Bank of England

While all eyes and ears will conveniently and expectedly be on the Fed announcement and press conference in a few hours, the real action continues to take place in China, where the liquidity crunch is becoming unbearable for the local banks (and will only get worse the longer Bernanke and Kuroda keep their hot money policies). The CNY benchmark money-market one-week repo rate was 138bp higher overnight to a 2 year high of 8.15%. The 7 day Interest-Rate swap rose for a record 13th day in a row jumping +10 bps to 4.08%, the highest since September 2011. China sold 10 Year bonds at a 3.50% yield, above the 3.47% expected, and at a bid to cover of 1.43 which was the lowest since August 2012. Moody’s commented that local government financing vehicles (LGFVs) pose significant risks to Chinese banks. LGFVs accounted for 14% of loan portfolios at end-2012 according to Moody’s.

 The “biggest risk to global financial stability”

There was non-Fed news in the overnight market. Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities." Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.

• Obama prepares for chilly talks with Putin over Syria (Reuters)
• G8 opens amid dispute on Syria arms (FT)
• Economists Blame Fed for Higher Bond Yields (WSJ) - wait... what? Isn't the "stronger economy" to blame?
• What a novel concept - In the Czech Republic, a spying scandal has forced the PM to resign (BBG)
• Rigged-Benchmark Probes Proliferate From Singapore to UK (BBG)
• Economists Wary as Fed's Next Forecast Looms  (Hilsenleak)
• Banks Balk at New Rules for Small Loans (WSJ)
• Sporadic clashes in Turkey as Erdogan asserts authority (Reuters)

Stock-market crashes saw the light of day more and more as the world became industrialized. The 19th century saw a rapid increase in their numbers.

"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."

 

"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."

 

"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"

• As Goldman's money-printing tentacle Carney arrives, everyone else leaves: Tucker to Leave BOE (WSJ)
• So much for pent up demand: Refinancings Plunge as Bond Yields Rise (WSJ)
• Singapore Censures 20 Banks for Attempts to Rig Benchmark Rates (BBG)
• Behind the Big Profits: A Research Tax Break (WSJ)
• While working for spies, Snowden was secretly prolific online (Reuters)
• Turkey to Await Ruling on Park as Erdogan Meets Protesters (BBG)
• Iran votes for new president, Khamenei slams U.S. doubts (Reuters)
• NSA revelations, modified wheat cast a pall on U.S. trade talks with Europe (WaPo)
• Euro zone inflation subdued as employment keeps falling (Reuters)

There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so. In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.

Those who have been following our coverage of the bipolar Chinese liquidity situation (most recently here and here) are well aware of the unique position the world's fastest (if only on paper) growing economy finds itself in: on one hand, it is the target of massive external hot money flows from both the Fed and the BOJ, which are pushing select inflation in the country higher, manifesting itself best in the real-estate market now higher for 12 consecutive months. On the other hand, the local banking system is in such dire need of liquidity, that not only have various short-term SHIBORs soared to multi-year highs but as Market News reported last week, China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in the market overnight and almost ushering in the first bank failure in China. The unprecedented liquidity shortage in China is seen best on the overnight SHIBOR chart below which just hit an all time high. In a nutshell there is zero free liquidity in the system. So what would have happened if the PBOC had continued on its merry way of withdrawing liquidity from the interbank market? Very bad things. “If the PBOC sold repos or bills today, the market would have collapsed.”

Liquidity overcame common sense and economic fundamentals for a time. A lot of money was made and a huge amount of leverage was put on. Everything rose with the tide. Look around you though; look carefully. We think the tide is beginning to go out. We believe recession in Europe will spread to America as the severity of the European crisis becomes more and more apparent. Upcoming economic data in France is also going to be quite troubling in my opinion and the contagion will become apparent in the United States.

The Bank of England's Andrew Haldane is not a man to mince his words (see here and here) but perhaps the excess truthiness in his latest testimony to British MPs may have many questioning his ability as a central-banker (unable to lie when it is required). "Let's be clear. We've intentionally blown the biggest government bond bubble in history," Haldane said. "We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted." As Canadian Carney steps into the BoE head shoes, it seems Haldane has some (indirect) advice there also, as The Guardian reports his comments that the committee had not been "entirely free" of political interference during the crisis; and that he hoped to "improve decision-making," in a less hierarchical, more diverse, somewhat humbler organization." The "biggest risk to global financial stability... would be a disorderly reversion in the yields of government bonds globally." he said, adding that there had been "shades of that" in recent weeks.

Paul Fisher Head of Markets at the Bank of England told the economic worriers of the UK that the BoE would not pull the stoppers out on the economic stimulus plan in the UK and that the “macroeconomic outlook here is not as bright as in the US, therefore we are some way behind them in terms of return to anything like trend growth”. Has Mr. Fisher been to the US recently?

First it was the conspiracy theory that Li(e)bor traders were manipulating the entire rates market which a year ago became conspiracy fact. Then it was commodities with an emphasis on the energy market (but not gold - gold is never, ever manipulated) with even such luminaries as JPMorgan's Blythe Masters, subsequently implicated. And moments ago, via Bloomberg, to absolutely nobody's surprise, we learn that that final market which so far had not been exposed as the "wild west" of manipulators, the FX market, is part of the conspiracy "fact" too. According to Bloomberg, "employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years."

Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.

Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in the towel to Bernanke's and Kuroda's liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People's Bank of China "decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government's ongoing commitment to its "prudent" monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC's rarely-used short-term liquidity operation (SLO) tool. But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available? Because when China finally does join what is already an historic liquidity tsunami then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world's most populous country.