Between the thinness of European bond markets during the summer doldrums and the hair-trigger momo-monkeys, it would appear that all the hopes and prayers of the Draghi "promise" have been more than priced into the Spanish bond curve already. Of course, short-dated yields could drop further on ECB buying; but where exactly 'should' that risk premia be? Of course, longer-dated yields could compress but does anyone really see a solution here, as opposed to short-term support to get through some debt maturities and avoid a catastrophic contagion? The critical point being - for all the anticipation of Draghi's bond-buying plan and its implicit conditionality, the Spanish yield curve has priced it all in and more - as the 2s10s curve is now at all-time (pre- and post- Euro-era) record steeps. We have seen this pattern before - into and during LTRO - that did not end well; and the crowd is getting larger and doors smaller in this one (and don't forget Corzine won't be your fall-guy this time)...
Despite a green showing in European equity indices this morning (aside from Spain that is) - as they shrug off the dismal China/Aussie data overnight in the incessant belief that bad is good and worse is better - there is a bid in a number of the major AAA safe-haven assets in Europe. Swiss 2Y rates are dropping notably this morning, German and Danish 2Y rates are stable to dropping, and Dutch and Finnish rates remain extremely low. It seems that between Merkel's comments this morning and the following big three unanswered questions - it's not all risk-on in Europe, and expectations for a squeeze in EURUSD - with net shorts at 2012 lows and USD longs basically neutral - seem exaggerated for now. Summing up on the euro area debt crisis, SocGen notes the issues remain the same; the periphery faces an uphill battle to meet targets that few private forecasters (including ourselves) expect can be reached, the EFSF/ESM is still too small with Spain and Italy combined facing around €800bn of funding needs over the coming three years and while the ECB can be helpful, it alone is not enough.
Last night we reported that the troubles for South Africa's metal mining industry, which accounts for 20% of the nation's GDP, have spread, when in the aftermath of the Lonmin Marikana Platinum mine bloodbath which saw 44 miners shot by police another mine - this time Gold Fields' KDC mine - went dark as the bulk of the firm's miners went on strike. Moments ago AP reported that violence has erupted at a third mine, this time the gold mine owned by the nephew of Nelson Mandela, where 4 workers have been shot. So much for an amicable resolution, or for gold production returning to historical levels.
Tomorrow the Battle of Frankfurt begins. Make no mistake in your thinking as America ends its holiday weekend; it will be a battle and there will be bodies littering the field of engagement. Spain and the rest have aims, plans, schemes if not hopes and ambitions in direct opposition to Germany and her side. The outcomes prayed for are a demand for money and a resistance to those demands. The pleas of Spain are about to be answered; first from the ECB and then from Germany’s acceptance or rejection of the Draghi plan. The “Game of Muddle” will be ended and real answers to real insistences will be given. It all comes down to this; money and how much of it and under what circumstances and whether the nations with capital are willing to hand it to their neighbors and watch their credit ratings, their own cost of funding, their standards of living decline to a mean for all of Europe.
Ahead of this week's 'critical' game-changing events - or not - it seems Europe's true overlord-ess is back, and now, tanned and relaxed, she is making clear that nothing about her (or her country's) view of the world has changed - no matter how much Draghi, Monti, Hollande, Rajoy or Samaras jawbone about it. It would seem by her words that expectations are being set and conditionality remains key - which means no matter what the ECB does - it is a can-kick no nearer an end-solution; and the market in its wisdom will price through that can-kick (after knee-jerking first of course): (via Bloomberg)
- *MERKEL SAYS `DEBT MEANS DEPENDENCY'
- *MERKEL SAYS EU MUST ENSURE THAT IT FIRST EARNS WHAT IT SPENDS
- *MERKEL SAYS `ECONOMY THERE FOR PEOPLE, NOT PEOPLE FOR ECONOMY'
- *MERKEL SAYS EUROPE HAS TO LEARN TO ONLY SPEND WHAT IT TAKES IN
- *MERKEL SAYS TOO MANY IN EUROPE HAVE LIVED BEYOND THEIR MEANS
- *MERKEL 'ABSOLUTELY CONFIDENCE' ECB TO WORK WITHIN ITS MANDATE
With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.
- Germans write off Greece, says poll (FT) - Only a quarter of Germans think Greece should stay in the eurozone
- As predicted here two months ago: ECB chief and Spanish PM on collision course (FT)
- Gold Wagers Jump To 5-Month High As Fed Spurs Rally (Bloomberg)
- Euro zone factories faltering as core crumbles (Reuters)
- Those who expected more China easing, beware: PBOC Has No Short Term Intention for Loose Money Policy (Financial Market News)
- French jobless tops three million, minister says (AFP)
- Spain Leads Europe’s $25 Billion Gamble Before ECB (Bloomberg)
- US investor is Ireland’s biggest creditor (FT)
- Draghi May See Silver Lining In Disappointing Investors (Bloomberg)
- China's steel traders expose banks' bad debts (Reuters)
- NY probes private equity tax strategy (FT)
In addition to the daily NEW QE/LSAP/ZIRP On again/Off again rumors, one of the most memorable aspects of a vacation-heavy August was the pervasive weakness in corporate top lines, coupled with a substantial portion of the S&P guiding lower into a very uncertain future. Perhaps this explains why when looking at the best performing asset classes of the past month, it is precisely those 'barbeque relish' vqrietals silver, and gold that shone, despite offering no dividends, and despite having not a single earnings call or forecast revision between them. Or perhaps in spite of.
