Copper

UPDATE: EURUSD at 1.2478 as we post.

While European, US, and commodity markets (ex-Spain) were enjoying the hope/hype of ECB rumors and QE chatter, Egan Jones just burst the bubble. back to reality. Within minutes of their downgrade of Spain, EURUSD was plunging faster than Facebook and along with that cornerstone of correlated risk markets, gold, silver, oil, copper, and US equities had smashed lower.

The Greek equity index jumped almost 7% today, its biggest rise in 8 months, on the back of absolutely no 'real' change whatsoever (Greek opinion poll results change by the second and the stability fund payments were already known) and indeed a worsening situation across most of the rest of Europe (ex-Germany) - with chatter of growing bank runs and Bankia's epic demise. Of course, one needs to bear in mind the ASE pop is off 22-year lows before sounding that all-clear here as Bund yields collapse to all-time record lows and Spanish yields (and spreads) to Euro-era record wides (and almost all-time record highs). Broad European equities and credit gapped up at the open (as did EURUSD) but the rest of the day was spent drifting inexorably back to lows as the Euro-Stoxx ended down 0.5% (with Spain - at 9 year lows - and Italy underperforming notably also - with banks halted on and off all day). Spain and Italy saw sovereign spreads leaking (16bps and 8bps respectively) as the former broke 450bps over AAA for the first time (and 510bps over Bunds). Corporate and financial credit spreads leaked back wider from the positive start to the day and ended still modestly tighter on the day - though financials notably underperformed non-financials. EUR-USD basis swaps improved modestly but EURUSD round-tripped from a decent open to Thursday/Friday highs over 1.26 and back down towards Friday's close - with the USD -0.2% from Friday's close - as AUD strength helped exaggerate the move mildly. Commodities are following USD's lead and as it strengthens into the European close, they are losing early gains (Copper/Oil up around 0.6%, Gold Unch, Silver down 0.5%). USD and Oil weakness into the European close were the most notable micro-trends.

Having hit its highs in the pre-open, equity markets drip-drip-dripped lower all day, retracing their late-day exuberance relative to credit markets and broad risk-assets by the middle of the afternoon. Even financials had given back almost all of their post 230ET ramp yesterday but then - IT happened again. Italy's Monti made the same technocrat-fed comments as yesterday and financials take off again leading stocks higher (only to come back 10 minutes later and back-pedal on his hard facts). This time though - was different. Yesterday's rumor-ramp added 2.5% to XLF (the financials ETF) but this time it only managed to spur a 0.5% gain before the effects faded. Coincidentally - the ramp pushed ES (the S&P 500 e-mini futures) up to VWAP where sure enough we saw heavy volume with large average trade size step in to briefly stall the rally - which then managed to push on to near the day-session's highs (but notably all on its own again). ES very much repeated the same pattern as yesterday but with lower average trade size still - ending the day exuberant but on its own. The USD kept pushing higher though - with the divergence with stocks now very large - (as EUR leaked lower - even as AUD rallied on the rumor-ramp) but this USD strength did not weigh as angrily overall on commodities today. Late Europe rumors of another LTRO pushed stocks up and dragged gold and silver up rapidly but they all gave it back by the close. With the USD up 1.5% on the week, Oil, Copper, Gold, and Silver are in the same currency-driven range between down 1.25 and 2% on the week - perhaps suggesting yesterday's plunge in PMs has seen a short-term end to the liquidation factors (though for how long). Into a long weekend, it seemed volume remained decent enough but once again average trade size was very low (suggesting little conviction here and/or algos giving pro-size exits). Treasury yields rose all day (ending higher by 3bps or so) pulling back to near Tuesday's closing levels. VIX tracked down to 21.5% (losing less than 1 vol on the day) and is once again cheap relative to credit/equity's view.

• China Pledges More ‘Fine-Tuning’ in Support for Growth (Bloomberg)... more promises, just never any actual funding
• Spain Calls for Help to Lower Borrowing Rates (AP)
• China Is a Black Box of Misinformation (Bloomberg)
• Fed data expose US$100bn JP Morgan blunder (IFRE)
• EU Chiefs Clash on Bonds Amid Call Greece Keep Cutting (Bloomberg)
• Spain to Recapitalize Bankia in Latest Bailout (WSJ)
• The running schizo tally: EU urges Greece to stay in euro, plans for possible exit (Reuters)
• The Seeds of the EU’s Crisis Were Sown 60 Years Ago (Bloomberg)
• Fed's Bullard says orderly Greek exit possible (Reuters)
• Some Big Firms Got Facebook Warning (WSJ)
• Chesapeake Raises Big Bet in Ohio (WSJ)

All you need to read.

Gold’s London AM fix this morning was USD 1,555.00, EUR 1,229.44, and GBP 989.56 per ounce. Yesterday's AM fix this morning was USD 1,575.75, EUR 1,233.95, and GBP 998.76 per ounce.

Gold fell $26.20 or 1.64% in New York yesterday and closed at $1,566.80/oz. Gold fell in Asia and those falls continued in Europe where gold has been trading in a $16 range.

