OPEC

On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio;  the renaissance of gold in finance;  "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.

Anticipating another leg-down in commodities (and mining stocks) before sufficient stress emerges in markets to force a decisive policy response - which will create an attractive buying opportunity - UBS joins our ranks of the anti-reflexive NEW QE front-running 'small-crowd'. Laying out five clear signals that keep them cautious: Equity valuations remain well above the October 2011 lows; Positioning is short in base metals and less long in oil and gold – improving this contrarian signal; China’s policy stance is not sufficiently stimulative to trigger restocking, and we see structural declines in commodity intensity there; and, Europe and emerging markets are in the early stages of destocking, with no stocking due in the US; UBS believes that investors will buy gold and gold equities early this cycle - correctly suggesting that it is right to move just ahead of the broader investor community, and buy gold and gold equities now. Clearly, buying gold early into a downturn carries greater risks and will be volatile – consequently, they advise investors wishing to go long gold and gold equities to hold a short or underweight copper and copper equity position against it. Interestingly within industrial commodities, they also like being long oil and short copper on a 3-year view.

Governments Don’t Manipulate the Price of Gold … Do They?

European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.

Given Friday’s announcements and subsequent rally, the relative dearth of weekend snippets and analyses seems a little surprising.

European equities are seen modestly higher at the midpoint of the European session, with the utilities and financials sectors leading the way higher. As such, the Bund is seen lower by around 40 ticks at the North American crossover. The closely-watched Spanish 10-yr government bond yield is seen lower on the day, trading at 6.85% last, as such, the spread between the peripheral 10-yr yields and their German counterpart has been seen tighter throughout the European morning. Issuance of 6-month bills from the Italian treasury passed by smoothly, selling EUR 9bln with a higher yield, but not an increase comparable with yesterday’s auction from the Spanish treasury. The decent selling from Italy today may pave the way for tomorrow’s issuance of 5- and 10-year bonds, which will be closely watched across the asset classes. Data of note has come from Germany, with the state CPIs coming in slightly higher than the previous readings, proving supportive for the expectation of national CPI to come in flat at 0.0% over the last month.

All you can read.

The announcement by the UK Treasury and BoE to take co-ordinated steps to boost credit and with the central bank re-activating its emergency liquidity facility has resulted in a sharp move higher in UK fixed income futures. GBP swaps are now pricing in a cut of 25bps in the base rate by the end of this year and following on from Goldman Sachs, analysts at Barclays and BNP Paribas are now calling for an increase in QE next month. The new measures have seen the likes of Lloyds Banking Group (+4.3%) and RBS (+7.0%) outperform the more moderate gains observed in their European counterparts. Meanwhile in Europe the focus remains on the possibility of co-ordinated action from the major central banks. However, it would seem more realistic that any new measures will likely come after the Greek election results are known and once ministers have conducted their G20 meetings. Given that there is an EU level conference call this afternoon scheduled for 1500BST the likelihood of rumours seem high but as the wires have indicated already these conversations are purely based upon co-ordination ahead of the meeting which is usual practice. The yields in Spain and Italy have been a lot calmer so far with the 10yr in Spain at 6.88%, off the uncomfortable test of 7% seen yesterday.

• 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)

All you need to know.

Equity markets have traded with moderate volatility so far today as peripheral news concerning Spain and Italy continues to be keenly watched by market participants. Overnight the Italian PM Mario Monti said he does not see any need for a bailout either now or in the future with the Italian and Spanish 10yr yields seen off their highs yesterday, lower by 9.8bps and 7.6bps respectively. On a sector breakdown tobacco stocks saw some slight support after US firm Philip Morris announced a new USD 18bln 3yr share buyback program, however, industrials have lagged as a whole following a profit warning from Swedish firm SKF. In terms of fixed income, the bund has continued yesterday's slide with the Bundesbank coming to market with a July 2022 tap. In initial reaction to the results, bunds saw a 20 tick spike higher, off session lows, following what was perceived to have been a "smooth" auction despite some concerns about the eventual credit worthiness of Germany given the recent bailout of the peripheral nations. Meanwhile, the long end of the EUR curve steepened in early trade as reports from the Danish government who have agreed to change the discount rate that pension funds estimate liabilities being noted. In FX, EUR/USD trades higher into the N.American cross-over with an Asian sovereign name being a touted buyer this morning. In other news the AUD also caught a bid shortly after comments from the German central bank who said that they are considering buying the antipodean currency.

All you can read.

• 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)

After opening over 1% higher, S&P 500 e-mini futures plunged to close at their lows of the day (down 1.5%) amid the widest range day in six months. Volume was heavy after ES touched up to its 200DMA at the Sunday night open slide along with Europe's weakness, stabilized at Thursday's closing VWAP around the European close, only to dump in the afternoon (as financials, materials, and AAPL led the plunge). The major US financials lost 5-7% from their opening ticks of the day with Citi, BofA, and MS the worst performers (as AAPL ended -1.5% after being up over 1%). Gold back at $1600 (and Silver) rallied 0.4% (diverging from recent sync with stocks) even as USD strength kicked in - ending the day +0.17% (from a -0.85% low in early European trading). Oil meanwhile ended down over 3% (ending below $81.50) from up 3% in early trading on OPEC chatter and global growth concerns (and we assume correlated risk liquidation). Credit underperformed - leading stocks once again - with IG back to last Wednesday's wides (as cheap macro overlays were laid out). Stocks and HYG (the high-yield bond ETF) plunged into the close to catch up to HY credit. Treasury yields dropped, along with stocks, down 2-5bps from Friday's close, as the 7Y segment outperformed (but were down 11-13bps from their opening high yields). VIX saw a huge range day of around 3.6 vols as we closed back above 23.5% and implied correlation soared almost 6pts to 74.5 (biggest pop in 7.5 months). Realized cross-asset class correlation rose significantly and remained extremely high into the close implying very systemic market movement - which given the weakness after-hours seems worrisome.

European equities in both the futures and the cash markets are making significant gains after a mornings’ trade, with financials, particularly in the periphery, leading the way higher following the weekend reports of the Eurogroup confirming aid for the Spanish banking sector. With data remaining light throughout the day, its likely investors will remain focused on the macro-picture, seeing some relief as the Spanish financials look to be recapitalized. At the open, risk sentiment was clear, with EUR/USD opening in the mid-1.2600’s, and peripheral government bond yield spreads against the German bund significantly tighter. In the past few hours, these positions have unwound somewhat, with EUR/USD breaking comfortably back below 1.2600 and the Spanish 10-yr yield spread moving through unchanged and on a widening trend across the last hour or so against its German counterpart, and the yield failing to break below the 6% mark.