Nomura

The S&P 500 has made little headway for two years running and as Gluskin Sheff's David Rosenberg points out, it first crossed 1380 on July 1, 1999 and since then has run around like a headless chicken (while other asset classes have not). Meanwhile, Europe's bottomless pit of debt deleveraging (which is as much a problem for the US and China but less ion focus for now) makes the entire discourse of some new and aggressive intervention by the ECB even more ridiculous (and all so deja vu); and the US is facing up to an entirely topless earnings season as revenues are coming in at only 1.2% above last year as it appears Q2 EPS is on track for a 0.2% YoY dip - with guidance falling fast. But apart from all that, Rosie sees the only source of real buying support for the stock market is the stranded short-seller forced to cover in the face of CB-jawboning as there is little sign of long-term believers stepping into the void.

• Bundesbank’s Weidmann Says ECB Shouldn’t Overstep Mandate (Bloomberg)
• Hollande and Monti Vow to Protect Euro (FT) - be begging Germany to death
• Monti Calls French, Finns to Action as Italy Yields Rises (Bloomberg)
• not working though: Banking license for bailout fund is wrong: German Economy Minister (Reuters)
• Switzerland is ‘New China’ in Currencies (FT)
• Regulator Says no to Obama Mortgage Write-Down Plan (Reuters) - tough: there will be socialism
• Gauging the Triggers to Fed Action (WSJ)
• When domestic monetization is not enough: Azumi Spurns Calls for Bank of Japan to Buy Foreign Bonds to Curb Yen (NYT)
• Indonesia’s July Inflation Accelerates on Higher Food Prices (Bloomberg) - remember: the Deep Fried black swan
• China Manufacturing Teeters Close to Contraction (Bloomberg)
• Spain Introduces Regional Debt Ceilings to Achieve Budget Goals (Bloomberg) - yes, they said "budget goals"

The jawboning party has come and gone, leading to a nearly 100 bps move tighter in Spanish spreads (from all time records of 7.6% just three days earlier), and now the hangover is here. Or, as Bloomberg puts it, Draghi is now in a box. "European Central Bank President Mario Draghi has boxed himself into a corner. Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today." If this seems like a Catch 22 in which the ECB loses regardless of the outcome, that's because it is. Luckily, no matter which path Draghi chooses, the time for talk is over, and now he has to act. Because with every day the ECB does nothing, the more credibility it loses.

• Bundesbank Maintains Opposition to ECB Bond Buying (WSJ)
• Greek Budget Talks Stumble as EU Urges Samaras to Deliver (Bloomberg)
• Fortified by euro, Finns take bailouts on the chin (Reuters)
• China Job Market for Graduates Shows Stress on Slowdown (Bloomberg)
• China Exports Fade as Inflation Eludes Targets: Cutting Research (Bloomberg)
• Japan Falters as Ito Calls for Euro Buys to Rein in Yen: Economy (Bloomberg)
• Government weighs social insurance reforms (China Daily)
• Colombia’s Split Central Bank to Weigh First Rate Cut Since 2010 (Bloomberg)

• Draghi Says ECB To Do Whatever Needed As Yields Threaten Europe (Bloomberg)
• Spain not mulling seeking further EU help (Reuters)... and it won't need a Bank bailout either. Oh wait
• Weak lending adds pressure for ECB action (Reuters)
• Sweden's economy still resilient to eurozone woes (Reuters)
• Bo Xilai’s Wife, Zhang Xiaojun, Prosecuted for Homicide (Xinhua)
• China’s Changsha City Unveils $130 Billion Investment Plan (Bloomberg)
• Foreclosure Filings Increase in 60% of Large U.S. Cities (Bloomberg)
• Free ECB’s hand to aid states, says minister (FT)
• Hungarian Premier Says Aid Deal Not Near (WSJ)
• Nomura Chief Resigns Over Insider Trading Scandal (NYT)

"The global growth picture is, as per our long-term contention, weak and deteriorating, pretty much everywhere – in the US, in the eurozone and in the emerging markets/BRICs.... We in the Global Macro Strategy team still think the market consensus is far too optimistic on policy expectations both in terms of the likelihood of seeing more (timely) fiscal and/or monetary policy assistance (globally), and in terms of any meaningful and/or lasting success of any such policy moves. In particular, we think that the period August through to November (inclusive) represents a major global policy and political vacuum. Based on the reasons set out earlier and also covered in my two prior notes, over the August to November period I am looking for the S&P500 to trade off down from around 1400 to 1100/1000 – in other words, I expect over the next four months to see global equity markets fall by 20% to 25% from current levels and to trade at or below the lows of 2011! US equity markets, along with parts of the EM spectrum, will I think underperform eurozone equity markets, where already very little hope resides. For iTraxx crossover, this equates to a spread wide for 2012 of – in my view – 800/1000bp.... And of course I still see a very clear path to 800 on the S&P500 at some point in 2013/2014, driven by market revulsion against pump-priming money printing central bankers, but this discussion is also for nearer the time."

