A topic we have been following for some time now and which continues to get no mention in the broader media, is the accelerating liquidity crunch in China, as demonstrated by surging repo rates between banks, both ultra short-term (7 days) and slightly longer dated (30 days). As the chart below demonstrates, just overnight the 30 Day repo surged by 19 bps to a fresh record of 4.25%. Seeing how this was in the 1.75% range as recently as 45 days ago, China's banks are currently scrambling to fill the 1 month secured borrowing void. Some have said this liquidity deficiency is purely a function of the Agri Bank's upcoming IPO sucking out all available liquidity, yet with subscriptions to that becoming open starting July 1, the real explanation lies elsewhere. Are China bad loans finally catching up with the banks? We should find out soon enough - the PBoC will flood the market with CNY201 billion this week, the biggest reliquification event in over 4 months, to "smooth out volatility in money markets", as interactive investor points out. If that is unsuccessful in bringing repo rates lower, it will be time to panic as China does not have the same misrepresentation apparatus that the ECB/IMF does.
- Options Clearinghouse wants access to Fed's discount window (Bloomberg) next up - $1,000 E-trade retail accounts have access to TALF and TLGP
- Jonathan Weil: Pimco's loss is a win for Wall Street crooks (Bloomberg)
- Wall Street reform bill goes into final hours with key provisions still unresolved (Reuters)
- BP relied on faulty US data (WSJ)
- Swiss banks winning funds from investors with weakening euro, buoying franc (Bloomberg)
- China central bank to inject 201 billion yuan into market this week to calm exploding money markets (iii)
- Banks on hook for $6.5 trillion GSEs? Bank execs panic over proposed change to orderly liquidation authority -- Dodd unhappy with Brown -- Zero hour arrives as derivatives, 'Volcker rule' remain unresolved (Counteroffer, Politico)
- Gillard breaks with tax policies that doomed Rudd (Bloomberg)
- The best stimulus: spend less, borrow less (Fortune)
- Venezuela to nationalize set of oil rigs belonging to Helmrich and Payne (Reuters)
- Yuan closes higher after moving in wide daily range of 150 bps (iii)
- Obama approval rating plunges on handling of BP catastrophe (Reuters)
- On Wall Street - so much cash, so little time (NYT)
- Simon Johnson endorses Paul Krugman for head spender, budget director and "quadrillion" redefiner (Baseline)
- The drilling ban is Soros' bonanza (IBD)
Initial claims at 457k, statistically insignificant compared to expectations 463k, down 19k compared to the prior weekly revised number (476k, from 472k). We expect another upward revision here. Continuing claims at 4,548, identical to expectations at 4,550 (previous 4,571k revised to 4,593k). Extended benefits once again blow out, +116,432 for the week ended June 5. Durable goods at -1.1%, compared to -1.4% expectations. Ex-transportation was 0.9%, versus expected 1.0%.
So much for that Greek bailout plan. Greek CDS are now back at fresh all time highs as the market seems set on not only testing the EU's rescue resolve, but determined to get a fresh new bailout plan entirely. At last check CDS was just shy of 1,000 bps. The immediate catalyst is a Fitch report that says Greece risk has gone up and that the country will need further consolidation in 2011 and 2012. The broader catalyst is that the entire Greek credit market is completely dead (noi cash liquidity) and momentum trading has now arrived in CDS, which is the only place left to express a bearish stance on Greece. Should the spread onslaught continue, we expect all of Europe to follow Germany's example and immediately ban naked CDS shorts across the continent. Luckily, both China and India are now set to open CDS trading of their own.
- Asian stocks rose, led by material producers and Japanese trading companies.
- China's chief auditor says rising debts of local governments are risky to economy.
- China's yuan rises moderately against the U.S. dollar.
- Fed offered a subdued assessment of the economy; affirmed rates would remain near zero for "an extended period."
- G-20 countries divided on issue of stimulus spending versus soaring deficits.
- Japan's exports rose 32.1% in May from a year earlier, the MoF - lower than expected.
- Oil falls to near $76 in Asia on signs US crude demand.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 24/06/10
As prospects before BP get darker by the day, and the likelihood of bankruptcy grows, the TBTF propaganda begins. Evidence A - Bloomberg headline: "BP Demise Would Threaten U.S. Energy Security, Industry." Just as the failure of bankrupt banks was supposed to lead to the destruction of capitalism, so the bankruptcy of BP plc is now supposed to lead to the degeneration of US energy independence. And who in their mind would force the Chapter 11 of a systemically important company? Once again, free market capitalism is about to walk out through the back door...
Some simple math and even simpler warnings from BNY ConvergEx' Nicholas Colas: "Managing the U.S. Federal budget is one of the toughest jobs in Washington, and the task recently took its toll on OMB Director Peter Orszag who announced his imminent departure on Tuesday. So, to ease the transition for his lucky replacement, we have slimmed down the U.S. Budget into a short introduction to the challenges ahead. Here you are, Mr./Ms Budget Director: for the Fiscal Year ended September 2009, the average employed worker contributed $12,748 in income tax payments to the Federal government. The budget created by Mr. Orszag (who we read is a very bright fellow) spent $16,809 on behalf of that same worker for: defense, federal worker salaries, Medicare, Medicaid, Social Security payments, unemployment benefits, and food stamps. Oh, and that’s just the biggest/most noticeable items in the budget. That “average” worker now has $65,237 in Treasuries debt to pay off, up from $56, 861 just eight months ago. So, good luck to you, future OMB Director. We will watch your career with considerable interest."