AUDJPY is getting smacked hard in this evening's admittedly thin trading given the US holiday. China's double-whammies of PMI data (both official and HSBC versions - with the latter revised lower from Flash to its lowest level since March 2009) and some weak Aussie retail sales data is weighing very heavily on the critical carry trade pair. S&P 500 futures traded down in line with AUDJPY from Friday's close but once the China PMI came as weak as it was so the 'Good is Bad', the PBoC have to do something crowd started buying and dragged ES up a few points. Juxtaposing these dismal macro data was a better than expected China Services PMI and Aussie manufacturing index - as the Schrodinger 'economy is good and bad' headlines continue to confound. For the 'bad-is-good' crowd who see stimulus as the solution, we offer three words 'steel overcapacity' and 'malinvestment' and a must-read story from Reuters on the Chinese turning on themselves...
Over the past months (and particularly in the last weeks), we have increasingly read negative comments on the ongoing zero-interest rate policy (ZIRP) and in some instances, negative-interest rate policy (NIRP). Today, we want to examine the origins of the idea that ultra-low rates of interest can exist, how this idea came about, why it was flawed and how it leads to an informal economic system. It was a fallacy based on misunderstanding of the rate of interest and human action. Another way of examining this is the following: The zero interest rate indicates that time is free. And as anything that is free is wasted, time will also be wasted. It should be clear that there is an inconsistency in simultaneously believing that investment demand and savings are mainly driven by income but that it is necessary to lower the interest rate to boost investment, as the Fed does... and the Fed is Keynesian! Finally, we note one last thing: As productivity, employment and production decrease, even a steady and low rate of inflation has the potential to morph into hyperinflation.
The Summer of hope is over. Analysts return to their desks amid a grand-tour of conferences, industry gatherings, and company meetings, and - as has happened on average for the last twelve years - expectations are notched down from first-half-of-the-year 'hope' that this-time-is-different. Barclays' Barry Knapp notes that while macro risks seem more balanced than last spring, equity investors face a considerably higher risk in that of elevated earnings estimates. Since 2000, the worst month for analyst estimate revision momentum (net revisions) is also October, followed by September and December (tied). It stands to reason (though it’s tough to statistically ‘prove’) that equity investors and analysts return from vacation, attend conferences, and cut their earnings estimates. This, in turn, contributes to increased volatility and negative returns. While many will be focused on broader concerns – the ECB meeting, German Constitutional Court, presidential polls and macro data – equity investors are likely to hear a consistent message from the ~180 conferences: the global and domestic economic outlook is not robust enough to justify 11% y/y earnings growth in 4Q12 or 12% in 2013.
First Platinum, Now Gold: As South African Miners Strike Spreads, Thousands Of Ounces Remain In The GroundSubmitted by Tyler Durden on 09/02/2012 16:44 -0400
Two weeks ago we showed dramatic footage as striking miners at Lonmin's Marikana South Africa platinum mine were fired upon by local the local cops, killing dozens of protesters in the process. Aside from the implications of what happens when the establishment loses control and desperate workers revolt with complete disregard for their own safety, the strike has crippled the world's third largest platinum maker, and has cut daily production of the precious metal by 2,500 ounces. Since then the Lonmin situation has remained critical, with just 6% of the South African company's workers turning up for work last week. In the meantime, the strike bug has gone airborne, and has now impacted Gold Fields, the world's fourth largest gold mine. From the FT: "Some 12,000 workers at a gold mine operated by Gold Fields have gone on strike, in the latest industrial strife to hit South Africa’s mining industry. Sven Lunsche, a spokesman for Gold Fields, said the wild-cat strike was not directly related to the crisis at the Marikana platinum complex, where 44 people have been killed in violence after rock drill operators downed their tools to demand higher wages on August 10. But he acknowledged that “the atmosphere in the mining industry is very volatile at the moment and this may have had an indirect impact on the situation". The bottom line: "The strike was costing the company 1,660 gold ounces of production a day, Mr Lunsche said." In other words in addition to the fear of a resumption in money printing by central bankers, the gold price will now have to deal with the added fear that supply disruptions just may hamper China's stealthy hording attempts to become the world's biggest holder of physical gold, or at least at sub $2000/oz prices.
With the US presidential election looming in just two months, there is hardly a state that is as critical to the outcome of who America’s next president will be, as Florida. As Bloomberg vividly summarizes, Florida - and specifically its five swing counties: Hillsborough, Orange, Pinellas, Seminole and Volusia - was the state that determined the president in all of the last 3 elections: set between the Republican-dominated North Florida and the more Democratic southern counties, these suburban communities of middle-class voters are known for their shifting allegiances. In 2008, Obama took four of the five counties to capture Florida. George W. Bush won three of the counties, and the state, in 2004. In 2000, Volusia’s vote count was disputed by Vice President Al Gore. Gore won the county yet lost Florida by 537 votes, giving Bush his first term as president. It is quite fitting then that these five counties are very much indicative of the primary malaise that has plagued the country for the past 4 years: the inability of the housing market to rebound no matter how many trillions in printed dollars are thrown at it. Which brings us to the key number that probably should (but most likely won’t in this age of ultra short-term attention spans and constant redirection and focus shifts): 11% - this is the foreclosure rate in these 5 critical counties, double what it was 4 years ago, and three times higher than the national foreclosure average rate of 3.4%. In other words, if there ever was a time and place when economics, through its sheer failure to restore “household wealth” in this most decisive region, was a key issue, now is the time.