Crude

While many will point to the drop in front-end Italian bond yields as proof positive that all is well in the still-peripheral nation, we note that today saw 10Y Italian bond (BTP) spreads crack back above 400bps for the first time in 3 weeks and nervously remind readers of the stock market reaction in Eastman Kodak a week or two before its death. Of course, Italy is perhaps not quite as imminently terminal as EK was (thanks to the ECB reacharound) but the excitement about BTP's 'optical' improvement will be starting to fade as banks are underperforming dramatically, we have exposed the sad reality of the LTRO, and now even the short-dated BTP yields are now over 40bps off their tights from last week. Why? Deutsche Bank's Jim Reid may have the answer that Italy has now been in recession four times in the last decade and while hope is high that the new austere budget will take the nation to debt sustainability, he notes that the cumulative forecast miss since 2003 on GDP estimates is approaching an incredible 20%. As Reid notes, "When debt sustainability arguments are finely balanced and very dependent on future growth the question we'd ask is how confident can we be that economists’ forecasts are correct that Italy will pull itself out of the perpetual weak and disappointing growth cycle seen over the last decade or so." As we (ZH) have been vociferously noting, LTRO did nothing but solve a very short-term liquidity crisis in bank funding, and the reality of insolvent sovereign and now more encumbered-bank balance sheets is starting the vicious circles up again. Deutsche's base case remains that peripheral growth will disappoint and the sovereign crisis will re-emerge shortly - we tend to agree.

Presented with little comment except to note that the fact that the price of Brent Crude in its local Euro currency has broken all-time highs from July 2008 - which we are sure won't impact the already recessionary environment facing many European nations.

While much of the focus has been on Paulson & Co., the hedge fund founded by billionaire John Paulson, cutting its stake in the SPDR Gold Trust by 15% in the fourth quarter, possibly of more importance is the fact that PIMCO, the Texas Teacher Retirement System and George Soros all increased their holdings of the biggest exchange-traded product backed by gold. Paulson cut his gold ETF bullion holdings by about 600 million dollars in Q4, a reduction that was likely driven by client redemption needs as he and his fund remain upbeat on gold – primarily due to inflation concerns.  Paulson’s reduction in SPDR was offset by other important buyers such as PIMCO, which oversees $1.36 trillion and is home to the world's biggest bond fund and significant institutional buying from the likes of the Texas Teacher Retirement System and billionaire investor George Soros. ‘Bond King’, Bill Gross recently wrote about gold as a “store of value” and PIMCO’s allocation to GLD may be ongoing as they seek to diversify their portfolios and hedge against inflation. Soros, who once suggested gold was or would be "the ultimate asset bubble," raised his stake in the SPDR Gold Trust (GLD), a gold-backed exchanged-traded fund, to 85,450 shares, up from 48,350 shares in the period. Soros, who had disclosed call and put options on the gold fund in the prior period, reported no such investments in the fourth quarter. Soros’ GLD position is worth a mere $13 million, however it suggests that he is not as bearish on gold as portrayed and that he sees further upside for gold.

Update 2: IRAN OIL MINISTRY DENIES STATE MEDIA REPORTS ON TEHRAN STOPPING OIL EXPORTS TO SIX EU STATES. I.E., total confusion

Update: Brent over $119; WTI over $102

PressTV has just issued a breaking news alert:

• In response to the latest sanctions imposed by the EU against Iran's energy and banking sectors, the Islamic Republic has cut oil exports to six European countries
• Iran on Wednesday cut oil exports to six European countries including Netherlands, Spain Italy, France, Greece and Portugal.

Still positive that China does not want Iran's crude? Oh, and congrats on just buying yourself record high gasoline prices Europe.

The bearish sentiment following Moody’s overnight catch-up move to S&P failed to have a long-lasting effect on sentiment today. Instead, better than expected German ZEW, together with another well bid Italian debt auction saw equities stage an impressive rally which in turn lifted indices into positive territory. As a result, Bund futures are trading back below the 138.00 level, while peripheral bond yield spread are generally tighter on the session. The risk on sentiment also boosted the energy complex which saw WTI crude futures climb back above 101.00 level (note: Brent March future expiry). Looking elsewhere, EUR/USD advanced above 1.3200 level after triggering stops. Of note, intraday option expiries are seen at 1.3220 and then at 1.3300 (large). USD/JPY is up after the BoJ announced that it will undertake additional monetary easing action and expand its asset-purchase fund by JPY 10trl, while touted buying by Russian names also supported the pair this morning.

Earlier today, we reported on the extended halt of the CME Globex crude market, which following an errant trading pattern, did not quite crash, but did the next best thing - go offline for a full 75 minutes. Why did this happen? Our initial speculation was that this "may have been an algo gone berserk in advance of what may or may not have been a block order.... Someone take quote stuffing a little too far today?" It turns out we were not too far off. Below is Nanex visualization of just what occurred in those seconds between 13:59:57 and 14:04:55 when "a blast of quotes corrupted a memory queue causing the software to believe the queue was full all the time." In other words just under two years after the May 2010 flash crash, another algo may have been the reason for the halt in one of the world's most important markets. At least this time there was no 10% "correction." How long until there is, and when it does happen again, will it be limited to just 10%? Oh, and whatever you do, most certainly don't expect this little incident to be brought up ever again by those in control, for any precautionary measure to be taken, or for the SEC to ever get involved. Any of those three would immediately imply something is very wrong with the market. And that's simply not allowed.

