Financial contagion in Europe is pushing already fragile global economies towards recessions, and the risk of slipping into global recession are rising significantly. Indeed, as we have warned for many months, there is a real risk of a global Depression given the scale of the debt levels in most western countries and the massive imbalances globally. A senior Chinese official, Chinese Vice Premier Wang, said yesterday that a ‘chronic’ long term global recession is certain to happen and China must focus on domestic problems. While all the focus has been on Europe in recent weeks, markets may again focus on the not inconsequential matter of the appalling US fiscal position which could see further market volatility and the dollar come under pressure again. Washington's latest fractious effort to come to grips with its mounting debt looks set to end in failure today as negotiators look set to announce they have failed to reach a deal. The Congressional ‘supercommittee ‘charged with cutting the US government's crushing $15 trillion debt looks set to admit failure which should support gold. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, reported a rise of 3.631 tons from a day earlier to 1,293.088 tons in its holdings, the highest in more than three months. The ETF witnessed an inflow of 24.422 tons last week, the biggest one-week rise in holdings since mid-August. Commerzbank say they expect to see gold trading at $1,800/oz by the end of the year. Barclays says it is sticking with a fairly bullish call for gold and says it sees the price at $1,875/oz in Q4, according to Reuters. Deutsche Bank say they expect periods of risk aversion to remain through 2012 and their strongest conviction trade remains long precious metals and specifically gold, according to Reuters.
These days the biggest single catalyst to a big gap down is the arrival of 3 am Eastern at which point Europe opens and specifically that one all important instrument, Italian BTPs, start trading. Sure enough, European risk aversion is back, hot on the heels of not only the completely expected Stuporcommittee agreement to disagree and put the US rating at risk, but following a Figaro report that it is now Moody's (as a reminder it was S&P which almost blew up the OAT market one week ago with that "technical glitch") that is contemplating a French downgrade. From Reuters: "Ratings agency Moody's believes the recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating, newspaper Le Figaro on Monday reported the agency as saying. "Presistently high financing costs combined with a deteriorating economic outlook could increase the difficulties that the government faces, with negative implications for credit," the newspaper quoted Moody's as saying. Reuters sought but was unable to obtain confirmation of the reported remarks from the the ratings agency. On Oct. 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget." The result: a resumption of the bloodbath. France CDS rise to 11 bps to match record 233. Italy CDS rise 15 bps to 543. Belgium CDS rise 12 bps to 337. The three-month cross-currency basis swap was 131 basis point below the euro interbank offered rate at 8:45 a.m. in London, the most expensive since December 2008, according to data compiled by Bloomberg. The rate was 130 on Nov. 18. As for cash spreads: they are not at all time records... But they will be shortly, especially since the ECB is largely missing from the market today: telegraphing that it won't monetize? Or is there a hit job on yet another European leader? Which Goldman leader will replace Sarko?
The week ahead is light on data. The highlight of the week will be the publication of the PMIs in the Eurozone and the IFO in Germany. We expect business sentiment to deteriorate but only modestly. There is also the release of the first of several monthly China PMIs. Durable Goods and the FOMC minutes in the US will also be interesting to watch. Data in the US has been reasonably stable and have continued to surprise mostly on the positive side, albeit less so recently as expectations have adapted. Sub-trend growth will lead the Fed to consider its easing options again, but possibly not until sometime next year. An important US event this week will be the deadline for the fiscal Super Committee, which will likely fail to deliver a plan to cut the budget deficit by $1.2tn over the next 10 years. Though markets do not expect a plan before the deadline, it is likely that the focus on structural US imbalances intensifies during the week. This could well become an even more risk-averse environment, leaving few options to go short the USD. As our weekly FX idea, we therefore like short $/JPY, aiming for a move back to the pre-intervention lows.
Japan's Kokusai Liquidates Remainder Of Euro Sovereign Exposure, Just As European Primary Issuance Supply SurgesSubmitted by Tyler Durden on 11/20/2011 - 23:19
When we discussed the specifics of the ongoing European bank run, we cited from the NYT which noted the actions of a core Japanese mutual fund with European sovereign exposure, namely that "earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt." The Nikkei has just reported that this was merely the beginning: "Kokusai Asset Management Co. has sold all Spanish and Belgian government bonds that were part of its flagship fund, Global Sovereign Open, The Nikkei learned Monday. As of Nov. 10, Spanish and Belgian bonds accounted for 1.8% and 3.1% of the fund, respectively. The share of the bonds in the fund's portfolio fell to zero as of Thursday." Just what prompted this drastic move and very loud slap in the face of the European confidence building exercise? "A Kokusai Asset Management official said the company sold off the bonds, amid widespread concerns about the outlook for Europe's sovereign debt crisis to avoid hurting the value of the fund, given volatile prices of the bonds. The mutual fund operator had already divested the fund of all its French government bonds in October and all Italian bonds in early November." It is safe to say that where one core asset managers has been (and no longer is), everyone else will shortly follow. For the simple reason that it is now if not cool to not have European exposure, it is certainly required by one's LPs to cut down on all European bonds. Kokusai is merely the canary: expect everyone else to go ahead and dump the €741 billion in non-domestically held Italian (and then all other European sovereigns) bonds. Good luck ECB buying these in the secondary market. And one market where the ECB can do nothing by charter, is the primary issuance one, where as the following update from Morgan Stanley shows, things are getting from from bad to worse.