Too Big Leads To Destruction of the Rule of Law

That Lieborgate is about to spill over and take down many more banks is well known: as previously reported that the world's biggest bank Deutsche Bank, has become a rat for the Liebor prosecution having turned sides. The reason: "Under the leniency programs of the EU, companies may get total immunity from fines or a reduction of fines which the anti-trust authorities would have otherwise imposed on them if they hand over evidence on anti-competitive agreements or those involved in a concerted practice." However, just like in the case of Barclays (with Diamond), JPM (with Bruno Iksil), UBS (with Kweku) and Goldman (with Fabrice Tourre), there always is a scapegoat. Today we find just who that scapegoat is. From Bloomberg: "Regulators are investigating the possible roles of Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank, the person said on condition of anonymity because the investigation is ongoing. The names of the banks and traders were reported earlier today by the Financial Times." Of course, as so very often happens, the link between the investigated firm, and the person in question no longer exists - after all what better brute way to tie up loose ends, than to fire the person in question at some point in the past: "Michael Golden, a spokesman for Deutsche Bank, confirmed that Bittar left the bank last year and declined to comment on the investigation." And since neither Bloomberg, nor the earlier FT article have any discussion of just where Mr. Bittar ended up, knowing quite well there is very likely a full-scale investigation forming into his Libor transgressions. The first place we went to, naturally, was LinkedIn, not because we expected to find his profile there: very few higher echelon bankers actually post their resumes on LinkedIn, but because we were fairly confident that the very useful function of seeing whose other profiles had been looked at in the context of even a "fake" Bittar, would provide us with clues. Sure enough that's precisely what happened.

Fed Chairman Bernanke should be impeached if he does not restore Fed surveillance over primary dealers immediately.

Between 'Twist+', his belief that Germany will 'blink' leaving any eurozone breakup/exit unlikely this year, and confidence that the US (Fed) and China (fiscal and monetary) will attempt once again to pump things up, Bob Janjuah (of Nomura) expect to see a risk-on phase that lifts the S&P - possibly climbing the wall of worry back up to the 1400s by late July or early August. His stop-loss (which would be very bearish in his view) is a weekly close under 1267 for the S&P. And then? He would look to position for an extremely bearish risk-off phase over late August through to November or December. The drivers of this extremely bearish expected phase are not new: overly bullish positioning and sentiment; weak global growth, not just in the eurozone but also in the US and the BRICs; the next leg of crisis in the ongoing eurozone debacle in my view; and of course the looming US fiscal crisis, which in Bob's view is not even ‘slightly’ priced into markets, but where he feels the probability of a crisis is close to 75%. His forecast for this extremely bearish risk-off phase over late Q3 and Q4 is that the S&P 500 trades below the low of last year, perhaps as low as 1000. Into 2013-14, I am still concerned that my long-standing 800 S&P500 target will be hit, but it will not be a straight line - QE3 will provide a short but sharp risk-on relief to markets. But as the bearded bear forecasts, once its ‘benefits’ subside (in weeks) it will be the failure of this QE3 to ‘fix’ things that, I fear, will open the door to 800 S&P.

Turkey raised its reported gold holdings by another 2% in the month of May. Turkey’s gold holding rose by 5.7 tonnes in May to total 245 tonnes, International Monetary Fund data showed, making it the latest in a string of countries to increase gold bullion reserves this year. Turkey has allowed banks to hold more of their reserves in gold to provide extra liquidity. The central bank this month raised the proportion of reserve requirements that can be held in foreign exchange to 50 percent from 45 percent, while the limit for gold was increased to 25 percent from 20 percent. The changes will add as much as $2.2 billion to gold reserves. Gold accounts for about 9.1 percent of Russia’s total reserves, 5.1 percent of Ukraine’s and 15 percent of Kazakhstan’s, according to the World Gold Council. That compares with more than 70 percent for the U.S. and Germany, the biggest bullion holders, according to Bloomberg figures. Kazakhstan plans to raise the amount of gold it holds as part of its reserves to 20 percent, Bisengaly Tadzhiyakov, deputy chairman of the country’s central bank, said earlier this month.

Here we come:

• MOODY'S CUTS 4 FIRMS BY 1 NOTCH
• MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
• MOODY'S CUTS 1 FIRM BY 3 NOTCHES
• MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
• MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
• MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
• MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
• BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.

Even as Moody is now about a week late on its Spanish bank downgrade where the banks are rated higher than the sovereign (which obviously is kept in check to prevent yields on bonds from soaring even more), here comes the next wholesale bank downgrade:

• Moody's expected to announce ratings downgrade for UK banks this evening - Sky Sources
• Exclusive: Big news - I'm told Moody's will announce downgrades of some of world's biggest banks, incl in UK, after US mkts close tonight. - Sky's Mark Kleinman

Looks like that fabricated 2 notch Margin Stanley downgrade (because 3 notches just won't do - those 4 months of Gorman-led "negotiations" made that painfully clear) is about to strike. The real question is: What Would Egan Who Do?

• Greece is Relevant: Central Banks Warn Greek-Led Euro Stress Threatens World (Bloomberg)
• Greece is very Relevant: World Economies Prepare for Panic After Greek Polls (Reuters)
• ECB's Draghi flags euro risks, spurs rate cut talk (Reuters)
• And as usual, beggars can be choosers... Hollande Urges Common Euro Debt, Greater ECB Role (Reuters)
• Wait and flee - Electoral uncertainty sends the economy into suspended animation (Economist)
• The EU Smiled While Spain’s Banks Cooked the Books (Bloomberg)
• Osborne’s £100bn Plan for UK Economy (FT)
• Two Cheers for Britain’s Bank Reform Plans: Martin Wolf (FT)
• BOJ Holds Policy Ahead of Greek Vote with Eye on Global Markets (Bloomberg)
• China Hits Back at U.S. Criticisms at WTO (Reuters)

• J.P. Morgan Knew of Risks: Warning Flags Raised Two Years Ago About CIO (WSJ)
• Cyprus Poised to Seek Bailout within Days (FT)
• U.S. Exempts India, South Korea From Iran Oil Sanctions (Bloomberg) - so those countries who need Iran crude?
• Barroso Pushes EU Banking Union (FT)
• Hollande Set for Poll Victory (FT)
• Fed Says U.S. Wealth Fell 38.8% in 2007-2010 on Housing (Bloomberg)
• Fed Officials Amplify Concerns over Europe (Reuters)
• Fed's Lockhart Says Lower Yields Bolster Case for No New Action (Bloomberg)