As if anyone needed another example of who is really running the show, the S&P 500 cash index (an index that tracks the weighted performance of 500 underlying and supposedly fundamentally idiosyncratic companies) closed at 1399.99 after breaching the almighty 1400 earlier in the afternoon. The Dow Industrials failed to close in the green for the month and Dow Transports notably diverged bearishly today as the afternoon's ramp-fest in equities - and notably nothing else - gave hope to hope-less. Between a weak/strong (you decide) jobless claims data, a dismal Kansas Fed (and Chicago NAI negative print) juxtaposed with what was 'supposedly' strong pending home sales (contracts not signings note), it seemed some early QE-hope spillover from Bernanke yesterday got us going (with gold outperforming) early on but as the US day-session began, stocks took off from their lows, stabilized into the European close, then re-accelerated - running stops to the early April non-farm-payroll print levels. Stocks reconnected with Gold's early run but this did not have the feel of a QE trade at all - the USD was flat all afternoon, volume was dismal, gold actually fell as stocks took off this afternoon, and Treasury yields rose and fell in a narrow range. In other words, there was not a concerted cross-asset class QE hope here - this was all stocks on their own - as they disconnected from our cross-capital structure and broad risk asset models as the afternoon wore on. Notably SPY implied vol is very close to crossing below its 20-day realized vol for the first time in almost five-months as VIX tested under 16% but couldn't maintain it into the close. The USD was lower close-to-close with AUD strength and JPY weakness most obvious as the US day session began with EUR relatively stable. Treasuries broadly remain lower in yield on the week with 7Y outperforming and 30Y basically unch. Copper was the best performing commodity today followed by Silver (though Ag remains down on the week) but Gold and Oil also benefited from USD's leaking. Discretionary, Energy, and Financials sectors outperformed on the day in stocks (with Materials weak - another non-QE sign) but it was the equity market's standalone bullishness that suggests this was more technical than a hope- or fundamental-based regime shift.
As we said yesterday, traders could have just slept through the entire day, ignored headlines about mad cows, auctions of European bonds maturing in a few weeks, speculation of Europe's alleged falling out favor with austerity which is very much irrelevant as all that matters is what German taxpayers/voters say, and the SEC's latest laughable scapegoating attempts, and just woken to the 4:30 pm announcement of iPhone sales in China. As expected, the entire world is now reacting. Here is Deutsche Bank's Jim Reid with the global response to the world's ongoing fascination with aspirational cell phones.
- China’s Biggest Banks Are Squeezed for Capital (NYT)
- Greeks detect hypocrisy as Dutch coalition stumbles (Reuters)
- Hollande Blames Europe’s Austerity Plan for Le Pen’s Rise (Bloomberg)
- In a Change, Mexico Reins In Its Oil Monopoly (NYT)
- China Tire Demand Slows as Economy Decelerates, Bridgestone Says (Bloomberg)
- Social Security’s financial forecast gets darker; Medicare’s outlook unchanged (WaPo)
- Fed’s 17 Rate Forecasts May Confuse More Than Clarify (Bloomberg)
- Senate to vote on array of Postal Service overhaul proposals (WaPo)
- Weidmann Says Bundesbank Is Preserving Euro Stability (Bloomberg)
It appears that when it comes to mocking consensus groupthink emanating from lazy career 'financiers' who seek protection from their lack of imagination and original thought, 'creation' of negative alpha and general underperformance (not to mention reliance on rating agencies, only to jump at the first opportunity to demonize the clueless raters), in the sheer herds of other D-grade asset "managers" (for much more read Jeremy Grantham explaining this and much more here), David Rosenberg enjoys even more linguistic flexibility than even us. Case in point, his just released trashing of the latest Barron's permabull groupthink effort titled "Outlook: Mostly Sunny." And just as it so often happens, no sooner did those words hit the cover of that particular rag, that it started raining, generously providing material for the latest "Roasting with Rosie."
