Lloyds

After trading higher in early European trade, equities pared back some of their gains as focus remained on the Greek austerity implementation details. In the forex market, EUR received support after ECB's Trichet said that the ECB is in a state of strong vigilance, which signals a possible change of rates, allied with news that German banks and the German government have agreed on a Greek debt plan. However, GBP/USD remained under pressure partly on the back of market talk that US names and a UK clearer were selling in the pair, with speculation of month-end demand from the Bundesbank assisting the rise EUR/GBP. Moving into the North American open, markets look ahead to key US economic data in the form of Initial/Continuing Jobless Claims and Chicago PMI figure, allied with GDP data from Canada. In fixed income, there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16 - Jun'18, with a purchase target of USD 4-5bln.

• Rice Supplies Tightening in China May Increase Imports, Bolster Inflation (Bloomberg)
• IMF warns US of global debt ‘shock’ (FT)
• China may widen yuan trading band soon-Bank of China (Reuters)
• Italy May Raise Trading Tax (WSJ)
• Deutsche Bank warns on voluntary rollover (FT)
• GOP wants Senate to cancel vacation (Washington Times)
• As QE2 ends, market debates Fed's next move (Reuters)
• Greek parliament expected to endorse second bill (Reuters)
• Appeals Court Says Health Law Is Constitutional (WSJ)

• China Auditor Warns of Risk on Local Debt (Reuters)
• Germany's Weber Slams Rescue Efforts (WSJ)
• Papandreou Faces Showdown on Austerity (Bloomberg)
• Obama to meet Senate leaders, keep debt talks alive (Reuters)
• Deutsche Bank, UniCredit May Have to Raise Additional Capital After Basel(Bloomberg)
• China to stimulate domestic demand: Wen (Reuters)
• Outflows a 'Major' Risk for Greek Banks (WSJ)
• Brussels eyes Tobin tax to aid EU coffers (FT)
• Threat of $100bn hit if US top rating lost (FT)
• Fed Seen Buying $25 Billion a Month in Treasuries After QE2 Comes to End (Bloomberg)

Everybody hates rating agencies. They missed Enron (balance sheet fraud), the sub-prime crisis (using models provided by banks) and sovereign debt crisis (concealed by foreign currency swaps). They have been wrong – so what? Stock market analysts are wrong all the time, and investors still read their worthless reports. And what would you expect from a stock recommendation if you knew it was paid for by the company the report is about? (People – you really need to switch off that Consumer News and Business Channel and put on your thinking caps.) Anyway. I came across this Weekly Market Outlook from Moody’s Analytics. They do something remarkable. They compare their own ratings with the rating implied by CDS (credit default swaps). Usually the rating agencies are a little bit behind the curve, so the CDS can give more of a “real-time” view of where the rating should be. Look at Bank of America and Merrill Lynch (now, of course, owned by BoA). Their implied rating is junk! JPMorgan Chase, Well Fargo and HSBC Finance Corp are not far behind in the BBB category.

• US banks to cut Treasuries use (FT)
• Obama Seeks to Win Back Wall Street Cash (NYT)
• Banks battle over US tax law (FT)
• In Greece, Some See a New Lehman (NYT)
• Treasury Strips Emerging as Wall Street Favorite as U.S. Recovery Falters (Bloomberg)
• Lagarde strengthens IMF bid with Indonesia backing (Reuters)
• Why Not Go For 5% Growth? (John Taylor)
• ‘Perfect Storm’ May Threaten Global Economy: Roubini (Bloomberg)
• Powerful quakes rattle New Zealand city, six injured (Reuters)
• Syrian forces take border town as inhabitants flee (Reuters)
• Flawed Titan of the Fed (Newsweek)

For investors and risk managers, the legal and sovereign risk illustrated by the Tropp v. the Corporation of Lloyd's litigation boggles the mind. If the Tropp petition is denied by the US Supreme Court, can any US individual, fund or fiduciary invest in Lloyd's with confidence?

Top-down equities underperformed credit once again as day after day we see the QE2 froth being blown off the weak recovery beer. HY credit is at its widest in six months, financials CDS are starting to crack finally, and sector relative richness in stocks is beginning to sync back to credit.

But for a bailout of sorts, one of the most villainous performances in cinematic history would never have made it to the silver screen. Producer Robert Evans was set upon getting Laurence Olivier to play the part of Dr. Christian Szell in the movie adaptation of William Goldman’s book, Marathon Man. However, because Olivier at the time was riddled with cancer, he was uninsurable so Paramount refused to use im. In desperation, Evans called his friends Merle Oberon and David Niven to arrange a meeting with the House of Lords (the upper body of the UK’s parliament). There, he urged them to put pressure on Lloyds of London to insure Britain’s greatest living actor. The ploy succeeded and a frail Olivier started working on the film. In the end, not only did he net an Oscar nomination for Best Supporting Actor, but his cancer also went into remission. Olivier lived on for another 13 years. The iconic scene in Marathon Man that, to this day has me squirming in my chair whenever I see it, involves Dr. Szell using particularly nasty dentistry techniques to torture poor Dustin Hoffman’s character, ‘Babe’, in order to establish whether the security of the stash of diamonds Szell has hidden has been compromised. Babe, however, genuinely has no idea what Szell is talking about. As Babe’s fear mounts, he tries giving Szell any and every answer to avoid the pain he is clearly about to face. He tells him ‘it’ is safe. He tells him ‘it’ is in grave danger - anything he thinks Szell wants to hear - but, unfortunately, Babe’s pain is inevitable and it is dispensed without compassion or humanity. Such is the way of the world.

