Crude

Stocks advanced as market participants looked forward to tomorrow’s 3yr LTRO by the ECB where the street expects EU banks to borrow around EUR 400-500bln. All ten sectors traded in positive territory for much of the session, however less than impressive demand for the latest Italian government paper saw equity indices lose some of the upside traction. Of note, the ECB allotted EUR 29.469bln in 7-day operation, as well as EUR 134bln for 1-day in bridge to 3yr loans. In other new, although Portugal's finance minister announced the country has passed its 3rd bailout review by the EU/IMF, this did not stop S&P's Kraemer saying that if there is a probability of default, it is higher in Portugal than in any other Euro-Zone country.

While the gold standard may no longer exist, nations and international organizations still have 30,877 metric tons of bullion reserves, valued at about $1.77 trillion. The dollar has been the world’s reserve currency since the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. It remained the most- traded legal tender after global currencies began freely floating in the early 1970s. The greenback dropped 12 percent against a basket of six major currencies since March 2009. The U.K. suspended the gold standard in 1931, Chatham House said. “Greater discipline on financial markets might have been helpful in inhibiting the reckless banking and excessive debt accumulation of the past decade,” the task force said. “However, with the onset of the global crisis, had gold had a more formal role to play, the rigidity it imposes might also have been a handicap when a more flexible policy response was required.” “For gold to play a more formal role in the international monetary system, it would be imperative for it neither to hamper the system’s performance nor to create unacceptable constraints on national economic policies,” the task force said.  Gold may “continue playing a significant role in the international monetary system, serving as a valuable hedge and safe haven, particularly in times when tail risks predominate.”

Last week we had the mispleasure of suffering a subdural hematoma or 7 after reading CA Congresswoman Nancy Pelosi's formal response to the gas price shock, in which it became abundantly clear that the amount of heavy metals in the California water supply is directly proportional to the insolvency of said state. Yet the only thing better than the resulting cathartic post, which had over 57,000 reads, and hundreds of comments, is JPMorgan doing the very same to what some allege is the most corrupt and incompetent legislator in the history of the US Congress. Which, to our and our readers' utmost delight, is precisely what happened today, when JPM Private Bank CIO Michael Cembalest decided to clinically deconstruct her argument into its constituent utterly insane components. Below we present the carnage.

Today was another tale of two worlds as stocks outperformed everything as broadly speaking risk assets leaked notably lower post Europe's close and accelerated post Nowotny. Financials led the exuberance (in stocks not credit) on a day when volume was certainly not terrible and credit market indices tracked stocks (ES) almost tick for tick (which along with desk chatter suggested little activity in credit today as credit dealers reracked along with futures movements). HYG dipped significantly into the close - after a decent drop in the middle of the day that was saved - only to be held up by its VWAP. For the second day in a row, VIX closed higher on a higher S&P close and implied correlation is sending those trend fade warnings once again but it was the broad-based disregard for any and every other asset class today (by stocks) - as Treasuries remained near their low yields of the day, Crude, Gold and the commodity complex all sold off, FX carry reverted back to risk-off after Europe closed, and apart from a minor leak higher in the last hour bond curves were notably flatter - that was surprising (and unusual in recent weeks/months). In the medium-term, credit remains considerably less sanguine than stocks here and the late day disappointment from Nowotny ahead of LTRO2 may have just taken the jam out of the equity market's doughnut for now.

Every time we see oil prices go up we hear that it will cause inflation and/or the economy will go into the tank. The premise is wrong because that has never happened.

But coincidentally, the ECB’s next Long Term Refinancing Operation (LTRO) is set for February 29...

"It Is completely ironic that we would be experiencing one of the most powerful cyclical upswings in the stock market since the recession ended at a time when we are clearly coming off the poorest quarter for earnings... There is this pervasive view that the U.S. economy is in better shape because a 2.2% sliver of GDP called the housing market is showing nascent signs of recovery. What about the 70% called the consumer?...Let's keep in mind that the jump in crude prices has occurred even with the Saudis producing at its fastest clip in 30 years - underscoring how tight the backdrop is... Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels." - David Rosenberg

Sorry, you can't blame dollar and gold for the surging oil and gasoline price.