Update 3: Market reopens - "perfectly normal market"

While today's market session has been broadly calm for the time being, that has not prevented Oil from falling back to its old norm of being impacted by the merest rumor of geopolitical tensions, of which we have had quite a few of already, following car explosion attacks targeting Israel embassy officials in India and Georgia. While Iran has yet to make any announcement on these events, which oddly enough resulted in no deaths, Israel has already blamed Iran for everything. From Reuters: "Prime Minister Benjamin Netanyahu said Israel's  arch-foe Iran "stands behind" bombers who targeted Israeli embassy cars in India and Georgia on Monday. Netanyahu linked the incidents  to reports of foiled attacks in Thailand and Azerbaijan last month for  which, he said, Iran and its Lebanese guerrilla "proxy" Hezbollah were  responsible."Iran, which stands behind these attacks, is the  largest exporter of terror in the world," Netanyahu said, addressing his  Likud party faction in parliament." It appears that when it comes to car bomb assassination plots, Iran still has to learn from those which targeted its own nuclear scientist successfully a few weeks ago. Yet this latest escalation in attempted provocations is not unexpected: it comes on the heels of the announcement of a US Naval Official who said that "Iran is building up its forces in the Persian Gulf and has prepared speedboats loaded with explosives." Whether it actually has or has not is irrelevant: all that matters is that the US navy 'says so.'

Stocks advanced today after Greek lawmakers finally approved a new austerity package aimed at averting a default. As a result, it now looks like that the country will get the next bailout tranche and avoid failing to meet debt redemptions in March. The draft legislation published by the Greek government showed that the EFSF may provide EUR 35bln to help Greece buy back bonds held by euro-area central banks as collateral, while Greek finance minister said that EUR 70bln in bonds are to be issued in the swap and Greece needs to make debt swap offer by Friday Feb 17th at the latest. Credit metrics such as Euribor and Euribor/OIS spreads continued to improve, which in turn supported financial sector. Looking elsewhere, comments from Iranian President Ahmadinejad over the weekend who said that Iran will soon reveal "very big new achievements" in its controversial nuclear programme, together with comments from China’s Wen who said the country will begin to fine tune its economic policies in the Q1 of this year supported both Brent and WTI crude prices today. Going forward, there are no major macro-economic releases this afternoon, but both the BoE and the Fed are due to conduct another round of Asset Purchases.

Stocks are not the only thing enjoying the ECB's $800 billion balance sheet expansion (and just announced additional Bank of England Quantiative Easing) over the past 6 months. Lately a new and unwelcome visitor has also figured out the Euroean Central Bank's sneaky motives. No, not Germany, they still are hopelessly confused and still believe the ECB is not "printing" money. Nor gold. It did long ago, just as Roubini was calling for an imminent crash following the 200 DMA breach - it is headed over $2000 in short order.  No, this time it is that last entrant to any reliqufication party, who just happens to be the guaranteed party-pooper: gasoline.

With major trade partners battered by recession, the latest trade data seem to give credence to a China hard-landing crash scenario by some forecasters.

Minxin Pei, the most original of current Sinologists, makes the point authoritarian/totalitarian regimes inherently prioritize requirements for protecting regime leaders over long-term national interest.

As Brent and WTI prices ebb and flow from local and global fundamentals and risk premia, Morgan Stanley notes that to be bullish from here, one would need to believe a supply disruption is coming. Considering conflict with Iran, sustained Middle East tensions, and the potential for sustained supply disruption their flowchart of price expectations notes that prices follow inventories and that as price rises, fundamentals will weaken (as without an OPEC production cut, inventories would balloon by 2Q12) and therefore to maintain current prices across the curve, supply risk premia must continue to grow. They raise their estimate for 2012 average Brent price to $105/bbl from $100/bbl which leaves them bearish given the forward curve priced around $115/bbl, as their base case adjusts to a belief that Middle East tensions persist but a conflict with Iran does not occur as they address QE3 expectations and EM inflation/hard landing concerns.

Say what you will about the tenets of Chinese economic slowdown assumptions and what not (despite inflation obviously continuing to be a rather pesky issue), at least its steadfast determination to have the world's largest crude oil stockpile is an ethos. At 23.4k metric tons of imports in January, China just imported the most crude in its history, despite the traditionally slow period around the Chinese new year. The trendline is unmissable - at this rate China will become the world's largest importer of Crude in a few short years, surpassing the US easily with its 28K metric tons of imports in a couple of years. Oh, and anyone who thinks that China will volunteer to lose Iran as a primary source of crude imports as its oil is "liberated" by Western powers as the country is obviously en route to having the world's largest crude stockpile (as to why this may be the case, read here), we have a bridge to Isfahan to sell you.

Hands up anyone who is surprised that the Bank of England has added another £50 billion to the quantitative easing pot? The same hands will also believe that the Greeks have agreed terms for the next bail out tranche with the Troika (the European Union, the IMF and the European Central Bank). This ongoing epic odyssey of the voyage to nowhere has grabbed the headlines, but the BoE’s quiet announcement is equally significant to us Brits. Central banks never utter the words quantitative easing, so the Bank calls it an addition to its “asset purchase programme”, which was only hiked to £275 billion back in October. The accompanying rhetoric states that inflation is on the way back down and may fall below their target of 2%, mainly as a result of the VAT increase last January falling out of the equation and lower energy prices, (despite Brent crude being over 10% higher Y-o-Y in sterling terms..); a convenient excuse perhaps.