Wow! Good equity swings in Europe: Down about 1% to the morning lows, up nearly 2% to noon highs and tanking back over 1.25% into the close.
Core & Soft EGBs rather muted in volatility, closing by and large unchanged, with Periphery bonds running a separate path.
Again that decorrelation.
Jump, Jive & Wail…
Equity markets continued to edge higher today as market participants grew hopeful that a full scale bailout of Spain will take place in the very near future. So much so that even though reports that Spain is to seek bailout this weekend was denied, the risk on sentiment held strong. As a result, SP/GE and IT/GE bond yield spreads tightened further, with IT 10s now yielding close to 5%. The renewed sense of security saw EUR/USD squeeze higher towards the psychologically important 1.3000 level, while GBP/USD also benefited from a weaker USD and is trading in minor positive territory in spite of another round of disappointing macro data from the UK. Going forward, the second half of the session sees the release of the latest ISM New York index, as well as the regular weekly API report. Both the BoE and the Fed are due to conduct another round of asset purchases at 1445BST and 1600BST respectively.
In a world in which markets are simply policy instruments of central planners it is no surprise that the only thing that matters is how much money is injected by any given central bank at any given time. Last night, following the Fed and the BOJ, it was the turn of Australia, which in a "surprise" move cut policy rates by 25 bps. From SocGen: "Reacting to a weaker global economic outlook, which has moderated the outlook for growth in Australia, the Reserve Bank of Australia cut its policy rate today by 25bp to 3.25%, a move that was predicted by only a minority of forecasters (including us). Nevertheless, we believe that markets are too aggressively priced for further rate reductions: we expect a low of 3.00%, to be reached by year-end, but the swap market is currently discounting a low of 2.4% by mid-2013. The reasons the RBA stated for lowering rates centered mostly on the global economic outlook, which has softened over recent months, not least because of greater uncertainty about near-term prospects in China, and hence the outlook for Australia is seen as a “little weaker”. The RBA also stated that the resource investment peak may be lower than previously thought." Sure enough, the move sent Australian stocks to 5 month highs, and global equity futures spiking. Of course, in the open-ended global race to debase perhaps it is more surprising i) they did not do this sooner and ii) not more banks have "cut" yet. Ironically, while the ECB, BOE and SNB are still contemplating next steps to catch up with Bernanke, it is the BOJ which in the abysmal failure of its own QE 8 from three weeks ago, is now contemplating QE 9 - the foreign bond edition (because buying treasury and corporate bonds, ETFs and REITs is never enough). Naturally, all this additional liquidity and promises thereof, has sent futures to fresh highs as more and more latent inflation is loaded up in the global monetary system.
The first concern of the Emir of Qatar is the prosperity and security of the tiny kingdom. To achieve that, he knows no limits. Stuck between Iran and Saudi Arabia is Qatar with the third largest natural gas deposit in the world. The gas gives the nearly quarter of a million Qatari citizens the highest per capita income on the planet and provides 70 percent of government revenue. How does an extremely wealthy midget with two potentially dangerous neighbors keep them from making an unwelcomed visit? Naturally, you have someone bigger and tougher to protect you. Of course, nothing is free. The price has been to allow the United States to have two military bases in a strategic location. According to Wikileak diplomatic cables, the Qataris are even paying sixty percent of the costs. Having tanks and bunker busting bombs nearby will discourage military aggression, but it does nothing to curb the social tumult that has been bubbling for decades in the Middle Eastern societies. Eighty-four years ago, the Moslem Brotherhood arose in Egypt because of the presence of foreign domination by Great Britain and the discontent of millions of the teaming masses yearning to be free. Eighty-four years later, the teaming masses are still yearning.
