Finds the answer is: "very"
The last few days have seen Western anti-Russian rhetoric and red lines escalate dramatically as the military and economic issues come to light in any push back against Putin's pressure. From NatGas export fallacies to "boomerang"-ing sanctions, the west seems stuck (for now).. which brings up the question - why is China and Russia making huge investments in commodity-miners? Russia's largest gold miner Polyus Gold is considering a complete onshoring of its activities and China is buying a huge Peruvian copper mine from Glencore. The outcome would appear to enable both firms to do away with USD but not having to buy this resource in the market... just mine it?
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
So from MF Global's "vaporized" commingled client assets to Basel's "evaporated" toughened derivatives rules, the banks are indeed "very happy." And now back to perpetuation the illusion that the system is stable.
The main overnight event, which we commented on previously, was China's trade data which was a disaster. March numbers turned out to be well below market consensus with exports falling 6.6% YoY (vs +4.8% expected) and imports falling 11.3% YoY (vs +3.9% expected). The underperformance of imports caused the trade balance to spike to $7.7bn (vs -$23bn in Feb). Pricing on the Greek 5-year syndicated bond is due later today, with the final size of the bond boosted to EUR 3bln from EUR 2.5bln as order books exceed EUR 20bln (equating to a rough bid/cover ratio of over 6) as the final yield is set at 4.75% (well below the 5.3% finance ministry target and well above our "the world is a bunch of idiots managing other people's money" 3% target). Ireland sold EUR 1bln in 10y bonds, marking the third successful return to the bond market since the bailout. Also of note, this morning saw the release of lower than expected French CPI data, underpinning fears of potential deflation in the Eurozone.
Remember CDOs? Murky, illiquid investments, backed by bulge-bracket firms that offered lots of yield over similar-rated corporates - just don't ask questions. As SCMP's Shirley Yam reports, China's so-called "trust" products, promise high returns with big-name backing, but a scheme touted at Ping An Bank highlights just how murky the world of mainland investment offerings is. After reading this, we suspect, that last trace of faith that the PBOC has the Chinese shadow banking system under control (and a growth renaissance is due any moment) will be eviscerated.
These are indeed scary times for the corrupt kleptocrats of China.
The most common pushback from any China bull, industrial commodity bull, US equity market bull, or in fact any risk market in general "bull" is "won't the authorities just pull the trigger? Won't they just stimulate?" As UBS Commodities group notes, the debate is most advanced for China and for industrial commodities, where the weakness in the economy, and the sharp commodity price falls of recent weeks, has consensus looking for a stimulus driven bounce. UBS does not think so - the authorities in China and the US have become increasingly focused on structural issues - which, simply put, means they are less willing to act than before. It appears last night's mini (railway-focused) stimulus supports the expectations of no "bazooka".
A week ago we wrote: 'While it has been public for a long time that i) JPM is eager to sell its physical commodities business and ii) the most likely buyer was little known Swiss-based Mercuria, there was nothing definitive released by JPM. Until moments ago, when Jamie Dimon formally announced that JPM is officially parting ways with the physical commodities business. But while contrary to previous expectations, following the sale JPM will still provide commercial gold vaulting operations around the world, it almost certainly means farewell to Blythe Masters." Sure enough:
JP MORGAN COMMODITY CHIEF BLYTHE MASTERS LEAVING, WSJ SAYS
Farewell Blythe: we hope your replacement will be just as skilled in keeping the price of physical gold affordable for those of us who keep BTFD every single day.
One way to understand why the global financial meltdown occurred in 2008 and not in 2012 is all the oxygen in the room had been consumed. In the U.S. housing market, there was nobody left to buy an overpriced house with a no-document liar loan because everyone who was qualified to buy a McMansion in the middle of nowhere had already bought three and everyone who wasn't qualified had purchased a McMansion to flip with a liar loan. Once the pool of credulous buyers evaporated, the dominoes fell, eventually circling the globe. Right now China is at the top of the S-Curve, and the problems of stagnation are still ahead.
What has worked for much of the last two years, and judging by today's epic squeeze in stocks, is still working... is to bet against the most extreme positioning. So, on that basis, the following rather contrarian pairs trade should be ripe for major convergence...
Warren Buffett once noted, Gold doesn’t do anything “but look at you.” However, the fact of the matter is that Gold has dramatically outperformed the stock market for the better part of 40 years.
Back in October, when European inflation shocked market observers after it tumbled to a then (revised)low of 0.7%, the reaction by the ECB was to shock everyone and lower rates by 25 bps - a completely unexpected move. Earlier today, Europe shocked everyone once again after it reported that annual Eurozone consumer inflation in March tumbled from 0.7% to a paltry 0.5%, the lowest level since November 2009, below already the depressingly low 0.6% forecast, driven primarily by energy costs which tumbled 2.1% courtesy of Japan continuing to export deflation (where are energy costs soaring? Look at the price of natgas in Japan for a hint).
Let the fun begin.