Copper

Financial credits remain the big underperformer hinting at much less risk appetite than USD-based stocks would indicate for now but broad risk assets staged an impressive bounce recovery on better than average volumes today as early weakness in Europe was shrugged off with better-than-expected macro data in the US (claims and Philly Fed headlines) and then later in the morning the story in the ECB Greek debt swap deal. We discussed both the macro data and the debt swap deal realities but the coincident timing of the ECB story right into the European close (when we have tended to see trends reverse in EUR and risk anyway) helped lift all risky asset boats as USD lost ground. The long-weekend and OPEX tomorrow likely helped exaggerate the trend back today but we note HYG underperformed out of the gate and while credit and stocks did rally together, the afternoon in the US saw stocks limp higher on lagging volumes (and lower trade size) as credit leaked lower. Treasuries sold off reasonably well as risk buyers came back (around 8bps off their low yields of the day pre-ECO) but rallied midly into the close (as credit derisked). Commodities all surged nicely from the macro break point this morning with Copper best on the day but WTI still best on the week. Silver is synced with USD strength still (-0.25% on the week) as Gold is modestly in the money at 1728 (+0.4% on the week) against +0.47% gains for the USD still. FX markets abruptly reversed yesterday's USD gains with most majors getting back to yesterday's highs. GBP outperformed today (at highs of the week) and JPY underperformed (lows of the week). VIX shifts into OPEX are always squirly and today was no different but we did see VIX futures rise into the close. We wonder if the last couple of days of Dow swings and vol spikes and recoveries will remind anyone of the mid-summer day swings last year?

As AAPL dominates the headlines for its dramatic 5% reversal intraday and biggest drop in over two months, perhaps it is worth pointing out that the lacking volumes have returned with a flourish. ES (the e-mini S&P futures contract) saw its heaviest volume since this mid-December rally began (30% above average) as our recent pontification on the messages from the credit market (along with the rhythmic periodicity of the rally's size and length) may be starting to wear on investors' risk appetites. After European credit markets accelerated to the downside today, US investment grade and high-yield credit was not buying any of the overnight rally in stock futures and moved wide of yesterday's pre-Samaras rally out of the gate. Stocks surged upwards, tracking uber-stock AAPL but as chatter of a NASDAQ rebalance sent game-theorists scrambling to migrate, AAPL's slump dragged everything down (sadly) with ES stalling at the pre-China rumor level before falling to pre-Samaras levels from yesterday's lows. A lack of rumors and no QE mention from FOMC minutes along with lackluster news from the Eurogroup did nothing to rescue the situation as EURUSD ended on its lows (-1% on the week now) and USD Strength saw carry trades dragging stocks down. Interestingly, post-FOMC Treasuries came off their best levels in the afternoon (even as stocks were tanking) but we saw Gold rallying (in the face of a stronger USD) - does make one wonder on where the safety trade is now. WTI closed near its highs of the day (over $102) and as we noted earlier Brent in EUR closed at record highs as Copper is -1.3% on the week and Silver is tracking USD -0.75% or so on the week.

The divergence between credit markets and equities accelerated today in Europe (and the US) as Senior and Subordinated financial credit spreads have increased dramatically in the last week. While risk has risen over 25% in financials, European stocks have gone sideways since the NFP print. The Subordinated financials spread has risen the most (in percentage terms) over the last 4 days since Nov2010 - and of course the broad equity markets are flat. It would seem that every trader and their mom is selling European financials and buying AAPL.

A certain flavor of econometric model dominates conventional portfolio management and financial analysis. This model can be paraphrased thusly: seasonally adjusted economic data such as the unemployment rate and financially derived data such as forward earnings and price-earnings ratios are reliable guides to future economic growth and future stock prices....If this model is so accurate and reliable, why did it fail so completely in 2008 when a visibly imploding debt-bubble brought down the entire global economy and crashed stock valuations? Of the tens of thousands of fund managers and financial analysts who made their living off various iterations of this econometric model, how many correctly called the implosion in the economy and stock prices? How many articles in Barrons, BusinessWeek, The Economist or the Wall Street Journal correctly predicted the rollover of stocks and how low they would fall? Of the tens of thousands of managers and analysts, perhaps a few dozen got it right (and that is a guess--it may have been more like a handful). In any event, the number who got it right using any econometric model was statistical noise, i.e. random flecks of accuracy. The entire econometric model of relying on P-E ratios, forward earnings, the unemployment rate, etc. to predict future economic trends and future stock valuations was proven catastrophically inadequate. The problem is these models are detached from the actual drivers of growth and stock valuations.

European corporate and financial credit markets are opening weak this morning - ignoring the exuberance in overnight ES futures (11,000 contracts in seconds on rumor of China for 10pt jump?) which is also leaking back rapidly to VWAP (even as European equity markets continue to levitate). Financials especially are now beyond yesterday's wides with subordinated spreads the underperformer for now. This extends from our comments yesterday that were picked up on CNBC with regard to the 'stigma-trade' in LTRO-encumbered banks (which is widening further this morning) as well as broad divergence between stocks and credit. Concerns over Ireland's fiscal consolidation plans balanced with a very slight beat on German GDP (though still negative) are seeing EURUSD leak back off its best levels of the night after it bounced off 1.31 in late US trading (on Samaras rumors then extended by this China chatter). Gold and Silver are pushing higher while Copper and Oil are stable for now (though notably up from yesterday's European close). European sovereigns are quiet for now while US Treasuries are slightly better bid.