Like sands through the hour-glass, these are the fears of our lives. Just as we noted last week, the focus of risk is shifting from Greece (where while 'tail-risk' has perhaps receded for now, it is all-but certain that the insolvency predicament will resurface as a source of political, policy, and market tension in the not-too-distant future) to other foot-holds on the growing wall-of-worry. As UBS' Larry Hatheway notes this week, several candidates may replace Greece in the risk headlines, among them rising bond yields, French elections, or a Chinese hard landing. But his sense, and ours, is that oil prices will become the next risk item for market participants. Partly this is because oil prices are already approaching levels where worries have occurred in the past (and the velocity of the move is also empirically troublesome) and partly as the remedy for all global-ills (that of central bank printing) is implicitly impacting this 'risk' in a vicious circle. With global growth expectations already low, the 0.2ppt drop in Global GDP for each $10/bbl rise in oil will do nothing for Europe and US hope - and leaves Central Banks in that dangerous position of reinflating their low core inflation data while all around them is inflating rapidly. With modest schadenfreude, we remind readers of our comments from last week: "Alas, as noted previously, the central bank tsunami is only just starting. Watch for inflation, and concerns thereof, to slowly seep into everything". Given oil's potential 'real' impact, as SocGen notes: "Perhaps Greece wasn't so bad after all."

When in doubt - buy. When in doubt what - everything. As the chart below shows starting with the open of the US market, literally everything has been bought: stocks, bonds, crude, gold, and 'logically', the VIX. It took the market virtually no time to remember that when trillions in liquidity are being injected into the market courtesy of central planners, a downtick is verboten. Next up: waiting for WTI $110. Should take a few minutes at most.

Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.

A few days ago, before the latest breakout in crude sent Brent to all time highs in GBP and EUR (and Asian Tapis in USD just shy of all time highs), we said that "we hope our readers stocked up on gasoline. Because things are about to get uglier. And by that we mean more expensive. But courtesy of hedonic adjustments, more expensive means cheaper, at least to the US government." This was due to recent news out of Iran "where on one hand we learn that IAEA just pronounced Iran nuclear talks a failure (this is bad), and on the other Press TV reports that the Iran army just started a 4 day air defense exercise in a 190,000 square kilometer area in southern Iran (this is just as bad). The escalation "ball" is now in the Western court." We were not surprised to learn that the "Western court" has responded in precisely the way we had expected. The WSJ reports: "The Pentagon is beefing up U.S. sea- and land-based defenses in the Persian Gulf to counter any attempt by Iran to close the Strait of Hormuz. The U.S. military has notified Congress of plans to preposition new mine-detection and clearing equipment and expand surveillance capabilities in and around the strait... The military also wants to quickly modify weapons systems on ships so they could be used against Iranian fast-attack boats, as well as shore-launched cruise missiles" Which means the escalation slider was just shifted up by one more level, as Iran will next do just what every actor caught in an Always Defect regime as part of an iterated prisoners' dilemma always does - step up the rhetoric even more, as backing off at this point is impossible. Which means that crude will go that much more higher in the coming days, as now even the MSM is starting to grasp the obvious - from the Guardian: "The drumbeat of war with Iran grows steadily more intense. Each day brings more defiant rhetoric from Tehran, another failed UN nuclear inspection, reports of western military preparations, an assassination, a missile test, or a dire warning that, once again, the world is sliding towards catastrophe. If this all feels familiar, that's because it is. For Iran, read Iraq in the countdown to the 2003 invasion." And the most ironic thing is that the biggest loser out of all this, at least in the short-term is.... Greece.

Some men you just can't reach. 

Silver and Gold remain the major outperformers year-to-date but the rest of commodities - most notably oil is catching up very fast having over taken stocks this week. It appears that the new-found flood of liquidity that we have been so passionately banging the table on for weeks, has found its way into the energy complex as European Sovereigns, European Financials, European Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. And as a hint to anyone who hasn't jumped on this tidal movement yet, one thing to note is that unlike stocks, commodities always have the risk of marginal or weak hands being shaken out via CME...margin hikes.

The record volatility, and 400 point up and down days in the DJIA of last summer seem like a lifetime ago, having been replaced by a smooth, unperturbed, 45 degree-inclined see of stock market appreciation, rising purely on the $2 trillion or so in liquidity pumped into global markets by the central printers, ever since Italy threatened to blow up the Ponzi last fall. In short - we have once again hit peak complacency. Yet with crude now matching every liquidity injection tick for tick (and then some: Crude's WTI return is now higher than that of stocks), there is absolutely no more space for the world central banks to inject any more stock appreciation without blowing up Obama's reelection chances (and you can be sure they know it). Suddenly the market finds itself without an explicit backstop. So what are some of the "realizations" that can pop the complacency bubble leading to a stock market plunge, and filling the liquidity-filled gap? Here are, courtesy of David Rosenberg, six distinct hurdles that loom ever closer on the horizon, and having been ignored for too long, courtesy of Bernanke et cie, will almost certainly become the market's preoccupation all too soon.