And the same old show and dance persists as initial claims continue confirming that at its core, the US economy is not improving one bit following the 12th consecutive claims pring over 400K. We still expect the June NFP consensus to be cut. The BLS reported that initial claims in the week ended June 25 were 428K, much higher than the expected 420K. Initial claims also missed expectations of 3,690K, printing at 3,702K. And guess what: this too is a drop from the upward revised 3714K, previously 3,697K. Both numbers this week will be revised higher next week, which will bring the rolling average far higher.
It is hard to define how much money Greece is getting. Is it the next tranche of IMF money? Is it the amount of cuts the Greek government agreed to take? Is it future promises of money from the Troika? It's hard to tell, but $20 billion seems to be about the amount that is being provided to get us through another 3 months...Let's assume the Lehman 2.0 and contagion crowd are correct. Is it realistic to assume that $3 per person is enough to save the world's entire economic model? If so, sign me up, I will contribute my $3. But the GDP of the U.S. $14.5 trillion (it is easy to remember since it is the same as the amount of U.S. debt outstanding). The GDP of the European Union is $16 trillion. Add in another $10 trillion for China and Japan and you have GDP of $40 trillion. The doomsayers are telling us that $20 billion is all that it takes to save a $40 trillion system? We have a $40 trillion global economy that hinges on getting $20 billion to Greece so they don't default.
While Goldman's traditional, client-facing sell-side research is terminally useless and empirical evidence suggests that doing the opposite of what is recommended yields profitable results more than two thirds of the time, what its trading desk releases to select clients is far more targeted, nuanced, and, in one word, correct. Which is why we were surprised to hear what Goldman's traders had to say about gold. To wit: "We are hearing anecdotes of strong physical demand already coming through in the last few days. Official sector buying is also likely to feature...Although having been rather wrong footed by this recent setback I
continue to believe that gold will have a strong end of summer into q4
and that current price moves are creating another great buying
opportunity." And unlike the reverse psychology in the research department, the sales guys are much more careful as they have named accounts they get make commission revenue from. Piss these off one too many times and you are cut off. Which makes us believe that Goldman is really long and strong here.
After trading higher in early European trade, equities pared back some of their gains as focus remained on the Greek austerity implementation details. In the forex market, EUR received support after ECB's Trichet said that the ECB is in a state of strong vigilance, which signals a possible change of rates, allied with news that German banks and the German government have agreed on a Greek debt plan. However, GBP/USD remained under pressure partly on the back of market talk that US names and a UK clearer were selling in the pair, with speculation of month-end demand from the Bundesbank assisting the rise EUR/GBP. Moving into the North American open, markets look ahead to key US economic data in the form of Initial/Continuing Jobless Claims and Chicago PMI figure, allied with GDP data from Canada. In fixed income, there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16 - Jun'18, with a purchase target of USD 4-5bln.
- Rice Supplies Tightening in China May Increase Imports, Bolster Inflation (Bloomberg)
- IMF warns US of global debt ‘shock’ (FT)
- China may widen yuan trading band soon-Bank of China (Reuters)
- Italy May Raise Trading Tax (WSJ)
- Deutsche Bank warns on voluntary rollover (FT)
- GOP wants Senate to cancel vacation (Washington Times)
- As QE2 ends, market debates Fed's next move (Reuters)
- Greek parliament expected to endorse second bill (Reuters)
- Appeals Court Says Health Law Is Constitutional (WSJ)
Creditex has just reported the preliminary results in the CDS settlement auction of Allied Irish Banks. According to initial data submitted to ISDA (for more on the mechanics of CDS auctions read here) on behalf of buyers and sellers of CDS into the auction, the AIB senior bonds will see a final recovery value of about 71.375 while the sub will barely recover 10%, or 12 cents on the dollar to be precise. Alas this is likely indicative of market clearing levels on most European bank bond liabilities due to the incestuous circular nature of European bank assets and liabilities where everything is interconnected in one massive closed loop. And yes, one wonders just which regulating central bank allowed this bank's debt to be pledged as collateral for as long as it did.
