Market Turbulence As Global Economies Falter: The European debt-crisis, the derailing of Chinese economic growth and an underemployed United States all point toward a “global crunch”.
As we look forward to tomorrow's scorched-earth policy-fest from Draghi-et-al., Jefferies' David Zervos, in his typically understated manner, notes "I love the smell of napalm in the morning. We are back in the kill zone - Apocalypse Europe." There will be no more strategizing, no more war games, no more speeches imploring the politicians to act. This is the real deal - a full scale European led global financial crisis that requires immediate and aggressive response from the only entities with the authority to act in the world financial "theatre". We should all keep in mind that the Europeans have not been able to generate an effective response to their debt/deflation crisis as of yet, and of course it is having global consequences. This is why we are here again looking into the deflationary abyss. The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons.
Global gold demand continues to surprise to the upside – especially sizeable demand from the Middle East and China. Confirmation of continuing huge demand in China came yesterday with data showing that Hong Kong shipped 101,768 kilograms of gold to mainland China in April, up 62% on the month - marking the second-highest monthly exports ever. While demand from India continues it has fallen from the record levels recently but demand from other Asian countries is robust with reports of demand in Thailand, Vietnam, Malaysia and Indonesia. A new and potentially significant source of demand is that of demand from Iran. Iran imported a massive $1.2 billion worth of precious metals from Turkey in April alone. Turkish exports of gold, precious metals, pearls and coins to Iran rose to $1.2 billion in April from a tiny $7,500 a year earlier, according to figures released by the state statistics institute in Ankara yesterday. This is a massive increase in demand and suggests that there may be official involvement in the imports from the Central Bank of Iran.
The absence of the UK from today’s trade is particularly evident, with volumes remaining particularly light across all asset classes. Nonetheless, European equities are largely seen drifting higher with the exception of the DAX index, which is yet to move over into positive territory. News flow remains light with the highlight of the day so far being comments from the Troika, confirming that Portugal remains on track with its bailout program, and have confirmed that the country will receive the next EUR 4.1bln tranche in July. FX moves remain in a tight range, with EUR/USD looking relatively unchanged, with the USD index slightly weaker as the US comes to market. Looking ahead in the session, participants can look forward to US ISM New York and Factory Orders data as the next risk events of the session.
There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply. What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat. But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds.
While Turkey has assured the U.S. government it will cut purchases of oil from Iran by 20% this year, its total trade with the Islamic Republic increased 47% to $4.8 billion in the first quarter from a year earlier. Sanctions aimed at isolating Iran because of its nuclear program, combined with revolutions in the Middle East, have spurred a tripling in the region’s purchases of Turkish precious metals and jewels to $942 million in the first three months, from $282 million in the same period last year. This 30% increase in demand is contributing to gold remaining above $1,600/oz in what has all the hallmarks of another period of consolidation prior to higher prices. “Turkey is exporting massive quantities of gold to Iran and Arab Spring countries as citizens in those countries switch to portable wealth,” Mert Yildiz, chief economist for Turkey at Renaissance Capital, told Bloomberg on April 30. The increase in trade with Iran comes as sanctions make it harder for trading partners such as Turkey, India and China to pay in dollars and euros. Iran said in February it would accept payment in any local currency or gold. Reuters report today that Iran is accepting payments in yuan for some of the crude oil it supplies to China, the Iranian ambassador to the United Arab Emirates said on Tuesday. "Yes, that is correct," Mohammed Reza Fayyaz told Reuters when asked to comment on an earlier report in The Financial Times.
According to Reuters, Italy is going to propose to the European Union that they should exempt borrowing used to pay their commercial obligations from their calculation of public debt. Monti, the article states, is also going to propose exempting the counting of public debt used for investments. You may be sure that Italy’s $211 billion of derivatives will now be entitled an “investment.” Now all of this will lower Italy’s debt to GDP ratio which is the real reason for these proposals and so even worse falsified numbers can be handed out to the Press in hopes that money will be invested in Italy based upon not just inaccurate but offically countenanced manufactured data. This way not only the debt to GDP ratio can be falsified but the growth numbers, the fiscal targets and a raft of other numbers that will no longer be real but just a systemic figment of Europe’s imagination.
