India

It's all about the central banks this week.

With the 2012 London Olympics now underway, ConvergEx's Nic Colas takes a look at the business of the Games.  As it turns out, the five-circle logo of the International Olympic Committee is essentially one of the strongest brands on the planet. The reason for this success seems to boil down to two fundamental drivers. In the developed economies of the world, the games represent an opportunity to reach a large audience that has grown fragmented and hard to reach due to everything from the social media to DVR devices.  In emerging markets, ever-larger middle classes represent excellent growth opportunities for global brands.  The bottom line is that the Olympics may prove to be the last piece of media content that remains relevant and interesting to the majority of the world’s consumers. The Olympics is therefore an unequivocal business success story, unharmed by global recession, sovereign debt woes, and the other economic problems of the moment. It just seems a shame that live-pigeon shooting and one-armed-weightlifting have been removed from the events and did dwarf-tossing ever make it?

With the heat-wave in Southern Europe, the missing Monsoon, and the earth-cracking drought in the US, it is no surprise that corn, wheat, and soymeal prices are soaring as crop yields plunge. The level of inventories were already low going in and as Bloomberg notes, consumers around the world will feel the effect of higher food prices as the worst drought in 50 years impact the world's largest exporter of corn and wheat (and 3rd largest of soymeal). Within Asia, Korea and Malaysia will be most adversely affected, considering direct effects referenced in per capita and GDP terms. Indonesia and Japan are Asia’s largest importers of wheat, both importing roughly 5.7 million metric tons on average. China is by a wide margin the region’s largest importer of soy, with average imports of 49.9 million in the last five years. The impact on headline inflation in Asia will be stronger for the economies with lower per capita incomes — Vietnam, India, the Philippines and Indonesia — where food and food products account for a larger share of the typical consumption basket. Even in places where incomes are high, such as Singapore, food accounts for 22 percent of the consumer price index.

"This market isn't real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they're doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed's ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. Then you get a message, "Do not pass go." Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract... The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today."

Because Everyone from the Ultra-Rich to Illegal Immigrants Pay Nothing

• Greece should pay wages in drachmas - German MP (Reuters)
• Greece Seeks More Cuts as Deadlines Loom (WSJ)
• Greece Back at Center of Euro Crisis as Exit Talk Resurfaces (Bloomberg)
• Berlusconi seeks return to liberal roots (FT)
• For brokers like Peregrine, from bad times to worse (Reuters)
• Japan Sees More ‘Widespread’ Global Slowdown With China Cooling (Bloomberg)
• China Central Bank Adviser Forecasts Growth Slowdown to 7.4% (Bloomberg)
• London Out to Prove It's Still in the Game (WSJ)
• Stockton Reveals Bondholder Offers From Mediation (Bloomberg)
• US lawmakers propose greater SEC powers (FT)

As the flow of subsidies from Washington slowly ebbs, the TBTF banks will begin to feed upon one another...

The World Gold Council have just published their commentary on gold’s price performance in various currencies, its volatility statistics and correlation to other assets in the quarter - Gold Q2, 2012 - Investment Statistics and Commentary. It provides macroeconomic context to the investment statistics published at the end of each quarter and highlights emerging themes relevant to gold’s future development. One of their key findings is that gold will act as hedge against possible coming dollar weakness and gold will act as a "currency hedge in the international monetary system." The key findings of the World Gold Council’s report are presented inside.

What's Ben gonna do?