Jim O'Neill Describes Europe's Surreal Times, Asks If Germany And The Euro Area Even Want The Monetary Union Any LongerSubmitted by Tyler Durden on 11/20/2011 - 22:45
Among the traditionally meandering permabullish ramblings of a man who continues to ignore the disconnect between reality and his view of the world, tonight's note by GSAM loss leader Jim O'Neill "Surreal Times" has a very ominous rhetorical question inbetween all the bullish propaganda: "The ECB doesn’t seem to regard 10-year Italian bonds as a bargain and, of course, it is rather tricky as they need to be sure that Monti will deliver. In turn, this means that what is really important is that Mario gets support from those in the background and, ultimately, the Italian voters. And then there is Spain. And still, of course, the troubling Greek situation. And ultimately, the complex world of Berlin and Frankfurt. As many European newspapers are asking in recent days, does Germany actually really still want the EMU? And, as I shall now provocatively ask, does the Euro Area? All very surreal." No Jim, all very logical, because for the first time in decades, Europe is finally starting to do the math and realizes it is failing miserably. It is those stuck in a world in which combined total exports are greater than total imports by over $300 blilion: a mathematical lunacy, who think that what is happening is "very surreal." To everyone else, the right phrase is "very much expected."
Two weeks ago, courtesy of Gresham's Law, we brought to our readers Jim Grant's greatest hits: a compilation of the most memorable TV appearances by the famous newsletter writer. Today, we are happy to present another controversial luminary - Russell Napier: the renowned financial historian and consultant for CLSA, as well as author of the engrossing Anatomy of the Bear, who only together with Albert Edwards, has predicted that the S&P would eventually drop to 400. Napier has articulated some fantastic insights on the generational cycle, bear market bottoms and currencies in recent years. His insights, unlike those of TV pundits whose soundbites are only there to fill the gap between two ad segments, are always something to look forward to.
Just hitting the headlines, probably related to Mike Bloomberg's 7:30 pm announcement:
- NY AUTHORITIES ARREST MAN IN BOMBING PLOT, N.Y. TIMES REPORTS
- MAN WANTED TO DETONATE BOMB IN BUILDING WITH GOVT WORKERS: NYT
- NY TIMES SAYS MAN WAS ARRESTED WITHIN THE LAST 24
- MAN HAD BEEN UNDER SURVEILLANCE FOR A YEAR, N.Y. TIMES REPORTS
- NY AUTHORITIES TO ANNOUNCE CHARGES AGAINST MAN TONIGHT
That's it for now
UPDATE 2: NEW YORK MAYOR TO HOLD NEWS CONFERENCE AT 7:30 P.M. (0030 GMT) ON TERRORISM-RELATED ISSUE - CNN
UPDATE: ES 1201 seemed to spur some serious volume for the overnight session.
While EURUSD had managed to clamber back into the green from a modest 25pip drop (bouncing off 1.3500), carry crosses (most specifically AUDJPY) are ebbing lower and Oil and Gold's soft opening is dragging equity futures to a dismal start. ES opened -13pts (around 1%), below its 50DMA (first time since 10/10) and at its lowest in over a month. With TSYs not open yet, ES is mildly lower than CONTEXT but we would expect the implicit shift in 2s10s30s to sync up with equity derisking.
As if anyone is actually surprised by the headlines appearing from Bloomberg with regard the Super-Committee - which in retrospect is perhaps a little aggressively-named:
*SUPERCOMMITTEE SAID TO ANNOUNCE NO AGREEMENT REACHED
*U.S. DEBT SUPERCOMMITTEE ANNOUNCEMENT SAID LIKELY ON MONDAY
While not immediate, it would seem obvious that a ratings downgrade can't be far behind this event given the reasoning for the last downgrade and the clear indication by this lack of agreement that nothing-has-changed.
Kyle Bass Destroys The Ponzi-Prone Debt Sustainability Arguments Of The Status Quo...And Why Germany Can't Save The WorldSubmitted by Tyler Durden on 11/20/2011 - 17:08
Another noteworthy Kyle Bass moment as he discusses debt sustainability among major global sovereign nations. Simply and proficiently, the hedge fund manager describes how a dwindling current account surplus in Japan, US welfare economics, and the peripheral-to-core European stressors are all Madoff-like and unsustainable. Switching from broad-brush terms to the idiosyncratic complexities of each region, Bass offers his inimitable take - in a mere six minutes - on how the status quo is quivering under its own self-deception. His rightful conclusions remain extremely worrisome and should be required reading/watching for every central banker and politician trying to keep the dream alive.
