Italy

There was quite a bit of dispersion among European equity indices today (with Italy worst and Spain actually holding up - albeit down 1.4%) but the European equivalent of the S&P 500 (the BE500) dropped 2% - its biggest single-day plunge in 10 months. Credit markets - just as in the US - have been warning of a disconnect for two weeks and today's equity dive has more than halved that divergence. European sovereigns are wider by 10-15bps. Europe's VIX is over 2 vols higher at 18.4% (its highest in a month). European financial stocks dropped by their most in 3 months and European high-yield credit worsened by its most in 3 months. A late-day ramp made things alook a little better than they had earlier with a 100 pip rally in EURUSD off earlier lows seemingly providing some help.

• Apple Bonds Stick Buyers With $280.6 Million Loss as Rates Climb (BBG)
• Iceland Freezes EU Plans as New Government Shuns Euro Crisis (BBG)
• "Transparent Fed" - Ben Bernanke meets privately with Darrell Issa (Politico)
• Bank of Japan vows market steps to curb bond turbulence (Reuters) holds policy (FT)
• Stockholm riots spread in third night of unrest (FT)
• Dudley Says Decision on Taper Will Require 3-4 Months (BBG)
• Senate panel passes immigration bill; Obama praises move (Reuters)
• Italy to outline youth jobs plan as government struggles (Reuters)
• Apple CEO Tim Cook, Lawmakers Square Off Over Taxes (WSJ)
• Google Joins Apple Avoiding Taxes With Stateless Income (BBG)
• Sony Board Discussing Loeb’s Entertainment IPO Proposal (BBG)
• Vote Strengthens Dimon's Grip (WSJ), Dimon performance well choreographed (FT)

Margaret Thatcher might have been the perfect housewife that got Britain off to a good start or at least that’s what she would have liked us all to have believed when she was in power. The prefect Grantham housewife, so simple: never spend more than you earn, the defender of good management of budgetary finances. But that was all part of the ruse, wasn’t it?

The theory of Petrodollar Warfare can be attributed to US analyst and author William R Clarke, and his 2005 book of that title which interpreted the US-UK decision to invade Iraq in 2003. He called this an "oil currency war", but the concept of the petrodollar system and petrodollar recyling dates back to the eve of the first Oil Shock in 1973-1974. The role of the petrodollar system as a driving force of US foreign policy is explained by analysts and historians as basic to maintaining the dollar's status as the world's dominant reserve currency - and the currency in which oil is priced. Today however, with the major and massive changes of oil resource availability revealed by the shale energy revolution, rising global oil production capabilities, stagnating oil demand, and rising renewable energy supplies in all major developed countries, and the constantly declining role of oil in the economy, the Petrodollar System's days are surely numbered

The Arctic is expected to become more important in the coming decades as climate change makes natural resources and transport routes more accessible. Satellite data collected since 1979 shows that both the thickness of the ice in the Arctic and range of sea ice have decreased substantially, especially during the summer months. The melting of the ice facilitates natural resource exploration in the high north. U.S. Geological Survey estimates from 2008 suggest that 13 percent of the world's undiscovered oil and 30 percent of undiscovered natural gas reserves are located in the Arctic Circle. Reflecting the growing interest in the region, the Arctic Council granted six new countries (China, India, Italy, Japan, South Korea and Singapore) observer status during a May 15 ministerial meeting in Kiruna, Sweden.

It will come as no surprise to ZH readers that the topic of youth unemployment is critical in Europe but as Der Speigel reports, while the German government's efforts remain largely symbolic, Southern European leaders pander to older voters by defending the status quo and are failing in their fight against the potential for social unrest. One graduate noted, "None of my friends believes that we have a future or will be able to live a normal life," as a lost generation is taking shape in Europe. And European governments seem clueless; instead of launching effective education and training programs to prepare Southern European youth for a professional life after the crisis, the Continent's political elites preferred to wage old ideological battles. In this way, Europe wasted valuable time, at least until governments were shaken early this month by news of a very worrisome record: Unemployment among 15- to 24-year-olds has climbed above 60 percent in Greece. Suddenly Europe is scrambling to address the problem making it an 'obseesion'. There are strong words coming out of Europe's capitals today, but they have not been followed by any action to date.

