, I think you could see that close to 110 before this decline is complete."
While the massive drubbing across risk assets has modestly subsided, the global investing herd has finally realized that in the absence of shifting money into bonds (or even in addition to), there is a certain shiny yellow metal that may be just as good a store of value (granted, inedible) that despite a lack of cash flows (and who needs cash flow in a fiat based exchange system which will soon be wiped out anyway), is probably just a good substitue and as of this night is providing 1761 reasons as to why it is becoming increasingly obvious that if anybody listened to Hugh Hendry's presentation from last year in which he suggested people panic, it is the central planners. Should the Fed proceed with announcing QE3 tomorrow in the form of Operation Twist 2, gold will likely resume it vertical ascent to $2,000 which may be breached as soon as Friday. Alternatively, should Bernanke keep mum and disappoint everybody, all bets are off, across every single asset class.
The last time we had a modestly comparable collapse in overnight trading, a certain futures trader from SocGen whose gimmickry had been uncovered, caused the Fed to lower its Fed Funds rate in an emergency meeting first thing in the morning. Which is why we wonder, should the ongoing rout accelerate, to an extent driven by the decimation in the Korean Kospi, down -9.5% at last check, but also due to increasing worries the Fed may not announce QE3 tomorrow (or if it does, it will be OT2-like and won't have any actual LSAP component to it), whether Bernanke will be forced to have an emergency address with market in the morning, around 7 am, in order to prevent what is shaping up to be a market collapse of epic proportions. And certainly not helping matters is either Chinese inflation coming in hotter than expected, (see prior post), nor the fact that in the People's Daily, PBoC advisor Xia Bin said that China doesn't rule out "normal market operations" to promotes is own interested when necessary amid the US debt turmoil. "China should set up an overseas investment committee to accelerate the strategic use of foreign exchange, Xia said, according to the report. This committee should organize storage of strategic materials, Xia said, according to the report. The country should allow and encourage companies to purchase foreign exchanges with the yuan, the report said, cited Xia as saying." Wait a minute, you may ask, how does that work without China floating the Yuan? The answer: precisely. So while we wonder just what punitive measures China will take to make sure America behaves, here are the futures. We will update this chart if anything insane occurs.
As I've stated before I wish I could be more definitive here. This market really showed its hand today. The late day selloff was a sign of funds and or individual investors waiting for a chance to sell into strength to meet margin and or redemption calls only to find lower prices and forced to sell at the close. Bank Of America remains a wild card as well and the companies statement today basically said the market had it wrong. Not the calming words long investors want to hear. What the fall 2008 pattern shows us is this market can remain oversold for a very long time. Initiating short positions at these levels is very difficult unless one is using hedged option trades such as vertical spreads. The volatility could easily turn a winning trade into a losing one. Lastly, remember it is human nature for others to relay their fears and limitations upon an event beyond their control. I'm listening to Carl Icahn right now say how this selloff is way overdone. He doesn't see it lastly any longer but what basis does he have for saying that? Other than talking his book he has none. Don't be greedy and don't be a hero. There may very well be more selling ahead of this market.