The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a remarkable plunge in economic freedom during the past decade. From 1980 to 2000, the US was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. The ranking of the US has fallen precipitously; from second in 2000 to eighth in 2005 and 19th in 2010. By 2009, the United States had fallen behind Switzerland, Canada, Australia, Chile, and Mauritius, countries that chose not to follow the path of massive growth in government financed by borrowing that is now the most prominent characteristic of US fiscal policy. By 2010, the United States had also fallen behind Finland and Denmark, two European welfare states. Moreover, it now trails Bahrain, the United Arab Emirates, Estonia, Taiwan, and Qatar. The Fraser Institute's massive volume on the Economic Freedom Of The World - based on the following five factors: Size of Government, Legal System & Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation - covers 42 variables with the goal of quantifying the key ingredients of economic freedom.
Health Tip for Paper Money Users
- World on track for record food prices 'within a year' due to US drought (Telegraph)
- Foxconn halts production at plant after mass brawl (BBC)
- Germany Losing Patience With Spain as EU Warns on Crisis Effort (Bloomberg)
- Fed Recovery Doubts Spur Investor Bid for Treasuries (Bloomberg)
- Japan protests as Chinese ships enter disputed waters (Reuters)
- In Shark-Infested Waters, Resolve of Two Giants Is Tested (NYT)
- China jails Wang Lijun for 15 years (FT)
- China closes in on Bo Xilai after jailing ex-police chief (Reuters)
- European Leaders Struggle to Overcome Crisis Stalemate (Bloomberg)
- Politicians 1: Austerity 0 - Portugal Gives Ground on Worker Contributions (WSJ)
- Obama Controls Most of His Money as Republicans Have More (Bloomberg)
- Coeure Says Not Clear That Further ECB Interest-Rate Cut Needed (Bloomberg)
- France Seeks Labour Overhaul (WSJ)
While it is impossible to predict where the S&P will be in 10 years (or even 1), one can safely make some assumptions about what the world will look like in a decade (assuming of course it hasn't blown up by then). It will be hungry, it will be thirsty, it will demand resources, and it will be crowded (and it will certainly have lots and lots of wheelbarrows carrying pieces of paper to and fro the local bakery). Implicitly then, countries which control the production and export of various key natural resources and commodities channels will become increasingly more strategic and important. However, for some economies, such as the Middle East, whose entire export-based welfare is reliant on a core set of commodities, this export-benefit may be a doubled-edged sword, should it lead to militant antagonism by one time friends and outright enemies, and/or complacency leading to lack of revenue stream diversity. In order to determine who the key resource players in the future will be, we present the below commodity trade matrix which answers two questions: how important is a commodity to a country, and how important is a country to a commodity. As GS notes, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy. Will food (and water) be the oil of the future, and will the next resource war be not over black, or even yellow, gold, but, pardon the pun, edible gold?
As if depressing PMI data out of China overnight was not enough (it was certainly enough to send the Shanghai Composite tumbling 2.08% to 2024.8 and just off fresh 4 year lows), we then got Europe to join in the fray with a composite PMI print of 45.9, down from 46.3, and a miss to expectations of a modest rise to 46.6 (driven by a manufacturing PMI of 46.0 up from 45.1, and a Services PMI down from 47.2 to 46.0). The biggest surprise was the sheer collapse in French manufacturing data which tumbled from 46.0 to a 4 year low of 42.6 on expectations of a rise to 46.4, which sent the EURUSD firmly into sub 1.30 territory and not even several good paradoxical bond auctions from Spain (because a good auction here means no bailout, means those who bought the bonds will soon suffer big losses) have managed to dent the very poor overnight sentiment which now implies a European GDP contraction of -1% of more. Reality has also halted the global easing euphoria (the USDJPY is now 40 bps below where the BOJ announced the injection of another Y10 Trillion), and has everyone wondering, now that QEternity is priced in, what next?
