On June 15, North Korea threatened military action Tuesday in response to any UN censure over the sinking of a South Korean warship. As AFP then reported, "We don't want the Security Council to take measures provoking us," Pyongyang's ambassador to the United Nations, Sin Son Ho, told reporters in a rare press conference here by North Korea. If the 15-member UN Security Council takes action against Pyongyang "follow-up measures will be carried out by our military forces...I (will) lose my job," he warned. It appears the UN's Security Council has decide to call North Korea's bluff. The AP reports that "The United States has introduced a draft statement in the U.N. Security Council that would condemn the deadly sinking of a South Korean warship and express "deep concern" at the finding of an international investigation that blamed North Korea for torpedoing the vessel." It was however, unclear, if according to the draft statement would directly place the blame on North Korea, or if the condemnation would be targeted at nobody in particular, leading to a major political victory for the communist country.

The latest market trampoline action on horrendous consumer credit news should be sufficient to get every last sane person out of this illegal, yet fully government endorsed, backdoor gambling operation, or at least those that are stupid enough not to be trading with other people's money. Today marks the most recent long white candlestick on almost record low volume for a ramp day. Note the straight line higher immediately following the consumer credit collapse and the leak that QE2 is coming any minute. Our only question is how bad is the news coming this weekend for the primary dealers to need to surge the market so high on nothing. Well, that, and also we wonder if after the circus rang the closing bell on the Nasdaq two days ago, whether today the Sicilian mafia will be at the NYSE close.

The latest consumer credit number continues the decline we have seen in recent months, plunging from $2424.4 billion in April to $2415.3 billion in May, a $9.1 billion decline, or 4.5% annualized, on consensus of $2.3 billion. Yet the biggest stunner was the April revision which was whacked from +$1 billion to a revised -$14.9 billion! In other words, there has been a $24 billion decline in consumer credit in the past two months. The biggest hit was, as usual, experienced by revolving credit accounts, which fell by a 10.5 annualized rate to $830.8 billion, from $838.2 billion in April, and just north of $910 billion a year earlier. The bottom line is that consumers continue to retrench as the deflationary wave gets ever bigger. And the only lender, for the second month, running, is guess who... Yet stocks, which confirm again they are now completely decoupled from facts, statistics, or reality in general, jump on this very negative development.

The last few weeks there have been a whole bunch of puttable CDs being issued by European banks, and overall apparently that has given money markets some confidence and money is being put to work. That also explains why people have been buying EDU0 99.50 and 99.625 calls or the future outright, a thawing of the funding market would clearly lead to lower Libor, and the Fed which had started pulling liquidity away has basically stopped with global liquidity indicators showing signs that cash has been added to the system. Those puttable securities allow money market funds to treat it as a trade of maturity the put notice, rather than the full duration of the CD is the option is not exercised: you basically get a 1Y rate for a 7 day deal yeeeehhaaaaw! So Money Funds love it, and even though the banks don't get credit for full duration liquidity but instead liquidity that has the put notice as duration, it allows them to fund themselves. No wonder European banks love it too. It then makes complete sense to see EURUSD doing a bit better even when stocks sell-off, and we get compressing swap spreads and lower vol as well (helped by both selling of the optionality by money market funds who only really care about going around their new SEC regulation not buying options, and a slew of agency issuance being digested).

Nic Lenoir

Just like Goldman top ticked the EURUSD trade to within a few hours of the multiyear low of the pair when it issued its downgrade from 1.35 to 1.15, so today's notice that Goldman is now bearish on the dollar should be enough reason for everyone to short the living daylight out of the euro. Amusingly even as the GS Global Market team sees a major slowdown in the US, somehow the rest of the world (BRICs) is supposed to pick up the slack, even as Jim O'Neill himself has now said he expects China to decelerate materially. Also, according to Goldman's "GS Bond Sudoku Model" the fair value on the 10 Year is at 3.1%, "with a very grim macro backdrop needed to justify yields at 2.5% or below." Well if the Sudoku says so... Altogether confusion is rampant, but the only thing that matters is that Goldman is now buying dollars and selling euros.

The irrational exuberance of the last 24 hours has evaporated following the Meredith Whitney downgrade of Goldman 2010 EPS, but mostly after reports that some European banks are so busted they managed to fail an exquisitely doctored test designed so that no banks would fail. The market is once again wondering if someone can fail this farce, what would the test of reality look like? The result: the traditional carry-risk correlation has once again recoupled and with countless such occurrences continues to be the most routinely profitable intraday trade available.
The irrational exuberance of the last 24 hours has evaporated following reports that some European banks are so busted to fail an exquisitely doctored test designed so that no banks would fail. The market is once again wondering if someone can fail this farce, what would reality look like? The result: the traditional carry-risk correlation has once again recoupled and with countless such occurrences continues to be the most routinely profitable intraday trade available.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/07/10