Australia

From the lawsuit: "Goldman intentionally failed to provide correct information regarding the state of the market in Timberwolf and/or intentionally failed to provide correct information concerning Goldman's actual opinion concerning the state of the market for the Timberwolf security and its quality and value. At the time Goldman made these statements to BYAFM, Goldman was actively shorting both Timberwolf and comparable securities because Goldman's internal assessment of the market for such securities was that their value would drop. In order to reduce Goldman's exposure to CDOs, Goldman personnel made false and misleading statements of material fact, knowing such statements were false and misleading... and with knowledge that BYAFM would rely on them in making the decision to purchase an interest in Timberwolf. Moreover, Goldman personnel failed to disclose material information knowing that, by this omission, information that they did disclose was rendered misleading, or they acted with reckless disregard as to whether the omission of the information rendered other disclosures misleading."

The week's biggest (sovereign) CDS movers have been released, and we have some new entrants in the most endangered species list. While by now nobody will be surprised that the UK is a consistent top 2 player (coming in this week with $319 million in net notional derisking, this making it the 8th week or so the country has made the top 3), only behind Italy and its $452 million in net notional, and just in front of last week's #1 Brazil, the presence of the United States at #4 should be a little unsettling. It has been months since the US appeared in the top 5. And just like in the long gold case, the same types of existential questions once again arise when the interest in US CDS picks up: who gets to pay off your contracts in the case of an event of default? Elsewhere, the presence of Korea and Turkey (or Australia) in the top 10 should not come as too surprising. On the other end, short covering was violent in CDS of Spain, Hungary and Portugal - Europe's newest lepers. Is the CDS community concerned the EU can actually pull out a rabbit out of the hat that actually works for once? Hardly. The top 10 reriskers also saw the inclusion of France and long-forgotten insolvent Greece.

First Goldman came out with a "favorite tactical short" of the EURUSD, targeting a 1.18 rate several days ago, now BofA is out with the latest hit job on the European currency: the bailed out bank's John Shin has said that he is lowering his "forecast for the euro, pushing down the year-end 2010 target to 1.15 from 1.28 and the year-end 2011 target to 1.10 from 1.20." He continues, "the evolution of the crisis has not only been a near-term negative for the euro, but signals poorly for its medium and longer-term future." Now this is very ironic, because as we pointed out two short days ago, the very same firm's European strategist, Hans Mikkelsen, espoused a much different optimistic point of view: "While we continue to view funding pressures as contained due to the
ECB/Fed currency swap lines, the main risk to our tactical long credit
positions remains any disorderly declines in the Euro as that would
undermine the credibility of the ECB to contain the sovereign crisis." Presumably the take home here is that as long as the decline from 1.20 to 1.10 is orderly all shall be well? Because as has been repeatedly demonstrated, hedge funds always align calmly, in single file,  when the Central Bank theater is burning, happy to see their sell EUR orders executed if and only if RBS, BofA, Barclays and GS so desire... We eagerly await Mikkelsen's positive spin to Shin's note, as otherwise those defending Europe's less than rosy liquidity situation may be down one more advocate.

This article is a look at the US's recovery, Europe's recovery, Asia's (China) recovery, and how they all tie together. While US manufacturing has been improving, mainly because of exports, it is also flattening out. Ditto almost everywhere else. This is a sign of what's coming.

The big four Australian banks - ANZ, Commonwealth, NAB, and Westpac - have used the cover of the global financial crisis to charge borrowers more than the increase in their own costs, resulting in big profits; however, the minutiae of stories about banks gouging their customers with excessive fees distracts citizens from understanding the much more important big picture of the fractional reserve lending scam.

• Asian stock markets were mostly lower with the Japanese market somewhat volatile.
• Australia's economic growth slows in first quarter as businesses cut spending.
• Corn syrup producers acknowledge opponents are souring US market for common sweetener.
• EU antitrust regulators to probe Siemens and Areva nuclear non-compete deals.
• EU ministers affirming commitment to adding western Balkan countries to the Union.
• Japanese PM will quit in less than nine months after taking office, on US base row.
• Tobacco loophole in Obama's child health law costs US $250M as companies avoid huge tax hike.