All you need to read and some more.
Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010. And he minces no words: gold and silver prices are suppressed. With extreme prejudice. In this detailed interview, Harvey explains to Chris the mechanics how of he sees this manipulation occurring, why he predicts this fraudulent pricing scheme will collapse soon, and why it's critical to be holding physical (vs paper) bullion when it does.
Take your pick of how to describe this week's action. The Dow was green, S&P 500 unch (ES closed right at its 50DMA), and NASDAQ down for its biggest 2-week loss since the rally began. Heavy volume and incessant selling pressure pushed AAPL to its biggest 10-day loss in over 8 months as it closed at 5-week lows just shy of filling the gap from 3/13 and very close to testing its 50DMA for the first time in 4 months. Credit and equity markets generally did a round-trip today closing near their lows after opening the day-session near their highs off the ubiquitous overnight ramp. HY is practically unchanged on the week as IG saw up-in-quality rotation and outperformed while the S&P ended in between the two as they all traded in a broad range for the second week in a row - even though volatility remains intraday. Treasuries slid to their lowest yields of the day into the close today (though off the week's best and unch today) once again somewhat range-bound but with a notable falling-yield momentum down a few bps on the week with the long-end outperforming and 10Y closing under 1.96%. Copper and Oil rallied solidly today but aside from a little volatility Gold and Silver trod water ending the week with Gold -1% and Silver +0.55% as WTI ended back over $104. The EUR kept rallying all week (more repatriation flows?) dragging the USD lower as JPY underperformed on the week (flat today as the rest of the majors tracked USD weakness) and GBP outperformed. Broadly, the Treasury strength balanced the Oil and FX market risk-on-sentiment but risk-assets proxied higher into the US day-session open only to give it all back and drag stocks back down. It feels like there is still hope for some re-liquification but the weakness in AAPL and the financials suggest at best rotation and at worst steady risk-off while earnings beats (of drastically lowered expectations) keep the dream alive.
NYSE volume was 20% above yesterday's and S&P 500 e-mini futures (ES) volume surged to its 2nd highest of the year as the last 30 minutes saw heavy volume and large average trade size very active as it pushed up towards VWAP and oscillated around its 50DMA. ES closed below its 50DMA for the first time since Monday but equities notably underperformed Treasuries (playing catch-up to bond's recent rally). Equities hit their lows at around 1430ET as ES coincided with Monday's closing VWAP (and Apple also tested and stayed around Monday's closing VWAP) and with a spike down and recovery in WTI prices (margin calls?). The major financials saw their best levels pre-open and slid lower all day with very little bounce at the close. While there was plenty of volatility in FX and commodity markets, close-to-close changes were relatively benign in the USD (DXY) and Oil, Copper, and Gold (while Silver modestly outperformed). All the action in FX was between US open and Europe's close but the afternoon saw AUD drifting weaker and CAD lose most of its spike gains from yesterday as JPY also slipped relative to the USD reducing some of the negative carry impact. Just as we had noted, and reiterated this morning and afternoon, equities performed the same hope-driven rally relative to broad risk assets as last week, and before the late day VWAP-seeking surge, almost completed their shift to fair-value. VIX also pulled higher to its credit-equity-implied fair-value before falling back as we rallied into the close. Overall average trade size today in ES, given its very heavy volume, was among the lowest of the year which suggests a lot of algos trying to wriggle their way back to VWAP to release some orders and with equity reverting to Treasury's, credit's, and broad-risk-asset's views of the less-than-stellar world, we suspect there is more selling to come here - albeit with OPEX complications.
Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation. Neither has occurred, and the question is, why not? The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation. If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation. Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but 'hot,' inflation.