UPDATE: EURUSD is sliding on our earlier note on German 'not so fast' comments

As we noted earlier, volumes in equity (cash and futures) were dismal today and yet we managed to close at the highs of the day after gapping up to open last night, sliding into Europe's close (as they derisked broadly) only to limp above VWAP and close just under 1350 in ES (the e-mini S&P futures contract) - right around the level of the open at the day-session - though we note that while financials outperformed, the majors all lost considerable ground from the open. Credit (HY and IG) tracked pretty well all day with stocks (and we heard liquidity was even worse over there) but maintains its underperforming stance post-NFP (especially high-yield credit). EURUSD was the standout today though as it leaked all the way back from a positive morning to close unchanged from Friday - just under 1.32 and at its worst levels of the day. Among FX majors, AUD outperformed but JPY's push after the European close held FX carry swings in check and provided little fillip for ES. Treasuries rallied well off early morning high yields, bounced after the European close and then rallied into the day session close in the US (ignored by stocks) to end mixed with the short-end higher by 1-2bps and the long-end lower in yield by 1-2bps as the flattening dragged an earlier ebullient CONTEXT (broad risk asset proxy) back down to earth again. Oil dominated chatter as the halt gapped up ETFs only to slide back after it reopened though ending +1.9% from Friday and above $100.5 at the close. Gold tracked the USD almost perfectly (ending unch) while Silver outperformed its precious friend modestly and Copper underperformed.

Since last Wednesday, European financials have seen credit spreads widen dramatically. After some initial gains today, they once again retreated and traded out to their widest levels in two weeks as both financials and non-financials closed wider and at their worst levels of the day in European credit. Sovereigns also deteriorated significantly after around 8amET with 10Y BTPs for instance adding 20bps or so to close unch (as the rest of the major sovereigns saw de minimus +2 to -4bps changes). Bunds and Treasuries stayed close together and we note TSYs rallied 7bps (from +4 to -3bps) from early morning Europe trading and leaked off a little into the close. WTI is holding above $100 even as Copper is down 1% while Gold and Silver's gains are in sync with USD's modest losses - though EUR is leaking back lower (holding just above 1.32) into the close to around unch. While this post-Thanksgiving Day rally was perhaps predicated on global growth (US decoupling, China soft landing) and extended by LTRO (contagious bank insolvency runs risk containment), the underperformance of banks' credit risk in the last few days should be very worrisome with Senior unsecured credit wider by over 30bps in 3 days, its largest deterioration in two months.

Market focus tends to be almost solely on Chinese and Indian demand but demand is broad based throughout increasingly important Asian gold markets. Demand for gold remains robust in most Asian countries where consumers are buying gold as a store of wealth due to concerns about their local paper currency.  This phenomenon is happening throughout Asia including in Malaysia, Indonesia, Thailand and Vietnam and other large Asian countries (see news below regarding demand for gold by investors in Thailand).   AFP have a very interesting article on Vietnamese ‘gold fever’ which recounts how  “stashing gold at home rather than having cash in the bank is a generations-old habit in communist Vietnam”. And old habits are dying hard even if an ounce of gold bullion can now cost up to US $100 more in Hanoi than anywhere else in the world due to government meddling in the gold market. AFP quote 60-year-old retiree Truong Van Hue “I still like to keep my savings in gold. It's safe for retired people like me. I can sell the gold any time, anywhere, when I need cash,” he told AFP. Although the treasure has long been perceived as a safe haven, the recent gold rush has alarmed Vietnam's government, which is faced with an 18 percent inflation rate and an unstable national currency, the dong.

With major trade partners battered by recession, the latest trade data seem to give credence to a China hard-landing crash scenario by some forecasters.

UPDATE: EURUSD back over 1.32 and TSYs +2bps on Greek loan plan news.

Credit (and vol) continue to lead the way as smart deriskers as ES (the e-mini S&P 500 futures contract) ends down only 0.5% - which sadly is the biggest drop since 12/28. The late day surge in ES, which was not supported by IG or HY credit (and very clearly not HYG - the HY bond ETF - which closed at its lows and saw its biggest single-day loss since Thanksgiving), saw heavier volumes and large average trade size which suggest professionals willing to cover longs or add shorts above in order to get filled. Materials stocks underperformed but the major financials had a tough day as their CDS deteriorated to one-week wides. VIX (and its many derivative ETFs) had a very bumpy ride today. VXX (the vol ETF) rose over 14% (most in 3 months) at one point before it pulled back (coming back to settle perfectly at its VWAP so not too worrisome). After the European close, FX markets largely went sideways with the USD inching higher (EUR weaker) as JPY strength reflected on FX carry pair weakness and held stocks down. Treasuries extended their gains from yesterday's peak of the week yields as 7s to 30s rallied around 6bps leaving the 30Y best performer on the week at around unchanged. Commodities generally tracked lower on USD strength with Oil the exception as WTI pushed back up to $99 into the close (ending the week +1.1% and Copper -1.1%). Gold and Silver ended the week down almost in line with USD's gains at around 0.25-0.5%. Broadly speaking risk has been off since around the European close yesterday and ES and CONTEXT have reconverged on a medium-term basis this afternoon (to around NFP-spike levels) as traders await the potential for event risk emerging from Europe.