Whether the move in overnight Libor is due to an end of quarter window dressing scramble by the banks who in a Repo 105 fashion are doing their best to seem healthy, or it is due to the recent evaporation of European money market funds which are going into US securities, leaving Europe high and dry, is unclear; what is clear is that overnight EUR Libor just doubled, exploding by an unprecedented 85.5 bps to 1.78%, the highest it has been since early 2009 (see chart). Why is this troublesome: because the USD overnight Libor is at 0.128%, which is to be expected courtesy of the recent very much expected extension on the Fed's swap lines with European banks. But it does beg the question: instead of the traditional shortage of USD on every risk precipice, is there suddenly a massive black hole in overnight EUR funding, and has Chinese buying of euros by the bushel backfired and is about to further hobble European, and US, liquidity. As a reminder yesterday, General Collateral traded at the lowest rate ever, or -0.002%. Alternatively, this may be a function of the ECB providing less than expected euros in its latest 91 Day Long-Term Refinancing Operation, which saw 265 bidders scramble to secure €132 billion from the ECB. And meanwhile in China, despite all the recent attempt to reestablish liquidity in the market, the 7 and 14 Day SHIBORs both broke their recent downward trend. If this is all simple end of quarter liquidity shoring up, that's fine: thing should get back to normal tomorrow. If, however, the liquidity picture does not change on July 1, it may be time to step away from the keyboard and at least get to know where the nearest emergency exit is.
Once again the world will be watching Greece although with far less interest as the parliament is expected to pass the austerity bill with voting expected to commence on each individual point in the mid-term package at about 8 am Eastern. In the meantime there will be quite a bit economic data, such as Initial Claims, the critical Chicago PMI, the Kansas City Fed Index, as well as various Fed speeches. Most importantly, today is the day when the Fed stops adding net liquidity to the market with the last POMO due at 11:00 am. Expect another window dressing meltup into the afternoon at which point anything goes.
A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge
With Goldman having recently downgraded its outlook on China, it was only a matter of time before its FX team came out with a completely nonsensical and inverted call on the first derivative of a Chinese slowdown: the AUD. As of tonight Goldman is advising clients that its prop desk has a lot of AUDJPY to sell up until 90, and will buy everything below 84, in other words Thomas Stolper says to go tactically long the AUDJPY until 90, with an 84 stop. Of course, this makes all the sense in the world if China is slowing down. As a reminder, Stolper is the same guy whose call track record in 2010 was about 0 out of XXX. On account of it being a long day we refuse to even attempt to deduce how many level of reverse psychology are involved in this call. Needless to say, any time a hedge fund tells you to buy a bridge it probably has one to sell.
Over the past two weeks, we have been suggesting, tongue in cheekily, that despite the relentless desires of everyone to sell the EUR, it has continued to drift higher, due to some inexplicable force with bottomless pockets, which, after some deductive logic, we assumed was China. It turns out we were correct. Naturally, figuring out what China does with its $3 trillion in foreign reserves is sometimes more complex than brain surgery (except what it does every time it sees a barrel of oil for sale: then it is pretty much guaranteed what it will do). But when it comes to preserving its 3 rounds of horrendous European down payments, it was pretty logical that China would do everything in its power to prevent a waterfall effect that would result in Europe imploding in a ball of illiquid singularity. The WSJ has confirmed that China's SAFE is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. And while this does not mean the EUR is the new reserve currency, it certainly means that China has now become the deciding factor as to just who is (much to the chagrin of Markel, and delight of Geithner... for the time being).