In the absence of major data releases, the focal point of the week for markets becomes the release of the minutes of the May FOMC meeting. The most notable change in the statement was the inclusion of the new language: “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” In the May meeting minutes, the market will be looking for any clarification of the motivation behind this change as well as any evidence that the committee members may be becoming less comfortable with the unemployment rate threshold or more specific about tapering timelines and dates.

A quiet day unfolding with just Chicago Fed permadove on the wires today at 1pm, following some early pre-Japan market fireworks in the USDJPY and the silver complex, where a cascade of USDJPY margin calls, sent silver to its lowest in years as someone got carted out feet first following a forced liquidation. This however did not stop the Friday ramp higher in the USDJPY from sending the Nikkei225, in a delayed response, to a level surpassing the Dow Jones Industrial Average for the first time in years. Quiet, however, may be just how the traders at 72 Cummings Point Road like it just in case they can hear the paddy wagons approach, following news that things between the government and SAC Capital are turning from bad to worse and that Stevie Cohen, responsible for up to 10-15% of daily NYSE volume, may be testifying before a grand jury soon. The news itself sent S&P futures briefly lower when it hit last night, showing just how influential the CT hedge fund is for overall market liquidity in a world in which the bulk of market "volume" is algos collecting liquidity rebates and churning liquid stocks back and forth to one another.

With unemployment rates running at all-time record highs across the peripheral European nations and the rise of nationalist (some might say extremist) parties, it remains somewhat surprising that there has not been greater social unrest (yet). The people of Europe are caught in a hinterland of knowing what is best in the long-run but fearing the short-term band-aid ripping pain of exiting the political farce known as the European Union. But some have found a way... There is another way to 'exit' on personal terms from the austerity and pain induced by a centrally planned overlord. Immigration to Germany from Italy, Spain, Greece, and Portugal has 'never' been higher... leaving us wondering - at what point does the free and open exchange of everything in the union gets its share of 'protectionism' from an over-stuffed Germany freezing the import of labor? So it seems that not only is the money (deposits) finding a new home but the people too are moving to where the money is..

It was less than a month ago that the new Italian government of the pseudotechnocrat Letta, of Bilderberg 2012 and Aspen Institute fame, was voted in by a majority of the PD and the PDL parties (the latter agreeing so Berlusconi would get an extension of his much needed political immunity from assorted prison sentences). It may not last too long. As Reuters reports, it took just 20 days for Letta's approval rating to plunge by 25%, dropping from 43% at the start of the month to 34%, according to an SWG institute poll. It would appear the Italian people (unlike their Japanese peers who at least according to government-controlled media data could not be happier with PM Abe, supposedly because of the bubblelicious 50% rise in the Nikkei225 year to date, even though under 20% are actually invested in the stock market making one wonder just how credible polling, and all other data in Japan actually is) don't have Mrs. Watanabe's childish fascination wth soaring stock bubbles, sexy bonds, mini skirts and 2% inflation bras, and instead demand real economic results. Which also means the protests are back.

Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain's bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year). With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut 'non-template' may indeed become the key template.

Read 'Em and Weep

Since 2009, when Hypo Alpe Adria was 'nationalized', the Austrian government has dumped more than EUR2 billion into the troubled bank. It remains on life-support but this time the government-proposed 'aid' being offered is running into a wall. The rest of Austria's banks (as creditors as well as forced levy-payers from other bailouts) dismiss the government's plan for a "bad-bank" model a la Ireland adding that they "will not allow themselves to be put under pressure by politicians." Reuters notes that the 'bad-bank' plan is up against a deadline at the end of May from the European Commission, and among others Unicredit Austria is clear on its role, "decidedly rule out a commitment on our part." The increasing tension between Vienna and Brussels is evident as a quick sale of the bank will lead to a EUR5-6 billion loss for taxpayers (hurting the government's budget plans) but it seems the rest of Austria's banks are unwilling to throw more good money after bad, "if we go this way, some persuasion will be needed". Is it time for more non-templates?

It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."

Bill Gross, who manages the world’s largest bond fund, has indicated that the 30+ year old super cycle bull market in bonds has ended. This is very bad news for the markets.