It has been so long since the CME cut gold and silver margins that frankly we are a little bit stunned... In an extended announcement, which saw outright margins for virtually every commodity get cut, the CME just lowered Initial and Maintenance margins of gold (by 12%) and silver (13%), to $7500 maintenance for GC and $16000 maintenance for SI. Did the paper bull trap season just open? And how long before these are re-hiked by 15%, 20% or more? For now, however, this is certainly near-term bullish.

Credit markets are continuing the trend of the last couple of days with this afternoon seeing their underperformance accelerating. Major underperformance this week in investment grade and high yield credit markets relative to stocks (and as we noted this morning, we are also seeing financial credit in Europe notably underperforming) as Maiden Lane II assets are sold and high yield issuance peaks (and liquidity dries up). Adding to the concerns, VIX futures saw their biggest 2-day jump in over two months despite equity's modest rally. On a day when Pisani tells us there was much to rejoice about, stocks managed only negligible gains (even with broad risk assets in risk-on mode, TSY yields up, FX carry up, Oil up) and while stocks are limping higher now (aside from AAPL of course) with financials underperforming, perhaps this week of notably higher average trade size in equity futures is the calm before the real storm gets going - as credit and vol seems to be hinting at.

Much has been made of today's Reuters story how "Iran turns to barter for food as sanctions cripple imports" in which we learn that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food", and whose purpose no doubt is to demonstrate just how crippled the Iranian economy is as a result of the ongoing US embargo. Incidentally this story is 100% the opposite of the Debka-spun groundless disinformation from a few weeks ago that India was preparing to pay for Iran's oil in gold (they got the asset right, but the flow of funds direction hopelessly wrong). While there is certainly truth to the fact that the US is actively seeking to destabilize the local government, we wonder why? After all as the opportunity cost for the existing regime to do something drastic gets ever lower as the popular resentment rises, leaving the local administration with few options but to engage either the US or Israel. Unless of course, this is the ultimate goal. Yet going back to the Reuters story, it would be quite dramatic, if only it was not the case that Iran has been laying the groundwork for a barter economy for many months now, something which various other analysts perceive as the basis for the destruction of the petrodollar system. Perhaps regular readers will recall that back in July, we wrote an article titled "China And Iran To Bypass Dollar, Plan Oil Barter System." Specifically, we wrote that "according to the FT, China has decided to commence a barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant." Seen in this light the fact that Iran is actually proceeding with a barter system, something that had been in the works for quite a while, actually puts the Reuters story in a totally different light: instead of one predicting the imminent demise of the Iranian economy, the conclusion is inverted, and underscores the culmination of what may have been an extended barter preparation period, has finally gone from beta to (pardon the pun) gold, and Iran is now successfully engaging in global trade without the use of the historical reserve currency.

Somehow, once again, we managed to rally EURUSD (to 2 month highs) on the back of Greek deal hopes (even as Merkel stomped her feet, Hollande flexed his muscles, and Dallara/Venizelos had nothing to report) which maintained a modicum of support for equity markets (which also got a little late day push from another record-breaking Consumer-Credit expansion) as cash S&P made it to early July 2011 levels. Unfortunately, with Utilities leading S&P sectors, credit diverging wider in investment grade and high-yield, Copper underperforming (post overnight China reality checks), WTI's exuberance (relative to Brent at least), and implied correlation diverging bearishly from VIX, we can't say this was a wholly supported rally. Broad risk-asset proxy (CONTEXT) did stay in sync with ES (the e-mini S&P 500 futures contract) after the European close as Treasuries held up near the day's high yields and FX carry stabilized. Financials lagged with the majors actually underperforming for a change as we note the late-day surge in ES to new highs saw significant average trade size suggesting more professionals covering longs into strength rather than adding at the top. Volume was above yesterday's dismal performance but remained below the year's average so far. Credit and equity vol are back in line and credit has now been flat and underperforming for the last three days (even as HY issuance has been high).

The surge in the U.S. money supply in recent years has sent gold into a series of new record nominal highs.  Money supply surged again in 2011 sending gold to new record nominal highs. Money supply has grown again, by more than 35% on an annualized basis, and this is contributing to gold’s consolidation and strong gains in January.  The Federal Reserve's latest weekly money supply report from last Thursday shows seasonally adjusted M1 rose $13.2 billion to $2.233 trillion, while M2 rose $4.5 billion to $9.768 trillion.