How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any MomentSubmitted by Tyler Durden on 06/23/2010 17:16 -0400
Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop. From their findings: "While analyzing HFT (High Frequency Trading) quote counts, we were
shocked to find cases where one exchange was sending an extremely high number
of quotes for one stock in a single second: as high as 5,000 quotes in 1
second! During May 6, there were hundreds of times that a single stock had over
1,000 quotes from one exchange in a single second. Even more disturbing, there
doesn't seem to be any economic justification for this. In many of the cases,
the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to
analyze a handful of these cases in detail and graphed the sequential
bid/offers to better understand them. What we discovered was a manipulative
device with destabilizing effect." In other words: enough with all the bullshit about HFT as a liquidity provider mechanism: in reality this is just a facade for the most insidious, computerized market manipulative device ever created. Nanex' conclusion: "What benefit could there be to whomever is generating these extremely high
quote rates? After thoughtful analysis, we can only think of one. Competition
between HFT systems today has reached the point where microseconds matter. Any
edge one has to process information faster than a competitor makes all the
difference in this game. If you could generate a large number of quotes that
your competitors have to process, but you can ignore since you generated them,
you gain valuable processing time. This is an extremely disturbing development,
because as more HFT systems start doing this, it is only a matter of time
before quote-stuffing shuts down the entire market from congestion. We think it
played an active role in the final drop on 5/6/2010, and urge everyone involved
to take a look at what is going on. Our recommendation for a simple 50ms quote
expiration rule would eliminate quote-stuffing and level the playing field
without impacting legitimate trading."
Equity Outflows Unstoppable, As 7th Sequential Outflow Of Domestic Equity Funds Brings Total YTD Redemptions To $29 BnSubmitted by Tyler Durden on 06/23/2010 23:17 -0400
The market has gotten to the point where, at least according to ICI, no matter what stocks do, all equity investors do is pull money out. The week ending June 16 was the 7th sequential week in a row to see domestic equity mutual fund outflows: $1.8 billion was redeemed, bringing the total for the 7 week period beginning May 5 to ($30) billion, and year to date to ($29) billion. Yet instead of following the trail of money (wrong direction), stocks are hanging on to the EURJPY and the several HFT algos, which together with the prime broker brigade keep the market afloat against the natural flow of funds. And even as equity redemptions refuse to abate, inflows into bond funds are as resilient as ever, perhaps explaining the surprisingly strong bid for both IG and HY over the past two weeks, where some very shady bonds have broken above par as HY underwriting syndicates hope the issuance window stays open at least one week more, before we see yet another record HY fund outflow.
The irony and the Freudian displacement reaction are simply too much. Since Moody's knows it would be kneecapped and Friend-o'ed the second it downgrades the UK, Germany or France, it has decided to lash out at the very people who will be the cause of the next, and terminal for the rating agency, round of congressional grillings in a year or so, when Europe is bankrupt and Moody's is questioned why it kept England at AAA until two days after the sovereign default.
Another Day, Another Loss For Goldman Sachs Clients: Latest GS FX Reco Stopped Out With 0.8% Loss In Just 3 DaysSubmitted by Tyler Durden on 06/23/2010 21:50 -0400
Goldman's Thomas Stolper is not having a good year. Or rather, Thomas Stolper is having a blockbuster year, Goldman clients who listened to Tom Stolper are scraping the bottom of the GoM. Pretty much every single trade conceived by the Goldman FX team ends up stopping out with clients ending up on the losing end. Tonight is just such an example: "$/PHP closed London at 46.10, above our stop and leading to a potential loss of 0.8%." The trade was initiated on Monday. 0.8% in 3 days. Annualized that's just under a 100% loss. Clients 0 - Goldman + ∞.
Ridiculed By Americans Everywhere, Krugman Now Threatens, Gives Unsolicited Advice To Germany, Pisses Entire Nation OffSubmitted by Tyler Durden on 06/23/2010 19:37 -0400
These days it's hard being a religious fanatic, also known as a Keynesian. It is even harder when you are Paul Krugman (sadly, the cornerstone of NYT's entire paywall strategy), and everyone in your own country is already sick and tired of, and openly ignores your constant appeals to drown the world in new and record amounts of debt, thus ignoring your appeals with impunity. So what do you do when nobody takes you seriously for thousands of miles around? Why you go even further - to the core of Europe in fact... where you proceed to threaten, badger, insult and give your unsolicited advice to anyone that listens. That "unlucky soul" in this case happens to be Germany daily Handeslbatt, which ran an interview with the "economist" in which Krugman stick not a foot, but an entire SS-20 nuclear warhead armed ICBM, in his mouth. And since Krugman is unaware, preaching the benefits of record deficit spending in Germany, ever since that little experiment in hyperinflation known as the Weimar Republic, tends to generate adverse reactions. Which is precisely what happened in this case. Luckily, now Krugman is a persona non grata in at least one country. Unfortunately, it is not the one in which his trite platitudes and melancholic remembrances of the golden days of Greenspan's credit bubble are still published on a daily basis.
This week’s DOE report showed a larger than expected build in crude oil
stocks, a smaller than expected build in distillate inventories and a small
drawdown in gasoline stocks. These numbers reinforced the generallyheld
consensus that we have plenty of oil in storage. And, while supplies
were building or falling by small amounts, there were fresh concerns over
the pace of economic recovery – which will impact demand.
The Commerce Department reported that purchases of new homes in
the US dropped in May to a new record low, as a government tax credit
expired. Sales fell by a third, to 300,000 in May. It was the smallest
number of new homes sold since 1963.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/06/10