• Rajoy to ask for ECB assistance, according to reports (Sharecast)
• Bundesbank Suggests Greek Exit From Euro Would Be Manageable (Bloomberg)
• Unemployed Burn as Fed Fiddles in Debate Over Natural Rate (Bloomberg)
• Regulators, investors turn up heat over Facebook IPO (Reuters)
• China to boost private energy investment to bolster economy (Reuters)
• OECD fears euro woe to snap brittle world recovery (Reuters)
• China slowdown threatens Australia - World Bank (Herald Sun)
• Guessing game begins over next Treasury chief (Reuters)
• Italians spurn main parties in local polls (FT)
• A fragile Europe must change fast (FT)
• Spain to outline Bankia plan, may announce bailout size (Reuters)
• China Should Adjust Policy Early - Government Researcher (WSJ)

All you need to read.

Just when one thought it was safe to come out of hiding from under the school desk after the latest nuclear bomb drill (because Europe once again plans on recycling the Euro bond gambit - just like it did in 2011 - so all shall be well), here comes David Rosenberg carrying the launch codes, and setting off the mushroom cloud.

It was all going to plan until that early angst from Egan-Jones Spain downgrade was increased by L-Pap's 'sky-is-falling' Greek exit plans comments. Treasuries had leaked higher in yield and recoupled with stocks (after the divergence yesterday) but the USD (driven by EUR deterioration) was pushing higher (diverging from its recent correlation). This was dragging commodities lower but gently as stocks (especially financials) continued their dead-cat impressions. Even Facebook showed signs that the deluge of reality was coming off its shoulders. By the European close, stocks had pulled unhealthily high relative to risk-assets in general (once again) and credit was lagging a little. The Spain downgrade news stalled the EUR which began to slide - as did Gold and Silver along with USD strength - but Treasuries kept on limping higher in yield and tracking stocks, Then in the last hour of the day the L-Pap headlines - along with an increasing sense of deceleration (we saw heavy volume come in just after the European close - suggesting covering of the heavy volume up from the bounce lows yesterday) - and all the momo names started to lag with AAPL losing steam (more schadenfreude there after our comments yesterday) and then financials stumbled off their exuberant highs (though JPM managed a very good gain of over 4.5% still - as IG9 compressed for the first time in a few weeks). S&P 500 e-mini futures (ES) managed only a small loss but all the positive momentum was lost and large average trade size pressure came in at the close as it tried to get up to VWAP. VIX gained 0.5vols to close back above 22.5% and the term structure bear-steepened a little more. Yesterday's credit-led strength faded today, as skews normalized, with HYG losses and a renewed fear of the ETFs and indices leaking into the real bond market soon once again. Clusterbook is trading $30.80 after-hours with over 101mm shares traded!

Something different today. A dip was bought and kept a little momentum - aided and abetted by some late-afternoon desperation EUR buying correlation-help which dragged the Dow back over the magical 12,500 level. Stocks and high-yield credit bounced nicely today - with the latter dragging the former higher from what we could tell (on the back of reversion to fair-value in the ETF and credit market) - as the rest of risk-assets were generally stable. AAPL rotation (making yet another one of its 9-plus % drops-and-pops) helped drag NASDAQ up while FB dragged the entire social media segment down. Financials, while up as a sector, were ugly in the majors with JPM joining Citi and MS in the red YTD now and BAC back to 4 month lows. Gold was unch and silver down as Oil and Copper jumped (with the former testing $93 at the close). Treasuries were practically unchanged from Friday's close but the long-end rallied the most from its opening levels last night and the 2s10s30s curve was a significant risk-on driver. Stocks were on their own though when we look at Treasuries, the USD, and gold as it appears the credit compression arbs were enough to pull stocks up and AUD and EUR strength into the close was interestingly aggressive - short-squeeze or does someone know something? Heavy and large size volume into the close suggests it was another ramp to provide exits - and credit indices needed to shed some 'cheapness' - though we remember that Europe is due to open in 10 hours. VIX tumbled over 3 vols but remains above 22% with the term-structure fo vol still steep.

One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV... and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.

All you need to read.

At the beginning of the week, European equities are seen modestly higher in the major indices with underperformance noted in the peripheral markets. Markets have sought some solace in the G8 summit over the weekend, with leaders agreeing that the optimal scenario would be Greece remaining within the European Monetary Union, and have furtively agreed that further measures may be necessary to return Europe to growth. The disagreements, however, continue to rollover as leaders fail to commit to a specific growth strategy. The tentative risk sentiment is reflected in the fixed income markets, with the German Bund remaining in negative territory for much of the session and 10yr government bond yield spread between the periphery and the German benchmark tighter on the session. Touted bids by domestic accounts helped support BTPs (Italian paper), especially in the short end of the curve, where the spread between the German equivalent is trading tighter by around 3bps. From Tokyo, comments from Fed’s Lockhart have drawn attention, who commented that with the downside risks emerging from the Eurozone, it would be unwise to take QE3 off the table.

Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly.