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China Aims To Be "Major Gold Trading Center" With Interbank Gold Trading





China has proposed to broaden trading of precious metals in its local market in order to help China become a "major gold trading centre" (see News). The Wall Street Journal was briefed about China's plans by "a person involved with the matter." The paper reports that "the move could increase liquidity and help Beijing gain stronger pricing power for key commodities like gold". China is the largest consumer and now the largest producer of gold in the world and has aspirations to become a major gold trading center on a par with London and New York. China is also the fifth largest holder of gold reserves in the world after the U.S., Germany, France, Italy. Chinese officials have spoken of China’s aspirations to have gold reserves as large as the U.S. in order to help position the yuan or renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term. In the longer term, being a major gold trading center would make China a more powerful financial and economic player and indeed could allow them to influence commodity and other important market prices. Indeed, Reuters reported that becoming a major gold trading center "would boost the country's clout in setting global prices".

 
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The Reign In Spain May Soon Be Over





Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.

 
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Deep Into The Lieborgate Rabbit Hole: The Swiss Hedge Fund Link?





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.

 
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Frontrunning: July 19





  • U.S drought wilts crops as officials pray for rain (Reuters)
  • Obama backs aid for drought farmers (FT)
  • Greek leaders identify two-thirds of spending cuts (FT)
  • Central bankers eyeing whether Libor needs scrapping (Reuters)
  • Markets Face a Life Sentence of Hard Libor (WSJ)
  • World Bank chief warns no region immune to Europe crisis (Reuters)
  • China big four banks' new loans double in early July (Reuters)
  • Nokia Loss Widens as Smartphone Sales Slump (WSJ)
  • Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)
 
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Morgan Stanley With Huge Q2 Miss, Posts Abysmal Results





Morgan Stanley reported earnings this morning, and showed that unless one has massive loan loss reserves to release, US banks are in big trouble. The firm just reported $0.28 EPS including DVA benefit, on expectations of $0.29. But it was the top line that got blown out, with the firm reporting $7.0 billion in revenue including the DVA fudge, but more importantly $6.6 billion. The expectations was for a $7.58 billion top line: a 14% miss. The top line number plunged over 25% compared to a year ago. The main reason for the collapse in profit: the virtual disappearance of any cash from combined fixed income, commodity and equity sales and trading, which imploded from $3.7 billion a year ago, to just $1.9 billion this quarter. And while the company slashed comp in Q2 as was to be expected following such horrible results, by over 33% to $1.4 billion from $2.2 billion, here is what most are focused on: "As a result of a rating agency downgrade of the Firm's long-term credit rating in June, the amount of additional collateral requirements or other payments that could be called by counterparties, exchanges or clearing organizations under the terms of certain OTC trading agreements and certain other agreements was approximately $6.3 billion, of which $2.9 billion was called and posted at June 30, 2012." In other words, the company has yet to post more than half of its contractually required collateral. In the aftermath of these atrocious earnings, we wish them all the best in getting access to this cash.

 
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Blast From The "Devil's Advocate" Past: Barclays On Libor Manipulation





In retrospect, this may be one of the funnier "research" notes to have come out of Barlcays in the past 5 years.

 
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Spanish 10 Year Yield Back Over 7% Following Ugly Bond Auction





Instead of sticking to selling short-term, LTRO covered debt, Spain was so desperate to show it has capital markets access that this morning it tried selling bond due 2014, 2017 and 2019 with a maximum issuance target of €3 billion. It failed to not only meet the target, but to price the €1.074 billion in bonds due 2017 at anything less than an all time high (6.459%) as a result sending the entire curve blowing out wider, and the 10 Year above the critical 7% threshold again, for the first time since the June Euro summit, whose only function was to give a positive return for the fiscal year to such US pension funds as Calpers and New Year. In summary:  Spain sold 2.98 billion euros of short- to medium-term government bonds on Thursday in a sale at which borrowing costs rose and demand fell. The average yield at a sale of 1.07 billion euros of five-year bonds rose to 6.46 percent compared with 6.07 percent at the previous auction of the debt last month. Investors' bids were worth 2.1 times the amount offered for the five-year paper versus 3.4 times at the last auction, and 2.9 times for the seven-year bond. The average yield at the seven-year sale rose to 6.7 percent from 4.83 percent.

 
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RANsquawk EU Market Re-Cap - 19th July 2012





 
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RANsquawk UK Data Preview - Retail Sales for June - 19th July 2012





 
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Guest Post: Poor Thieves Go To Jail, Rich Thieves Don’t





A bank clerk who dreamed of becoming a model stole £46,000 from the tills — and spent it on plastic surgery and shopping sprees. Rachael Claire Martin, 24, used the cash to fund a boob job, dental work and liposuction, as well as hair extensions and nights out. Steal thousands from a bank? You face criminal charges, a trial and jail time.

When that same bank manipulates a $600 trillion market by rigging the LIBOR rate for profit? No criminal charges, no trial, no jail time.

We hope she achieves her dream of becoming a model. And We hope the LIBOR-riggers spend a very long time in jail — but in reality there’s not much chance of that.

 
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Three US Aircraft Carriers Now In The Middle East With Fourth En Route





A week ago we reported news that Middle East veteran aircraft carrier CVN-74 Stennis was ending its brief sabbatical prematurely, and far earlier than previously expected, and heading right back into the field, er sea, of action. As Kitsapsun reported, "Bremerton-based aircraft carrier USS John C. Stennis is returning to the Middle East much sooner than expected. The Navy hasn't officially announced the new deployment plan for the Stennis, said spokesman Lt. Cmdr. Zach Harrell." The ship came home to Naval Base Kitsap on March 2 after seven months of launching planes into Iraq and Afghanistan. Generally, it wouldn't go back to the Fifth Fleet area of responsibility for four to five years, after a deployment to the Western Pacific and a maintenance period. But with Iran making threats, crew members learned Saturday they'll be leaving again in late August for eight months." We concluded that shortly, Stennis will be the third carrier accompanying Lincoln and Enterprise. As it turns out, a third carrier was already en route, and as of today, CVN 69 Eisenhower is either at the opening of the Straits of Hormuz, or just past it. That makes 3 aircraft carriers in the middle east, 2 in the Gulf and the Arabian Sea and one just off the coast of Syria. And technically, the LHD 7 Iwo Jima Big Deck Amphibious ship, which is also just off the coast of Iran region, makes three and a half. Which means that a 5th one (rounded up) - Stennis - is coming in 1-2 months. Good luck Iran.

 
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UBS Issues Hyperinflation Warning For US And UK, Calls It Purely "A Fiscal Phenomenon"





From UBS: "We think that a creditor nation is less at risk of hyperinflation than a debtor nation, as a debtor nation relies not only on the confidence of domestic creditors, but also of foreign creditors. We therefore think that the hyperinflation risk to global investors is largest in the US and the UK. The more the fiscal situation deteriorates and the more central banks debase their currencies, the higher the risk of a loss of confidence in the future purchasing power of money. Indicators to watch in order to determine the risk of hyperinflation therefore pertain to the fiscal situation and monetary policy stance in high-deficit countries. Note that current government deficits and the current size of central bank balance sheets are not sufficient to indicate the sustainability of the fiscal or monetary policy stance and thus, the risk of hyperinflation. The fiscal situation can worsen without affecting the current fiscal deficit, for example when governments assume contingent liabilities of the banking system or when the economic outlook worsens unexpectedly. Similarly, the monetary policy stance can expand without affecting the size of the central bank balance sheet. This happens for example when central banks lower collateral requirements or monetary policy rates, in particular the interest rate paid on reserves deposited with the central bank. A significant deterioration of the fiscal situation or a significant expansion of the monetary policy stance in the large-deficit countries could lead us to increase the probability we assign to the risk of hyperinflation."

 
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The Asian-American Arms Race In Charts





Asian Navies vary broadly in size "Asia is a study in contrasts. It is home to economic freedom and political liberty; it is also home to political instability and tyranny. Some of Asia’s borders are unsettled and volatile. And military budgets and capabilities are expanding, sometimes faster than economic growth. The rise of China as a great power presents both sides of this equation. It is being watched carefully by all the countries of the region. It is the U.S. that is recognized as the catalyst in ensuring a prosperous peace over conflict. America is a Pacific power. That much is a matter of geography and history. But the facts – and America’s principles and interests – demand more than resignation to geography. They call for continued American leadership, commitment, and the predominant comprehensive power that has enabled Asia’s very welcomed, opportunity-laden rise." Thus prefaces the Heritage Foundation its Asian 'Book of Charts', which summarizes most of the key economic, financial, trade, geopolitical, most importantly militaristic tensions both in Asia and, by dint of being the global marginal economic force, the world itself. And while we will present the complete deck shortly, of particular interest we find the summary in 7 easy charts how Asia is slowly but surely catching up on that accepted by conventional wisdom GloboCop - the United States.

 
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Brodsky On Gold, 'Credit Money', And Real Return Investing





Macroeconomic issues currently playing out in Europe, Asia, and the United States may be linked by the same dynamic: over-leveraged banking systems concerned about repayment from public- and private-sector borrowers, and the implication that curtailment or non-payment would have on their balance sheets. Global banks are linked or segregated by the currencies in which they lend. Given the currencies in which their loan assets are denominated, market handicapping of the timing of relative bank vulnerability is directly impacting the relative value of currencies in the foreign exchange market, which makes it appear that the US dollar (and economy?) is, as Pimco notes, “the cleanest dirty shirt”. Is there a clean shirt anywhere – creased, pressed and folded? QBAMCO's Paul Brodsky (in a deep dramatic voice-over) sets the scene: In a world where time series stand still... and real purchasing power value has no meaning... a few monetary bodies stand between economic death and destruction... between commercial hope and financial despair... between risk-free returns and return-free risk. Amid this set of conditions it seems entirely prudent to position purchasing power in vehicles that would benefit as the nominal stock of base money grows at a rate far in excess of the gold stock growth rate.

 
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Low Volume Equity Decoupling Becoming Farcical





UPDATE: AXP (down AH) and IBM (up AH) miss top-line; QCOM misses everything and guides down (up AH - AAPL staggered a little but unch now), EBAY beat (small up AH); KMI miss (down AH)

Far be it from us to say but once again equity markets spurted far and away beyond credit, interest rates, FX carry, commodities, and reality would have expected with only good-old VIX crashing to breathe that levered life into them. Ending the day with a 15 handle, VIX closed at its lowest in over three-and-a-half months and notably beyond where equity and credit relationships would expect as the front-end of the curve remains under huge pressure. Gold, the USD, and Treasury yields all played along on the day - trading with a decent correlation in a relatively narrow range but the open of the US day-session saw the appearance of the infamous equity rally-monkey who lifted us 1% in 30 mins then extended 10 more points into the European close. EUR roundtripped on the day leaving USD practically unch but -0.35% on the week. Credit markets were quiet (cash busier than synthetic) as IG, HY, and HYG all underperformed for the second day. Gold and Silver limped lower on the day as WTI surged back above $90 to two month highs. Treasuries traded in a very narrow range ending the day -2bps across the curve. Financials underperformed as Tech and Industrials reached for the skies with a 1.75% boost today (makes perfect sense after the earnings?). Decent average trade size on the day which was more prevalent up above 1365 suggests more unwinds of blocks into strength but something has to give with VIX for this train to stop running.

 
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