All-in-all a very weak close to a worrisome day (especially given month-start rebalancing hopes). Even the positive ECO prints were questionable on the basis of regime-change a month ago and anything more recent was showing a disappointing trajectory. Weakness was evident across all sectors and industries in credit but the stress in the ENRG space are clearly particularly notable (especially given their somewhat safe-haven status that may have hurt so many recently). Levels to consider in IG are 109.5bps as next support with 118.75bps as a decent short-term pivot. HY held above its pivot of 645bps today with next stop 587bps (large range due to recent vol) and a target of 702bps in the short-term.

• Asian stocks fall on Japan political concern, China growth.
• China's manufacturing expands at slower pace as economic growth moderates.
• China supercomputer named second-fastest in global list.
• ECB expects additional $239.26B in write-downs by European banks.
• ECB states rating firms aggravates crisis.
• Euro-zone unemployment tops 10% in April.
• Euro moved lower against USD, Yen, on German Pres. Köhler's unexpected resignation.

News tidbits from the MSM tainted with actual facts, figures and smart ass opinions from yours truly.

It’s not all about making money. Listen to the story of Colonel Mitchell Paige on Guadalcanal in 1942.

Although those of us who invest in the currency market have to pay careful attention to the daily price twitches resulting from economic releases and political speeches, the foreign exchange value of individual currencies actually moves glacially with wide emotional swings around the central value. The emotion has often run against the dollar. Before the start of the euro, the Deutsche mark was the market favorite. Two societal attributes probably contributed to this consistent bias. First, the Bundesbank and the German government preached and usually followed a more conservative monetary and fiscal strategy than the Fed and the US government did, which resulted in marginally tighter liquidity on average in Germany. The two governments’ different leanings could partly be explained by the historical accident of the ruinous hyperinflation that Germany suffered in 1923, terrifying modern Germans, but more critical was the fact that the US population was younger and growing faster than the German one. Because the tendency to consume is higher in the early years of adulthood and trails off dramatically as retirement age approaches, Americans bought more and saved less than the Germans. Furthermore, the US had to spend more on its infrastructure and social services than Germany, just to handle the higher level of household formation. Looking over the past 40 years, it seems that countries with growing populations and with faster growing economies tend to have weaker currencies than those with a more stable population and slower growing economies.

Full report

"The World Gold Council believes that with ongoing uncertainties surrounding the US dollar and the Euro, the search for alternative international asset choices within the central bank sector should clearly involve consideration of gold.Q1 net sales of 15 tonnes were very modest in comparison with historical averages. The IMF was the main contributor, with sales of 24.1 tonnes during the course of the quarter falling well within the limits of the Central Bank Gold Agreement (CBGA). The Fund remains committed to its aim of ensuring that its sales are not disruptive to the gold market. Sales among other CBGA signatories were nonexistent, while outside of the agreement, net purchases were concentrated in Russia, where the central bank continued its programme of steady accumulation." - World Gold Council

May 2010 was an amazing month in credit. To the close last night, IG saw its largest monthly widening in absolute spreads (+34.5bps) since our records began in late 2004 and at 37.5% in spread widening terms, the biggest deterioration close-to-close on a month since FEB08 (which interestingly was very similar in that it widened from 97bps to 130bps). HY also widened around 38% in percentage spread terms on the month (to last night's close) or around 189bps. This was the biggest move since FEB09 in absolute terms and biggest percentage widening since AUG07.Our point with all this histrionics is that it is only modestly surprising to see the market rallying today as we head into a long weekend with a half-day tomorrow and month-end. Such a huge month would warrant either a significant amount of profit-taking on any short gains - if nothing else to prudently book some gains and reassess, or just to rebalance weightings among some of the bigger funds.

Full recap of the ideas and recommendations at yesterday's Ira Sohn conference.

• China to have surplus diesel and gasoline next year, accdg. to PetroChina
• Europe crisis chokes Asia-Pacific loan market on concern exports to slump.
• Hedge funds inflows to Asian managers will surge this year, accdg. to Barclays
• Japanese exports increase for fifth month as Asian recovery boosts demand.
• Asian shares gain as global sell-off eases; Won, Kiwi advance against Yen.
• China's $300B sovereign fund will maintain investment in Eurozone, Xinhua says.