The states of America are, truly, children of the Constitution. The legal framework that is the foundation of state sovereignty and internal administration is unique for perhaps any country in history up to the moment the U.S. won its independence. States were designed to decentralize and keep in check the power of a subservient Federal Government. They were meant to be the guardians at the gate, the barrier to the formation of oligarchy or outright dictatorship. This, of course, has changed drastically. The battle over centralized verses decentralized authority and economy has been going on for quite some time, and is undeniably critical in our climate of crisis now, under a government which is bankrupt in every sense and a currency which is on the verge of calamity... The following is a step by step method that states could use to accomplish the task of insulation from financial crisis and federal control. Much of it hinges on a willingness by state governments to actually pursue independence, which might seem like a naïve dream to most of us. But, in the wake of a major breakdown, and the fall of the greenback, I believe many states will be seeking a way to weather the storm, if only out of a desire to survive, and this includes walking away from their ties to Washington.
Matthew Bishop, the US Editor of The Economist, has been interviewed by the Wall Street Journal TV about gold and why “people have lost faith in the 20th century religion of government backed fiat money." He says that he has become an agnostic or an atheist with regard to his belief in government-backed money as he fears that governments are in a position whereby they are going to debase currencies such as the “paper dollar and “paper euro” “in a big way.” Gold becomes one of the “alternative religions” in that environment. History shows that a deleveraging downturn takes a long time and can take 7 or 8 years. Inflationary pressures are building and will be seen in the second half of the cycle, according to Bishop. Bishop says he would put some of his money into gold but is prohibited from this due to the investment policies of The Economist. He advocates owning gold as a “portfolio of money” and diversification and advocates having 5% to 10% of one’s money in gold. The Economist magazine has a strong Keynesian bias and has been one of the most anti-gold publications in the world with many simplistic, unbalanced and ill-informed articles. The publication has suggested on many occasions since 2008 that gold is a bubble. Clients of GoldCore have told us that they were prompted to sell their gold bullion as long ago as 2009 after reading such articles in The Economist.
Will central bankers be able to save the day again?
On a long enough timeline, all things come to an end. Even for such venerable venues as the London Metals Exchange, with its 130 year history, and its annual turnover of over $11 trillion in metal contracts, which also makes it the largest market for non-ferrous metals. As the English FT reminisces, "When the LME was established in 1877, Britain was one of the world’s most important manufacturing powerhouses, and the LME’s benchmark contracts for delivery in three months were designed to mirror the length of time needed to reach British ports for shipments of copper from Chile and tin from Malaysia." Furthermore, in the beginning, and all the way through 1993, the flagship copper contract was denominated in sterling, at which point it was switched to the USD following the "Black Wednesday" ERM sterling crisis, courtesy of George Soros who made about $1 billion by shorting the GBP, and formally ended the sterling's role as even an informal backup reserve currency. As of today, insult follows inury, as the LME has formally asked the members of the exchange to drop the sterling contract denomination (in addition to USD, EUR, and JPY contracts) and replace it with the Chinese renminbi. Why this sudden and dramatic, if gradual and tacit, admission that the CNY is the ascendent reserve currency? Because, as the FT reminds us, China has become the market for non-ferrous metals: it is "the dominant force in the market, accounting for more than 40 per cent of global demand for most metals and a rapidly increasing share of trading in LME futures." Add that to yesterday's news of a widening in the CNY band (which incidentally is much ado about nothing, at least for now: at best it will allow China to devalue its currency when and if it so desires much faster than before, much to Geithner's final humiliation), and to the previously reported extensive network of bilateral CNY-based trade agreements already kris-crossing Asia, and one can see why if America is not worried about the reserve status of the dollar, it damn well should be.
There is the slow realisation that the complacency of recent months was again misplaced. It remains obvious that the euro zone debt crisis is far from over and this will support gold in the coming months – especially in euro terms.
Gold in euro terms has been consolidating above €1,200/oz for six months now. With the eurozone crisis set to deepen and the continuing risk of contagion, we could see gold break out in euro terms prior to doing so in dollars, pounds and other currencies.