The worst thing about following the neverending Greek bankruptcy saga is that while everyone knows that the can will be kicked down the road in one way or another until the population simply snaps and brings the bulldozers out to Syntagma square, the recent pick up in daily very irrelevant voting events (which are supposed to occur in the middle of the night but are delayed until noon Eastern), among many other irrelevant events, has made sleeping for US-based coverage nearly impossible. It has also caused a surge in noise-based newsflow that has absolutely no real relevance to anything except sending the EURUSD higher (more on the reason for that in the next post). And yes: today's vote was not the last one. Not even close. There is much more. But since we are sick of typing, here is SocGen explaining what the next steps in Greece's voyage throw the treacherous waters of the Southern District of New York are.
Obama Redirects From A Broke US Government By Playing The Class Warfare Card, Focuses On "Millionaires And Billionaires"Submitted by Tyler Durden on 06/29/2011 - 18:17
In what appears to be an increasingly tenuous attempt to redirect focus from terminal federal government failure through the imposition of yet another round of class antagonism, Barack Obama, as part of his earlier address to the nation, stressed that more revenue "must be part of any deficit-reduction deal" and criticized Republicans for protecting tax breaks for "millionaires and billionaires" in the process even invoking users of corporate jets (despite that fact that he himself boasted using the $56,000/hour taxpayer funded Air Force one to travel the 110 mile distance between Washington DC and Williamsburg, VA). As the WSJ puts it: Obama "staked out his position in budget negotiations, which have reached a critical phase and increasingly appear to hinge on which side wins the public-relations battle." Well-aware of the dead end trap that Bernanke finds himself in namely that monetary policy alone is now (or ever) powerless to fix the economy (although it sure would do miracle for the Russell 2000... and hyperinflation), and that a fiscal stimulus is currently unpassable, Obama dragged out the strawman, suggesting "that some initiatives designed to stimulate the economy in the short term should be included in a final deal, singling out a yearlong extension of the payroll-tax break for employees, which expires in January." The bottom line is that as the $4 trillion budget cutting goal is completely unattainable (something the Republicans have claimed is a priority in allowing a debt ceiling hike, yet which is nothing but a PR bluff), Obama has instead once again resorted to what he does best: foment class antagonisms within America, by singling out the rich versus the poor. Ironically, as a WSJ commentator puts it so eloquently, "Obama clearly wants all Americans brought down to a shared level of misery --- except, of course, our federal overlords who will continue to demand their own personal jets, international family travel at taxpayer expense, lifetime health benefits while being excused from the ravages of ObamaCare, and of course their recurring exemptions from all other laws that they impose on us lowly serf taxpayers. Obama wants class warfare? Well he got it: Americans vs their elitist, corrupt, irresponsible, thieving government." One can hope that the final outcome of said warfare here will be more effective than any and everywhere else, where said "governments" continue to dangle the carrot of (insolvent) entitlement program elimination should the population dare to change the status quo.
I'm not going to even begin to try and make sense out of today's market. Watching fires burn and teargas fired in Greece, 100 pip moves in the EUR/USD in minutes and computer algos tripping over each other was surreal beyond words. This market right now is a lottery. Calling equities forward looking or a pricing mechanism is beyond ridiculous. It is during noisy times like these that investors must step back and keep things in perspective. Trading on days like today requires little skill and a lot of luck. When I step back I see a deteriorating economy and an equity market trying to understand what to do. Do they "price in" a soft patch or a full blow recession. Market participants are told it is in fact a soft patch. The slightest hint of positive data reinforces those views.
General Collateral At -0.002%: Lowest EVER, As Scramble Out Of Money Markets Hits Afterburner, PrimesSubmitted by Tyler Durden on 06/29/2011 - 16:41
A few days ago we pointed out that special repo rates are now negative. Fine. How big is special collateral after all - in the grand scheme of things it is a tiny market. Well, as of today, General Collateral just hit -0.002, the lowest rate in the history of the series, and in our humble opinion this is a far more troubling indication of broad liquidity developments than the 1 month bill touching on -0.001%. Simply said, this confirms our speculation that there is now a massive rolling of funding out from money markets and into any market that will accept the maturing short term funding without it being rolled due to European contagion concerns. We said: "this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort." As of today, this prediction is well en route to being confirmed.