While everyone's attention was focused intently on peripheral European bond spreads last week and the incessant call for ECB intervention, a dramatic (and contagiously panic-worthy) move occurred in the European Investment Bank (EIB) bonds. For those unfamiliar, the EIB is the EU's IMF-equivalent and is the largest international non-sovereign lender and borrower. Technically, it is defined as "the European Union's long-term lending institution established in 1958 under the Treaty of Rome. It supports the EU’s priority objectives, especially European integration and the development of economically weak regions." 5Y Euro-denominated AAA-rated EIB bond spreads crashed higher, blowing past the 2009 record wides and clearly indicating that European capital flight is in full swing. The IMF-like entity, supported by a small capital base of deposits backed by promises of huge capital injections by sovereign nations (sound familiar?), has massive exposure across Europe (and elsewhere). The massive implicit leverage in the capital structure suggests the need for capital calls (and is Greece, Italy, and Spain likely to do that?) to maintain its AAA-status could be needed - given the MtM losses on its loans at a minimum. Clearly investors think the same this week and are starting to worry about the same self-referencing, self-supporting house-of-cards that caused the EFSF to be written off as potentially unworkable. With EUR20bn to be rolled (and EUR6bn in interest payments) in the next few months, we will get plenty of insight into investor demand for EIB AAA-rated paper and the impact on secondary trading from that supply.
Below we present the note from Nomura which is making the rounds today following the WSJ article referencing it and which touches upon a topic discussed by Zero Hedge way back before even the second Greek bailout from July 21, namely that the statutory law governing the sovereign bond indenture (i.e., whether bonds are issued under Greek or English law) should have major implications for trading dynamics due to the defatul fallback currency in the case of a currency collapse. In a nutshell: "Bonds issued under local law, such as Greek law, would likely be converted from euros into a new local currency—a blow to any investors left holding the paper. "New" currencies, such as a new drachma, could rapidly fall in value by as much as 50%, according to most estimates. Foreign-law debt, on the other hand, would be more likely to remain in euros, assuming a smaller euro still existed at all, the bank said." That Nomura and the WSJ is only half a year late with this discussion is not surprising. What is surprising is that the discussion has appeared in the first place: needless to say this is another rhetorical escalation in the push to get Merkel on the "same page" as it being telegraphed all too loudly that investors are now actively gearing up for a Eurozone collapse. Then again Nomura bankers are people too and deserve to be well paid for being part of the detested 1%. How else will this happen unless they too join the onslaught by the global banking syndicate which now consists of Deutsche Bank, JP Morgan, Barclays, Credit Suisse, and virtually everyone else, expect for Goldman of course, which appears quite happy with the chips falling as they may. After all, it already has Europe by the political short hairs. Now it just needs to take charge financially too. If in the process a few not so good banks are converted into omelette, so be it.
Buyers Of Last Resort: As Dumping Accelerates, Here Is Who Is Stuck Buying Another €741 Billion In Italian BondsSubmitted by Tyler Durden on 11/20/2011 - 14:37
Spoiler alert: There will be no surprise "I see dead bondholders"-type ending here. Having suggested precisely what the BTP trading dynamics look like previously, we now get official confirmation. With everyone else dumping Italian bonds in the open market, there are only two parties on the bid side: the ECB, and Italian banks. That's it. The only question is "how much" in order to determine at what point the selling onslaught will overhwhelm both insolvent Italian banks whose Risk Weighted capital will soon become too high forcing them out of the market, as well as drag down Draghi's recently expanded bond buying desk (we would say trading, but that would imply a two way market). Here is Barclays with the full breakdown: "Italy’s government bonds, representing the largest bond market in Europe, or the third largest in the world, have been particularly unstable since the beginning of July. The sheer size of the €1.6trn outstanding stock, of which around €220bn of bonds and €120bn of bills are rolled over every year, begs the questions who will be the buyers going forward. We thus update the breakdown of Italian bond holders which we presented in July (see Who Owns Italy's Government Debt? July 29, 2011), and analysed who has been selling and buying between the beginning of July (when widening started) and end of September (as of the latest available data). ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks) have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%." As said earlier - nothing at all unexpected: everyone who can get out is getting out. The only buyers are those for whom selling equates to suicide. That said, we wish Italian banks and the ECB the best of luck as they seek to purchase the €741 billion in bonds that are still to be offloaded as Merkel persists in refusing to let the ECB even considering announcing monetization intentions.
Rep. Ron Paul, who is statistically tied in first in the Iowa polls among the 2012 GOP presidential candidates, spoke with Bob Schieffer on how America's flawed policies contributed to 9/11, his stance on dealing with Iran, and the dismantling of key government institutions. Must watch, as unlike the other GOP candidates, Paul never peppers the audience (pardon the pun) with banal sound bites, moronic meanderings and pandering platitudes.