Bank of England

Nerves are frayed, tempers flare, the euro teeters

All you can read.

If yesterday's global intervention rumor was a feeler of market response to the next latest and greatest intervention then we may have big problems: the EURUSD is now unchanged, Spanish bond yields are now unchanged, stocks are doing their quad witching thing which means all stops will be taken out before the day is done, but most importantly the euphoria such an announcement would have created before is now completely gone (as per The Diminishing Returns Of Central Planning). What is actually worse, and how the G-20 rumor may have backfired, is that as we pointed out, suddenly there has been a significant shift in expectations: if Syriza does not have an outright win on Sunday then there will be no immediate central bank response, which was predicted to be "if needed". Remember: for this market, when all that matters is the next 10 minutes of trading, this is the only relevant metric. Which means that suddenly from a Risk On event, Syriza's loss has become Risk Off! Of course, the reality is that Sunday will almost certainly be a replay of the last election, where the parliament continues to be empty, and Greece continues to be "Belgium" - recall from May 3, "Previewing The First Of Many Greek Elections." In either case, as others have suggested holding on to positions over the weekend may not be the most prudent thing.

More than 80 institutions with collective assets under management of over $8 trillion attended the event and were polled regarding macroeconomic matters and their outlook for various asset classes. Gold is seen as one of the assets likely to outperform again in 2012 due to risks posed to the euro and longer term risks for the dollar. Those polled by UBS were also positive on emerging market debt. Both asset classes, gold and emerging market debt, were the top pick of 22.5% of the assembly – thereby accounting for 45% of the votes. On gold’s role as a reserve asset, the importance reserve managers attach to the yellow metal has slipped back to 2009 levels, with about 14% having the opinion that it will be the most important reserve currency in 25 years. This marks a decline from the past two years’ surveys wherein over 20% viewed gold to be the most important reserve currency. 

• How original: Syria prints new money as deficit grows (Reuters)- America is not Syria
• Former SNB head Hildebrand to become BlackRock vice chairman (FT)
• Osborne says Greece may have to quit euro (Reuters)
• Osborne Risks the Wrath of Merkel (FT)
• China second-quarter GDP growth may dip below 7 percent - government adviser (Reuters)
• Italian Borrowing Costs Surge at Auction of 1-Year Bills (Bloomberg)
• Greeks withdraw cash ahead of cliffhanger vote (Reuters)
• Merkel’s Choice Pits European Fate Against German Voter Interest (Bloomberg)
• Italy Tax Increases Backfire as Monti Tightens Belts (Bloomberg)
• Dimon says JPMorgan failed to rein in traders (Reuters)

All you can read.

All you need to know.

That economic data out of Europe was disappointing overnight should come as no surprise to anyone. That Spain is broke, and there is no money to bail it out under the existing framework (and that Germany is unwilling to come up with a new bailout scheme), should also be no surprise. And yet they somehow manage to stun the market... each and every day. Which is why overnight action has now boiled down to a simple algorithmic exercise: is there a short covering squeeze: if yes, then rip, aka Risk On. If not, then Risk Off. So far, the squeeze has not been initiated which is also to be expected, following the biggest short covering squeeze in up to two years. This too may change if repo desks decide to pull borrow as they tend to do during regular hours, to give the impression that the latest and greatest bailout plan is "working." And in other news, which is completely irrelevant, here is the actual news.

All you need to read.

Update: 9:00 am has come and gone... and no global bailout unlike November 30, 2011. Not a good sign for those expect a central-bank D-Day.

While minutes ago the Bank of England followed in the ECB's footsteps, it was the China central bank that stole England's thunder, announcing an unexpected rate cut moments before 7 am, and thus finally joining the global easing party: this was the first Chinese interest rate cut since 2008. As a reminder, hours before the global central bank intervention on November 30, China announced its first (50 bps) reserve requirement cut since 2008. Is today's PBOC move, which is the first cut of deposit and 1 year lending rates also since 2008, a harbinger of something much bigger to come any second now?

Global gold demand continues to surprise to the upside – especially sizeable demand from the Middle East and China. Confirmation of continuing huge demand in China came yesterday with data showing that Hong Kong shipped 101,768 kilograms of gold to mainland China in April, up 62% on the month - marking the second-highest monthly exports ever.  While demand from India continues it has fallen from the record levels recently but demand from other Asian countries is robust with reports of demand in Thailand, Vietnam, Malaysia and Indonesia. A new and potentially significant source of demand is that of demand from Iran. Iran imported a massive $1.2 billion worth of precious metals from Turkey in April alone. Turkish exports of gold, precious metals, pearls and coins to Iran rose to $1.2 billion in April from a tiny $7,500 a year earlier, according to figures released by the state statistics institute in Ankara yesterday. This is a massive increase in demand and suggests that there may be official involvement in the imports from the Central Bank of Iran.

• Spain Seeks Joint Bank Effort as Pressure Rises on Merkel (Bloomberg)
• Banks Cut Cross-Border Lending Most Since Lehman: BIS (Bloomberg)
• Shirakawa Bows to Yen Bulls as Intervention Fails (Bloomberg)
• Merrill Losses Were Withheld Before Bank of America Deal (NYT)
• Investors Brace for Slowdown (WSJ)
• China's lenders ordered to check bad loans (China Daily)
• Obama Seeks Way Out of Jobs Gloom (WSJ)
• Noda Reshuffles Japan Cabinet in Bid for Support on Sales Tax (Bloomberg)
• China to open the market further (China Daily)
• Australian Industry Must Adapt to High Currency, Hockey Says (Bloomberg)
• Tax-funded projects to be more transparent (China Daily)

All you need to read.

All you need to read

A push by the ECB for the euro zone to stand behind banks suffering from bank runs is slowly gaining traction but the bloc has yet to build backstops to prevent, or cope with, a sudden collapse of confidence in banks and mass deposit withdrawals. Last week, European leaders discussed pan European means of supporting banks, measures the ECB hopes will include a bank resolution fund to deal with the fallout from the wind up or restructuring of a failing bank. But a wave of withdrawals by depositors - either for fear that their government is too weak to stand behind its banks or that their country will exit the euro and forcibly convert their savings into a vastly devalued national currency - would represent a crisis of completely new proportions. Greece’s exit and reversion to their national currency, the drachma, could precipitate electronic bank runs in other periphery nations. The risk is that even savers who may trust their bank as being safe, come to the conclusion that there is a risk that their euro deposits may, in the event of a sovereign crisis, be forcibly converted to drachmas, pesetas, liras, punts and escudos.