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RANsquawk EU Market Wrap - 4th July 2012



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The Fed And LIBOR - The Biggest Manipulator Of Them All

The Fed does everything it can to keep LIBOR low. The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds.  You can see that historically as Fed Funds was changed, LIBOR responded appropriately. That all started to break down in 2007 and re-ignited in the late summer of 2008 and peaked after Lehman and AIG. The Fed was blatantly clear that it wanted borrowing costs to go down.  They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.



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On America's In Dependence Day

"Our forefathers shed blood rather than render unto King George. Yet today we madly mortgage our nation’s future to foreign powers, piling debt upon debt without limit or thought as to how it will be repaid. These debts ensnare our children and grandchildren even as we stop having them, confident in the knowledge that the government will take care of us in our old age, so why bother with the trouble and expense? If we were still a nation capable of shame with enough intellectual integrity to call things as they are, if we hadn’t debauched our language as badly as our currency, if we had the courage to look in the mirror and see how woefully we have squandered our Founders’ legacy, this Fourth of July would be a day not of celebration but of atonement. Give some thought to what we have lost as we mark another In Dependence Day. May providence have mercy on our nation, lest we end up getting what we deserve."



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EURUSD Retraces 75% of EUphoria As Credit Underperforms Stocks

With Spanish bond spreads over 30bps wider from their open this morning, EURUSD has just broken its 200-hour moving average trading back close to 1.2500 for the first time since the summit. While this is an 75% retracement of the EUphoria, broad equity markets are only modestly off their highs (we assume on rate cut hopes - which is likely helping driven EUR down a little) - and yet corporate and financial credit spreads are at two-day lows. Hope fades even in equity markets where once we dig into the individual indices that most are down modestly (though Spain and Italy are down around 1%). We also note that Bunds have outperformed Treasuries by 20bps from the initial risk-transfer spike on Friday morning - though TSYs are closed today as Bund yields dropped 10bps from open to close today. On a side-note, Spanish 5Y CDS briefly traded wider than Ireland 5Y CDS today for the first time in two years.



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Guest Post: They Don’t Call Them Real Interest Rates For Nothing

The idea that short-duration bond funds are a good bet due to “the FED’s complete control with regards to suppressing and maintaining short-term interest rates” is completely wrong on every level; they’ve been a losing investment in real terms for most of the last 5 years, and the Fed is determined to keep it that way. The Fed’s control over nominal interest rates is precisely the reason that I wouldn’t want to invest in treasuries; not only has it consistently made bonds into a real losing proposition, but it also creates a good deal of systemic currency risk. Simply, the Fed will — in the pursuit of low-rates — monetise to the point of endangering the dollar’s already-under-threat reserve currency status. The only things that would turn bonds into a winning proposition — rising interest rates, or deflation — are anathema to the Fed, and explicitly opposed by every dimension of current Fed policy. Of course, creating artificial demand for treasuries to control nominal rates has blowback; if the buyers are not there, the Fed must inflate the currency. Hiding inflation is hard, so it is preferable to a central bank that old money is used; this is why Japan has mandated that financial institutions buy treasuries, and why I fear that if we continue on this trajectory, that the United States and other Western economies may do the same thing.



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Meet Anthony Browne: The New Head Of The British Bankers Association

Three weeks ago, before Lieborgate broke and the world finally understood what so many had been warning about for so long, we noted something else: that not only was LIBOR manipulated and fudged daily between 2005 and 2008, but as the chart in the attached post shows, it has been gamed every single day in 2012 as well. More importantly, we noted something else - the transition at the top of the British Bankers Association: the organization responsible for compiling LIBOR submissions from member banks, and reporting what the daily Libor fixing is. Because in the second week of June, the BBA's new head became... the former head of lobbying for none other than Morgan Stanley, Anthony Browne, a firm which itself was just caught red-handed manipulating rating agency "independent ratings" to benefit its bottom line (and which itself miraculous was downgraded by less than what the market expected in order to allow it to avoid several billion in collateral calls). And what did Anthony do at Morgan Stanley until June 12: he was head of Government relations for Morgan Stanley for Europe, Middle East and Africa and was previously an economic and business adviser to London Mayor Boris Johnson.  That's right - "head of government relations" for a rather prominent TBTF bank, being put in charge of daily Libor fixing. But everyone is shocked, shocked, that gambling has been going on here for years.



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Emerging Market Liquidity Flows At Crisis Levels

The growth in Emerging Market 'External Liquidity' recently was only ever slower in the quarters either side of the crash in 2008. This is a very worrying sign. EM nations are highly dependent on 'external' capital inflows (to smooth current account deficits) and have empirically been exposed to the 'sudden stop' nature of these inflows. It appears that Europe's banking crisis and deleveraging is indeed having a critical impact on EM nations - which may oddly mean domestic policy adjustments will be necessary (raising rates to encourage capital inflows) that will further exacerbate the problems as global growth slows. This brings to mind our recent comments on the shadow banking system and the drop in deposits among traditional risk-hungry EM funding banks - as we note that the more deposit-free the banking system, the slower the funds will flow. The newer the debt- and asset-inflation-based 'capitalism', the faster it is impacted at the margin - and it appears many EM nations are being affected rather rapidly.



