Following this week's ongoing battery of abysmal economic news out of Europe it will hardly come as a surprise that yet another indicator has been released and is pointing to a multi-year low in the deleveraging (elsewhere called incorrectly austere) continent, namely the Euro-area wide confidence index which just slide to the lowest leve since 2009, missing every single estimate and declining sequentially across the board... And with the UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia now in re-recession, and Spain a definitive shoo in next week, the kicker is that German GDP will almost certainly now report a second consecutive GDP print in a few days, thus pushing the entire European continent in a double dip.
We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?
While gold demand from the western investors and store of wealth buyers has fallen in recent months, central bank demand continues to be very robust and this is providing strong support to gold above the $1,600/oz level. IMF data released overnight shows that Mexico added 16.8 metric tons of gold valued at about $906.4 million to its reserves in March. Russia continued to diversify its foreign exchange reserves and increased its gold reserves by about 16.5 tons according to a statement by its central bank on April 20. Other creditor nations with large foreign exchange reserves and exposure to the dollar and the euro including Turkey and Kazakhstan also increased their holdings of gold according to the International Monetary Fund data.Mexico raised its reserves to 122.6 tons last month when gold averaged $1,676.67 an ounce.Turkey added 11.5 tons, Kazakhstan 4.3 tons, Ukraine 1.2 tons, Tajikistan 0.4 ton, and Belarus 0.1 tonnes, according to the IMF. Ukraine, Czech Republic and Belarus also had modest increases in their gold reserves. Central banks are expanding reserves due to concerns about the dollar, euro, sterling and all fiat currencies.
But they forgot to check with the Germans.
- Fed's No. 2 Strongly Backs Low-Rate Policy (Hilsenrath)
- World Bank Cuts China 2012 Growth Outlook on Exports (Bloomberg)
- BlackRock's Street Shortcut: Big Banks Would Be Bypassed With Bond Platform; 'Not Going to Cannibalize' (WSJ)
- George Soros - Europe’s Future is Not Up to The Bundesbank (FT)
- Fed May Have Aggravated Income Inequality, El-Erian Says(Bloomberg)
- Shirakawa Pledges Japan Easing Amid Political Pressure (Bloomberg)
- Spain’s Debt Struggle Opens Door to Sarkozy Campaign Message (Bloomberg)
- Iran Woos Oil Buyers With Easy Credit (FT)
- Syria Pledges to Observe Ceasefire (FT)
- With a 2 Year delay, both FT and WSJ start covering the shadow banking system. For our ongoing coverage for the past 2.5 years see here.
- Trouble in shipping turns ocean into scrapheap (Telegraph)
- First-Quarter Home Prices Down 20.7% in Capital (China Daily)
- Bernanke Says Banks Need Bigger Capital Buffer (Reuters)
- Monti’s Overhaul Can’t Stop Pain From Spain: Euro Credit (Bloomberg)
- Spain Confronts Crisis Threat as Rajoy Seeks Deficit Cuts (Bloomberg)
- Japan’s Noda Announces Anti-Deflation Talks as BOJ Sets Policy (Bloomberg)
- White House makes case for Buffett Rule (CNN)
- Cameron to Make Historic Myanmar Trip (FT)
- 'Time for Closer Ties' With India (China Daily)
The week ahead will offer significant inputs to our views. ISM and payrolls will likely set the market tone for the next few weeks. Despite the softer signals from regional surveys, Goldman expects the ISM to improve at the margin relative to last month’s print. In contrast, it expects payrolls to grow by 175k, down from last month’s 227k jobs gain. FOMC minutes will likely show that Fed officials had a discussion on further easing but are unlikely to offer strong hints about the likelihood and possible timing of a third round of Quantitative Easing.
Next week will be relatively light in economic reporting, and with no HFT exchange IPOs on deck, and the VVIX hardly large enough to warrant a TVIX type collapse, it may be downright boring. The one thing that will provide excitement is whether or not the US economic decline in March following modestly stronger than expected January and February courtesy of a record warm winter, will accelerate in order to set the stage for the April FOMC meeting in which Bill Gross, quite pregnant with a record amount of MBS, now believes the first QE hint will come. Naturally this can not happen unless the market drops first, but the market will only spike on every drop interpreting it for more QE hints, and so on in a senseless Catch 22 until the FRBNY is forced to crash the market with gusto to unleash the NEW qeasing (remember - the Fed is now officially losing the race to debase). For those looking for a more detailed preview of next week's events, Goldman provides a handy primer.
