Copper

As Elvis (oops) Jerry Lee Lewis might have said if he were a trader "there's a whole lotta shakin' going on" but not much else. Cross asset-class correlations were weakening, ranges were very narrow today in stocks, credit, Treasuries, commodities, and FX, and volumes were well shrug. The three biggest items of note to us were among 'leadership' assets: AAPL dropped rather notably into the close - ending -0.7%; HYG (the high-yield bond ETF that has been so flow-/yield-grab-driven) dropped significantly into the close (saved by a last minute rescue) after heavy volume at the close last night and relatively heavy today as we sold down; and the major leveraged financials GS and MS - soared intraday (GS>MS) far exceeding their peers - but MS gave a significant amount of it back into the close while GS kept pushing up (+3%) with some major volume and VWAP action. Everyone is waiting for the great and good Draghi to anoint this rally tomorrow morning but the last hour pull to VWAP in S&P futures was not followed by VIX, as we note today was the lowest average trade size (amateurs) day of the year in S&P futures.

Monetary Outright Transactions - MOT

Moths??? Like those burning up on light bulbs??? Or like in “to mothball”, buy and store?

There is still some compression margin, but where to put the credit spread, real or “perceived”, from a (real) default possibility point of view or even from the shunned convertibility point of view?

“Believe me, it will be enough!” will request some massive outside-the-box thinking…

A very noisy gappy day with much larger volume than in recent days (which all dried up in the afternoon session until the close - for the heaviest volume day in a month) in US equities. European comments lifted us early in a correlated-risk-on manner until Bernanke's speech which hit markets like a meteor - stops were run up and down - but by the close equities and the USD ended fractionally lower from pre-Ben (notably up on the day to save the month for the Dow), Gold considerably up from pre-Ben, Treasury yields down notably from pre-Ben. Near six-month highs in Gold and five-month highs in Silver were the real movers today - with their largest gains in two months. VIX ended marginally lower at 17.5% (-0.3vols); credit was very thin today and tracked stocks in general (though less volatile); USD ended the week -0.5% which matches Oil's +0.5% on the week as Copper underperformed. Silver has overtaken Stocks as the Year-to-Date winner once again...

Upcoming calls from Ben and Mario to the governments?

Get your act together, there’s just so much that can be done.

Odd and contradictory ROn / ROff close

This evening, as many boomers on the verge of stepping into the golden hue of retirement sit down for dinner and watch the news, they will be perplexed at their next move. The Dow closed at 13000.71 (just in the realm of the Fed's 3rd mandate to enable retirement) but stunningly the S&P 500 closed at 1399.48 (below the dreaded 1400 level that gives everyone a green-light to retire). Volume was average for the recent lows and despite the S&P 500 e-mini's 'tickle-algo' efforts to get back up to the day-session opening levels (cutting half the day's losses), the last few minutes of the day saw a plunged back down to the lows. AAPL fell over 1.5% - its worst day in five weeks - enabling NASDAQ to catch-down to the S&P in performance terms since the 8/21 highs (down ~1.2%) while the Dow Transports is down 3.8% in the same period. Healthcare and Staples outperformed (though all sectors were red today) as Energy and Tech were the biggest losers. A strong 7Y auction sent TSYs bid to the week's low yields this afternoon but the early comments from Europe were the driver of USD strength (EUR weakness) and Treasury strength - which implicitly dragged commodities (though mixed) and stocks lower. VIX traded over 18% just before the European close, fell back and then rose once again into the close up 0.75 vols to its highest in a month. As everyone holds their breath for tomorrow, the after-hours crack lower in S&P futures - to end at the lows of the day - suggests some urgency to cover longs (as opposed to hedge - as VIX did not keep pace).

We don't need recession

Or means of repression

Just give us some money

Our life could be sunny too...

The outcome of the next round of monetary policy will be similar to those in recent history mentioned in this paper... "Perceived inflation will go through the roof.  We’re talking about near 0% interest rates around the developed world (near-term rates in Germany hit 0% in the auction at the end of May and are expected to go negative).  Oh yeah, and massive inflation.  I think gold will have no trouble hitting $3,000/oz in the medium-term and I see copper tripling over the next decade.  This is, of course, until we hit the next bubble sometime around 2018 and start over again.  The trend remains: since the stock market crash of 1987, through the dotcom bubble, and into the real-estate & stock market bubbles of 2007, each euphoric high and ensuing crash have been more extreme than the last.  These extremes are fueled by the easing that is meant to cure us.  The policy that we are facing within the coming months/years will, as the trend dictates, trump them all, and so inevitably will its hangover."