By now it should be more than clear that the entire hope-based, short-squeeze driven, algo-mediated rally is the result of the last traces of hope: with the US economy openly in free-fall mode, housing supported only by once again increasing shadow inventory (and even that myth is starting to falter following today's existing home sales update), corporate profits just barely holding in as a result of the last possible cuts into the bone via personnel terminations now that YoY revenue numbers have once again sloped lower and the corporate growth cycle has turned, there is little sustaining the market aside from the mysterious seller of endless vol, which could be well, anyone, and some quiet prayer that China may step in and once again, like back in 2009, be the marginal economic dynamo that restarts the global economy one more time. It would do that in the conventional way, of course: by easing as much as it possibly can. There is, however, one problem with this: food prices. As everyone knows the product the PBOC pays more attention to than anything else is food: pork, soy, corn, etc., and particularly food prices. Because if there is one thing that can cause social upheavals in the world's most populous country, it is a rerun of the spring of 2011 when as a result of global easing, we saw not only the Arab Spring, but violent flare ups throughout China. Which brings us to today's topic: black swans. Deep fried black swans.  As UBS explains the record drought that has gripped America may well have far-reaching implications beyond just the price of corn in the US. If, indeed, adverse US climatic conditions spread, and it appears they already have as "the monsoon season, which is critical for that country’s agricultural production, is 22% below normal conditions for the year" it means that Asian food prices will broadly be the next commodity sector to go sky high, and with that kill any hope of either an RRR cut, or an outright reduction in the PBOC's Interest Rate.

The first on-the-record comments, regarding the bombing in Bulgaria, from Israel's Netanyahu are not the most politically correct. His ire with the world's ignorance of Iran's terrorist-fostering position is very clear as are his threats and promises for retribution. Not good. And sure enough, WTI crude is spiking on this news to $91.75 (18% higher than its EU-Summit lows) back to 2-mointh highs. Via Bloomberg,

• *NETANYAHU THANKS BULGARIA FOR AID TO VICTIMS OF TERROR ATTACK
• *ISRAEL'S NETANYAHU SAYS IRAN, HEZBOLLAH CARRY OUT GLOBAL TERROR
• *NETANYAHU SAYS ATTACKS WERE PLANNED IN INDIA, THAILAND
• *NETANYAHU SAYS HEZBOLLAH ACTED AT BEHEST OF IRAN
• *NETANYAHU SAYS TOO DANGEROUS TO LET IRAN HAVE NUCLEAR ARMS
• *NETANYAHU SAYS ISRAEL WILL PURSUE, PUNISH TERRORISTS WITH FORCE
• *NETANYAHU SAYS WORLD MUST RECOGNIZE IRAN AS TERROR THREAT

Meanwhile, as a reminder, a 4th carrier group is on its way to the Gulf...

The smoke from the exploded bus carrying Israeli tourists was still billowing and yet Israeli PM Netanyahu had already declared that "Iran is responsible for the terror attack in Bulgaria, we will have a strong response against Iranian terror." Perhaps that statement was a little premature: as footage released by Bulgarian police indicates, the suspected suicide bomber is Caucasian, and was in possession of a Michigan driver's license, supposedly a fake one, but why anyone in Bulgaria would be carrying a fake Michigan ID is just a little confusing.

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."

There are various reasons why not only we at Zero Hedge are big fans of Hugh Hendry. One of them of course is his uncanny ability to not only tell the truth, but to bash his competitors faces into it (as Joseph Stiglitz so vividly recalls), even if it means running squarely against the consensus. The other reason are self-aware statements such as this one via the FT today: "What I found was that when I speak in person, and especially when it’s television and timing is so acute, it gives the impression that I am cavalier and, if you will, full of myself,” says Mr Hendry, speaking by phone from his office in Bayswater, central London." Hendry was obviously discussing his self-imposed media blackout which unlike other prominent financiers is not being used for book sales promotion purposes but appears quite genuine. It also means he won't get to collect $200/appearance fees as a guest contributor on CNBC but we digress. "The danger when people look at that from a distance is that they try to align that with the guy that they’ve just given $50m or $75m to and it’s not the same person." iI is sad that none of the other talking muppet heads and "daily pundits" who appear on financial comedy TV to merely blow smoke up assorted holes and talk their books, don't share Hendry's revelations a little more often.

The sharp losses in the gold mining sector Friday and last week could presage further weakness today but the higher weekly closes for gold and silver were constructive from a technical perspective.

After initial gains in Asia, gold fell early in Asian trading prior to recovering and then weakening again bang on 0800 GMT as Europe opened (see chart below).

Gold is higher in euro and Swiss franc terms but slightly lower in dollars and pounds.