In a number of stories in China's top newspapers today, the US has been slammed for its moves to restrict Iran's oil trade which could see Chinese banks sanctioned. As The People's Daily noted, Hong Lei (a Foreign Ministry spokesperson) warned such unilateral action was not only wrong but could exacerbate the stand-off over Iran's nuclear program. Arguing that China 'imports oil based on its economic development needs' without violating relevant resolutions of the UN Security Council and undermining the third party's and international community's interests, he noted China will not accept the practice of saddling unilateral sanctions on the third country. Adding to this, China Daily notes the typical UN blah-dom of Wang Min's comments of the "more pragmatic importance to be firmly committed to dialogue and negotiations in order to properly solve the Iranian nuclear issue". While China is clearly 'disappointed' in the US efforts, Russia turns the dial to 11 with its comments that the US efforts are inflaming, as Russia's Foreign Minister Sergei Lavrov said Tuesday, "Scientists in nearly all countries....are convinced that strikes may slow down the Iranian nuclear program. But they will never cancel it, close it down or eliminate it" warning that Iran will have no option but to develop nuclear weapons should the US strike. Well you can't please all the people all the time eh? Just ask Ben.
While hardly expecting anything quite as dramatic as the default of a Eurozone member, an epic collapse in world trade, or a central banker telling the world that "he has no Plan B as having a Plan B means admitting failure" in the next several days, there are quite a few events in the coming week. Here is Goldman's summary of what to expect in the next 168 hours.
- Cotton prices jump as India bans exports (FT)
- Goldman’s Asia Unit Lost Money First Time Since 2008 on Soured Stock Bets (Bloomberg)
- Meet Mark Spitznagel, Ron Paul's L.A. hedge-fund guy (SPCR)
- U.S., Israel Pull Closer on Iran (WSJ)
- IBM’s Watson Gets Wall Street Job After ‘Jeopardy’ Win (Bloomberg)
- US Senate OKs Bill Aimed at China Subsidies (Reuters)
- Czech Banks May Need More Funds in Crisis (Bloomberg)
- Banker Bonus Limits Sought by EU Lawmakers (Bloomberg)
- Volcker Rule Needs Extensive Revisions Amid Feedback, SEC’s Gallagher Says (Bloomberg)
European equity indices are exhibiting signs of risk averse behaviour, with financials and basic materials performing particularly poorly. This follows weekend reports from ECB sources that the central bank does not believe voluntary participation in the Greek debt swap deal will be sufficient, and the CACs will have to be invoked. Markets are also reacting to the weekend press from Germany, claiming the Troika believe Greece will require a third bailout of around EUR 50bln by 2020, however these reports were denied by a German spokesman earlier in the session. European Services PMI data released earlier in the session fell below expectations, compounding the already cautious market behaviour. European Banks have parked a fresh record EUR 820bln with the ECB overnight, showing further evidence that the LTRO has loosened liquidity constrictions in the continent. Commodities are making losses ahead of the North American open following overnight news that China have made a downward revision to their GDP target for 2012. Spot gold is trading down around 0.9% and WTI and Brent crude futures have been making a loss for most of the session so far, however oil has made positive movements in recent trade. These negative movements in commodities are also weighing down upon the commodity-linked currencies, with AUD particularly making losses on the session.
- U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut (BBG) -Expect one whopper of a seasonal adjustment to compensate
- European Banks May Tap ECB for $629 Billion Cash (Bloomberg) - EURUSD surging as all ECB easing now priced in; Fed is next
- Madrid presses EU to ease deficit targets (FT)
- Greek Parliament Approves Debt Write-Down (WSJ)
- Mentor of Central Bankers Fischer Rues Complacency as Economy Accelerates (Bloomberg)
- Draghi Takes Tough Line on Austerity (WSJ)
- European Banks Hit by Losses (WSJ)
- Moody's: won't take ratings action on Japan on Friday (Reuters)
- Athens told to change spending and taxes (FT)