For the 22nd day of the last 23, the S&P 500 was unable to manage a 1% gain or loss, having only managed to gain/lose more than 0.25% four days in the last 16. It's dead Jim. S&P 500 e-mini futures (ES) volume was equal to its lowest volume of the year (in years) and NYSE shares traded were also near multi-year lows. While cash equity indices closed very marginally green, ES ended modestly red (shock horror). VIX kept leaking higher, closing at 17% (up 0.5 vols), its highest close in a month (and the premium-to-realized just keeps growing) - seems like noone wants to sell their stocks and everyone wants to hedge - how did that portfolio insurance work out last time everyone was on one side? EURUSD sold off - even with Draghi's OpEd and so today saw Equities Up (all <0.15%), Treasury yields Up (1-2bps >7Y), EURUSD Down 35 pips (and implicitly USD stronger by 0.23%), Commodities - Gold/Silver/Oil/Copper Down around 0.3-0.5%, and credit tracked stocks. A 7.75 point range in ES over its 24-hour period is almost multi-year lows and once again the late-day pull back from highs to VWAP (and into the red) was the only volume of the day. Energy lost, Discretionary gained (consumption data up?) as AAPL and FB dropped (ugliest at the close), and the 18-day range is the lowest since May07 (and we know what that was).

Going nowhere fast was the theme today as equities managed to end practically unchanged (SPX/Dow down, NDX up) but intraday saw some very gappy behavior (though admittedly in a very small range). VIX is the story of the day in our view - realized volatility has dropped to near-record lows (which had, until a week ago, been a big driver of front-end implied vol compression) and yet VIX pushed higher (with implied vol now at almost a three-month high premium to realized). The point being - protection is bid, and a VIX of 16.5% is much more concerning given its premium than some would believe. Volume was above its very recent and dismal average but still around 15-20 percentage points below normal summer doldrums levels. Risk assets in general trod water today with modest outperformance by Treasuries (yields lower 1-2bps) and negligible moves in FX carry trades - even as the USD is down 0.35% since Friday (mirroring Silver's 0.35% gain). With Consumer confidence dismal, somewhat strangely both Consumer Staples and Discretionary outperformed on the day. Very low average trade size, a low high-low range, and a general inability to pull away from VWAP (+/-3pts only) suggested everyone is on hold (or buying protection as we noted above); but the small flush into the close was not very encouraging.

The causal relationship between scarcity, demand, and price is intuitive.  Whatever is scarce and in demand will rise in price; whatever is abundant and in low demand will decline in price to its cost basis. The corollary is somewhat less intuitive, but still solidly sensible: the cure for high prices is high prices, meaning that as the price of a commodity or service reaches a threshold of affordability/pain, suppliers and consumers will seek out alternatives or modify their behaviors to lower consumption. Much of the supposedly inelastic demand for goods is based on the presumptive value of ownership. For many workers, there simply won’t be enough income to indulge in the ownership model.  The cost in cash and opportunity are too high. This leads to a profound conclusion:  What will be scarce is income, not commodities.

• Australian minister says resources boom is over (Reuters)
• China dismisses reports of lost gold reserves (China Daily) - so China really did lose 80 tons of gold.
• Inconceivable: Former JPM CEO and Chairman William B Harrison Jr come out "In Defense Of Big Banks"
• Qantas Cancels 787 Order After Posting Annual Net Loss (Bloomberg)
• EU Official Says Crisis is Eroding Influence (WSJ)
• Greece Faces New Pressure on Cuts (WSJ)
• Philippines' black market is China's golden connection (Reuters)
• Hollande government responds to criticism (FT)
• LG Display Starts Touch Screens Output Before New IPhone (Bloomberg)
• Greek Crisis Evasion to Fore as Merkel Hosts Hollande in Berlin (Bloomberg)
• Stakes rise as US warned of double-dip (FT)
• Brazil’s Richest Woman Unmasked With $13 Billion Fortune (Bloomberg)

Gold’s remonetisation in the international financial and monetary system continues.  LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives.  It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday.  It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system.

UPDATE: AAPL cracked the demonic $666 level after-hours

For a moment this morning some were even thinking this would be the day, this could be the one where volumes come back, ranges expand, and some level of risk sensitivity returns; but alas, despite all the AAPL pumping and Silver surging, Equities ended the day unch on weak volumes (actually cash equities ended very small down for the 16th of the last 17 Monday red closes). The S&P 500 e-mini future (ES) intraday range was a remarkably low 8.5pts, volume at its new post-Knight normal (half-normal), average trade-size lower than average, and risk-assets in general were highly correlated during the day-session as Treasuries also closed unchanged, USD down very modestly and Oil unch. Financials and Tech & Healthcare and Utilities were the only sectors in the green on the day (in an awkward risk on and off way). Copper dumped as Silver surged 2.6% on the day to two-month highs. AAPL also surged 2.6% (up 7% in the last 6 days - a level that has repeatedly been followed by pullbacks this year) as everyone's new favorite IPO (MANU) lost 2.6% (even as FB gained almost 5% closing just below $20). VIX gained 0.6 vols ending above 14% (but drifted lower from the open). While the markets main seem zombie-like, there were some intraday moves in FX and Treasury markets - but these were dominant during Europe's open and faded into the US day-session.