Two more indicators of a stalling global economy came out of China and the UK overnight, where manufacturing Purchasing Managers Indices posted substantial drops. Growth in the Chinese manufacturing sector slowed to a 10-month low in May, with both production and new orders gains moderating during the month, according to the final HSBC Purchasing Managers Index released Wednesday. The final May reading stood at 51.6, up from the May flash reading
of 51.1 reading but down from 51.8 in both April and March. Total new orders rose for the tenth consecutive month but at a slower pace than in April, while new export orders contracted for the first time in three months, though the rate of contraction was only marginal. This caused the pace of output growth to slow to a ten-month low, HSBC said. However, the pace of new employment rose at the fastest rate in five months. The rise in input price growth eased to a nine-month low in May. Yet the modest Chinese slowdown was nothing compared to the now confirmed stagflation gripping the UK, where Manufacturing PMI fell from 54.4 to 52.1 in May, weaker than consensus expectations (54.1) and its lowest level since September 2009. As Goldman reports,  consumer-facing manufacturers registered the sharpest contraction in output on the month. Some of this is attributable to temporary effects; some may be indicative of more sustained pressure on household incomes. Nowhere was the impact of this more evident than on the GBPUSD pair which took a nearly 100 pip overnight tumble, and has weighed on European markets overnight. Other global PMI readings also confirmed that the world economic is approaching stall speed, which should certainly be favorable for global bizarro stocks.

Gold has breached the $1500 level and reached new record nominal highs at $1,505.65/oz. Since yesterday it has gradually risen in all currencies and is approaching record nominal highs in all major currencies. $2,400/oz is the inflation adjusted (CPI) high of 1980 and given the very uncertain macroeconomic climate of today and concerns about the dollar and all major currencies, arguably even more uncertain than the 1970’s, the real high remains a very viable target. It is important to remember that while gold has risen some 6 times in 11 years ($250 to $1500) it rose by 24 times in 9 years in the 1970’s – from 1971 to January 1980 ($35 to $850). This puts the recent reasonably gradual increase in gold prices in perspective and should give gold bears and top callers pause for thought.

• Goldman lowers Q1 GDP, sees rest of year outlook as "messy: (Zero Hedge)
• GOP Aim: Cut $4 Trillion (WSJ)
• Trichet Seen Burying Ailing Nations With Interest-Rate Rise (BusinessWeek)
• ECB criticised over expected rate rise (FT)
• Important for China arbs: BOC HK Cuts Yuan Deposit Interest Rate (Bloomberg)
• In Tripoli, Growing Murmurs Of Dissent (WSJ)
• Inflation Surge May Cause Hike in Won, Rates (Korea JoongAng)
• Us Foreign Policy "Shocker": U.S. Shifts to Seek Removal of Yemen’s Leader, an Ally (NYT)
• Next Problem for Oil: Nigerian Elections (WSJ)
• Geithner Says Strict Policy on Currency Hurts China (NYT)
• China closes half the nation's dairies (Telegraph)
• Ireland to Push for Better Bailout Terms (WSJ)

Just your typical London protest. The Telegraph has recorded the attempted break and entry into a bank, which however proves too much for scattered "anarchists" courtesy of reinforced glass. The same can not be said for the Ritz hotel unfortunately.

While most of the focus continues to be on North Africa and the Middle East, the not inconsequential matters of the European sovereign debt crisis and the US’ dire fiscal situation continue to bubble away beneath the radar. Greek and Portuguese bonds have taken another hammering this morning. The Greek 10-Year yield has surged to 12.44% (TD: make that 12.764%), up another 35 basis points today alone, and Portuguese 10-Year has surged to 7.58% (TD: make that 7.66%), another 22 basis points. The recent “bailouts” and failure to properly restructure the debt shows that the sovereign debt crisis is far from contained. The US recorded its biggest monthly deficit in history yesterday with a $223 billion deficit for February alone, the 29th straight month of deficits – a modern record. This does not bode well for the beleaguered dollar and could result in further sharp falls in the value of the dollar. Lloyds TSB's Assetwatch survey finds gold and silver beat all other assets in 2010 due to investors looking to “protect the value of their investments amid the renewed uncertainty over the global economic outlook including the debt concerns in the eurozone and rising inflation.”

Gold and silver have given up a small bit of yesterday’s strong gains in all currencies (especially the euro – see chart below) but are up more than 1% and 3% respectively on the week. Asian equity indices were higher overnight and are higher for the week, except for India where there are growing concerns about surging inflation and interest rates. European indices are higher today and most are up by some 1.5% to 2% on the week – as are US indices...Gold’s price surge yesterday was likely a combination of short covering, the very bullish demand figures out of China, accommodative monetary policy sounds from Trichet and Bernanke. The geopolitical situation in Egypt and the Middle East likely also led to buying.

Just out - BP is being sued by the US government. The suit is originating in a New Orleans court. Update: other firms sued include Transocean, Anadarko, Moex, and BP insurer Lloyd's. From Reuters: US seeks unspecified damages under clean water act, oil pollution act. US asks judge to hold companies liable without limits. Halliburton, Cameron International not included in Obama administration complaint