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Gold Seen At USD 3,500, 6,000 And 10,000 Per Ounce

Negative interest rates continue to penalise pensioners and savers in European countries and this will lead to further diversification into gold. Financial markets are already starting to wonder about the solidity of last week's summit measures to tackle the euro zone crisis and soon they may question whether even looser monetary policies will help prevent recessions and sovereign defaults. With Independence Day today (Happy July 4th to all our American followers, clients and friends), the ECB decision tomorrow and NFP on Friday, trading should be quite today but as we know illiquid markets can lead to outsized market moves. We tend to try and avoid predictions in GoldCore as the future is largely unknowable and there are so many variables that drive market action that it is nigh impossible to predict the future price of any asset class. However, our opinion has long been that over the long term all fiat currencies will depreciate and devalue against the finite currency that is gold. For this reason we have long held that gold would reach its inflation adjusted high of $2,400/oz and silver its inflation adjusted high at $140/oz and the equivalent in euros, pounds and other fiat currencies. Gold at just over $1,600/oz today remains 33% below its record nominal high in 1980. Silver at just over $28/oz today remains 80% below its record nominal high in 1980. However, we have tended to focus on the important diversification, store of value and safe haven benefits of owning physical gold (and silver) bullion.



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The Post EU-Summit Reality Reversion

We know its a holiday trading day but Europe is active (if not watching Bob) and deteriorating quite rapidly. EURUSD just traded below the ledge of the initial spike after the EU SUmmit (and has retraced around 60% of the rally now). Italian and Spanish sovereign bond spreads are 15-20bps wider from their open today and have retraced over 40% of the spread compression post the EU-Summit now. Bunds are rather notably 5-6bps lower in yield (as we noted earlier the 'nein' to ESM standards relieves some risk transfer concerns for now). Equity indices across Europe are down between 0.5% and 1.5%. European bank equities are down around 1.5% on average (modest) but have quickly retraced around 25% of their post-summit gains. It appears the initial squeeze euphoria is wearing off quite quickly.



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Live Webcast Of Bob Diamond Testimony On Lieborgate

UPDATE: *BARCLAYS SAYS HAS RECORDING OF DIAMOND, TUCKER CALL, SKY SAYS

We suspect the Treasury Select Committee hearing with Barclays ex-CEO Bob Diamond will have a few more fireworks than Jamie Dimon's congressional hearings. The Chairman of the committee noted "This is the most damaging scam I can recall" as the goal of the hearing is to ensure "the public know what went wrong and whether the perpetrators have been rooted out." While we will have our own fireworks on this side of the pond, we suspect the live stream below will contain more than a few as the independence of Libor remains in question.



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Germany Backtracks On Last Week's Summit

Those curious why peripheral European bond yields have once again resumed their levitation creep higher, it is because not only did yesterday the key Merkel coalition partner, CSU, threaten to leave Germany's ruling party hanging "if further euro zone states secure bailouts, saying there were limits to how far his party was prepared to go", but today we have gotten even more furious backtracking on Mario Monti's history "success" less than a week earlier, after on one hand German opposition SPD has said it opposed Direct ESM aid to banks, but more importantly, the German Finance Ministry itself said that the entire bailout timeline is now in question, saying that it "remains unclear if Eurozone finance ministers will decide on Spain's request for banking sector aid at their next monthly meeting on July 9." The ministry also added that a decision could only come once the report on Spain by the troika - the European Commission, the ECB and the IMF - had been finalized. In other words, that much maligned Troika, which Monti had supposedly exorcised from intervening in the economies of Spain and Italy, will, after all be very much present, which also means that all the media spin about last week's "gamechanging" and unconditional bailout summit resolution, has been for nothing, in line with all the skeptical expectations.



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BoE's Tucker Preparing To Self-Immolate... And Take Others Down

Paul Tucker, the Bank of England executive at the center of the Barclays/Diamond trigger-conversation, has issued a statement requesting a Treasury hearing to show his "keenness to clarify the position with regard to the events" of that hanging chad of a phone-call. What is most troublesome (for every major banker and politician) is his apparent willingness to take more down with him. As the M.A.D. escalates, MNI reports that minutes from 2007 show Tucker (who was/is in line as we noted yesterday for the top-job once King leaves next year) was fully aware from the early days of the financial crisis that market participants believed Libor was rigged. The Group’s November 2007 minutes, from a Tucker-chaired meeting, state “Several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress.” The minutes show that not only was the issue raised back in November 2007 but that the BOE went to great lengths as the crisis deepened the following year to keep its finger on the money markets’ pulse. It seems that instead of mounting the 'plead-da-fif' defense Tucker is coming all-guns-blazing and is willing to drag more names into this miasma as a suicide-bomb of a hearing where the truth is realized could well bring every high ranking banking official to admit the continued unreality of Libor rates.



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Pilots Of Downed Turkish Jet Found Dead

In the ongoing story of confusing (as even the US has now said Syria was in its right to defend itself) yet continuing Turkish provocation, whereby a Turkish jet was shot down after entering Syrian airspace, resulting in immediate NATO-wide escalations and fighter jets being scrambled every single day since, the latest news is that the pilots who had been hoped to be alive, have been found dead.



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Frontrunning: July 4

  • Most Germans Reject Ceding Sovereignty to EU, Stern Poll Shows (Bloomberg)
  • How Stockton went broke: A 15-year spending binge (Reuters)
  • Manchester United Shoots for $100 Million IPO (WSJ)... with 4x leverage and Jefferies as underwriter
  • Iran says can destroy U.S. bases "minutes after attack" (Reuters)
  • Poison claims spark call for Arafat exhumation  (FT)
  • Diamond Would Be Catch for Investment, Private Equity (Bloomberg)
  • Investors may shun big Libor lawsuit and go it alone (Reuters)
  • New Particle Found, Consistent With Higgs Boson (WSJ)
  • Chinese riot police clash with protesters  (FT)
  • Euro-Area June Manufacturing, Services Output Contracts (Bloomberg)
  • Utilities Struggle to Restore Power in East (WSJ)
  • Dark economic clouds gather anew over Obama campaign (Reuters)


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RANsquawk EU Market Re-Cap - 4th July 2012



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