Today the ECB is expected to do absolutely nothing, although many have their hopes up that at the post announcement press conference Mario Draghi may possibly hint at some more easing (with what collateral we wonder, and with what Germany) to bring some spring into the step of a continent that has milked $1.3 trillion in 3 year repo/discount window borrowings for all their worth and then some. And instead if the ECB cuts its rate below the psychological barrier of 1% today, or at any time over the next several months, it will make Hugh Hendry once again that much richer. Recall as of November: "He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year." Below is a full rundown of what to expect, and not to expected, from the former Goldmanite, now head of the central bank for the world's biggest economic region.
For those who have not been following the Bo Xilai drama unfolding with furious pace over the past month, we have some advice: you should be, as the fate of China will be defined by who is left standing at the end, which in turn will have momentous consequences for the entire Developed World. But where does one start? Luckily, Grant Williams' latest TTMYGH has one simple plot line: presenting the past, present and future of the epic power struggle between Wen Jiabao and Bo Xilai which has already claimed at least on death, and within China's top power echelon, the Politburo Standing Committee. "This week’s edition of Things That Make You Go Hmmm..... is a little different to those that have come before it in that it is more of a murder mystery/whodunnit and focuses on the machinations behind a very significant power struggle currently raging in the shadowy world of China’s ruling party. For those amongst you who like tales of drunken British businessmen, unexplained deaths, cyanide poisoning, swift autopsies, mysterious political figures, Lady Macbeth-type wives and police chiefs fleeing for their lives - read on. For those of you who prefer less sensationalist tales..... well read on anyway - this one’s a doozy!"
In the past 30 minutes, Europe has turned downright ugly, with short-term Bunds soaring to a record 140.64, and weakness creeping across the peripherals, as the realization that not only was the Spanish bond auction unsustainable, but also a French downgrade rumor once again making its way (the source of this is a Citi note by Michael Saunders who said that it is likely that Moody's will follow S&P, and put the French Aaa rating on review for possible downgrade by the autumn, after the country's supplementary budget is formalized). The result is a sudden and swift slide in the EURUSD to 1.3070 or the LOD. Here are some of the other recent surprising developments in the aftermath of what the propaganda machine wants to spin as a "successful" Spanish bond auction.
India's Jewellers End Gold Strike As Government Caves On Excise Duty: Pent Up Gold Demand To Be UnleashedSubmitted by Tyler Durden on 04/08/2012 10:24 -0500
A month ago, after causing a spike in cotton prices following the imposition of an export ban, India promptly overturned said surprising move following a surge in protest from not only various trade local groups, but more importantly China, whose already razor thin margins would become negative if input costs soared even further. The whole process lasted about 72 hours from beginning to end. Days after, desperate to fund ongoing budget shortfalls, the government shifted its attention to price controls in a market it knew China would absolutely not mind to having the price kept artificially low - gold. What happened then was an announcement by the government to impose to levy an excise duty on unbranded jewelry. The response was swift - a countrywide strike among India's jewellers who all went dark, crippling demand from one of the traditionally strongest gold markets in the world. And all this happening at a time when the wedding season is at its peak, with Akshaya Tritiya, one of the biggest gold buying festivals later in the month, making the period crucial for jewellers. As of hours ago, the Indian finance ministry has caved, and while it took three days to end the cotton export ban, it took three weeks to end the excise duty proposal, India's Finance Minister Pranab Mukherjee said that the government would consider scrapping a budget proposal to levy an excise duty on unbranded jewellery. The result will be three weeks of pent up demand for precious metals being unleashed suddenly, likely pushing spot gold far higher, to where it would be had this latest artificial price control never been established.
In a very thin market, the S&P futures came very close to hitting their 50 DMA on Friday. The S&P futures went from a high of 1,418 on Monday, to trade as low as 1,372 on Friday. A 46 point swing is healthy correction at the very least, if not an ominous warning sign of more problems to come. There were 3 key drivers to the negative price action in stocks this week. All 3 of them will continue to dominant issues next week.
European equities are taking losses as North America comes to market, with particular underperformance noted in the periphery bourses. Risk-aversion pushed both Spanish and Italian yields higher, with the spread between the Spanish 10-year and the Bund crossing above 400BPS for the first time since Late November 2011. The yields have now come off their highs but still remain elevated. It should be noted that markets are generally light today heading into the Easter weekend as investors take risk off the markets, so large surges in volumes have been observed. In the FX markets, EUR/CHF briefly broke below the SNB’s staunchly defended 1.2000 level on some exchanges, but uncertainty remains over the exact low due to different exchanges registering different prints. Needless to say, all exchanges witnessed a 30pip spike upwards in the cross with significant demand seen pushing the cross away from the floor. EUR/CHF now trades around the 1.2020 level.