It is one thing for tungsten-filled gold bars to appear in the UK, or in Germany: after all out of sight, and across the Atlantic, certainly must mean out of mind, and out of the safe. However, when a 10 ounce 999.9 gold bar bearing the stamp of the reputable Swiss Produits Artistiques Métaux Précieux (PAMP, with owner MTP) and a serial number (serial #038892, likely rehypothecated in at least 10 gold ETFs across the world but that's a different story), mysteriously emerges in the heart of the world's jewerly district located on 47th street in Manhattan, things get real quick. Moments ago, Myfoxny reported that a 10-ounce gold bar costing nearly $18,000 turned out to be a counterfeit. The discovery was made by the dealer Ibrahim Fadl, who bought the PAMP bar in question from a merchant who has sold him real gold before. "But he heard counterfeit gold bars were going around, so he drilled into several of his gold bars worth $100,000 and saw gray tungsten -- not gold. The bar was filled with tungsten, which weighs nearly the same as gold but costs just over a dollar an ounce."
Up until now, the LHD 7 Iwo Jima Big-Deck Amphibious Warfare ship was all alone in the Arabian Sea, patiently awaiting orders to liberate this or that middle east country of their oil reserves. This is no longer the case: launching today in general direction - Middle East - for a brand new 7 month engagement, is the LHA 1 Peleliu Amphibious Ready Group, consisting of the amphibious assault ship, the USS Peleliu which consists of 4000 marines. LHA 1 also comprises of the amphibious transport dock USS Green Bay and the dock landing ship USS Rushmore. Also deploying Monday is the Marine Corps' 15th Marine Expeditionary Unit and elements of Fleet Surgical Team 1, Helicopter Sea Combat Squadron 23, Assault Craft Units 1 and 5, and Beach Master Unit 1. And as we reported previously, the middle east veteran - the CVN 74 Stennis aircraft carrier - was providently already on its way. In other words, in about 2 weeks, the Middle east will be the focal point of 3 aircraft carriers, 2 amphibious assault forces, and who knows how many "developed" world armadas, all hell bent on securing that one extra bit of Middle East oil, under the guise of spreading democracy and liberating the local people who "hate America's for its freedom."
News may come, and news may go, but the fiscal policy implementation vehicle known as the market, and now controlled by the Political Reserve don't care. For those who do, here is what has happened in the past few hours and what is on deck for the remainder of the week.
One of the populist buzzwords of the past 5 years, particularly in Europe, has been "austerity", which as we have said for the roughly the same past 5 years, is simply a synonym for "deleveraging" but one which carries just the right amount of negative connotations, and is used by crafty politicians to shift blame from their own failure to enact proper policy (which over the past 30 years has merely meant to borrow growth from future political cycles, aka, issue debt) onto a "technical" word conceived by Ph.D.-clad economists, who too, are looking for a passive victim on which to project their failure of enacting a voodoo economic theory. There is one problem with all of the above. As we have also been saying for the past five years, the austerity deleveraging myth is one big lie. We are setting the record straight below with facts and figures. We would be delighted if some politician, somewhere, could disprove these facts, which essentially imply that the world is now in a global recession, having experienced no growth as the recent 100% contractionary PMI print of all major economies confirms, yet without any country actually having implemented austerity, pardon deleveraging to have at least a modest justification for this failure of growth.
One look at the short squeeze in the EURUSD, coupled with the endless jawboning out of Europe, and one may be left with the faulty impression that Europe has been magically fixed and that Greece couldn't be more delighted to remain in the Eurozone. One would be wrong. This is what is really going on in Europe: "As a pharmaceutical salesman in Greece for 17 years, Tilemachos Karachalios wore a suit, drove a company car and had an expense account. He now mops schools in Sweden, forced from his home by Greece’s economic crisis.“It was a very good job,” said Karachalios, 40, of his former life. “Now I clean Swedish s---." That more or less explains everything one needs to know about the "fixing" of Europe.
XAU/EUR Exchange Rate Daily - (Bloomberg)
Gold at €1,355/oz, just 2.5% from the record high of €1,390/oz, is a sign of a continuing lack of trust in the euro and in Draghi’s stewardship at the ECB.