Copper

Risk-aversion is noted in the European markets with all major European bourses trading lower heading into the US open. Participants remain particularly sensitive to Spain following a release from the ECB showing that Spanish bank’s net borrowing from the ECB hit a new record high at EUR 227.6bln in March against EUR 152.4bln in February. Further pressure on the equity markets was observed following the overnight release of a below-expected Chinese GDP reading, coming in at 8.1% against a consensus estimate of 8.4%. As such, markets have witnessed a flight to safety, with Bund futures up over 40 ticks on the day. In the energy complex, WTI and Brent futures are also trading lower, as the disappointing Chinese GDP data dampens future oil demand, however a failed rocket launch from North Korea may have capped the losses.

While it is unknown if this is merely a bull trap to get yet another bubble going, then to slaughter everyone with the same relentless barrage of margin hikes as we saw in the spring of 2011, or simply volumes in commodities have gotten so low that even the CME is willing to allow a little price appreciation in exchange for participation is unknown, but as of April 16 silver initial and maintenance margins will be 12.5% lower, while copper margins are declining by 20%.

More jaw-boning helped squeeze shorts as equity indices, credit, and precious metals all closed their highest since the NFP dive as QE3 hope is back on the table. The best day in four months for Materials (now the only sector green from before the NFP print) and Industrials, and the best two-day gain in financials and energy in four months but the S&P 500 remains around 1% off pre-NFP levels (but managed to fill the gap to the lows of last Thursday in S&P futures). Credit (both investment grade and high-yield spreads) managed - just as in Europe - to rip up to pre-NFP levels also (outperforming stocks). Notable divergence between AAPL and SPY started at 1045ET today - as GOOG volume picked up and accelerated which was also when ES (S&P e-mini futures) broke Tuesday's opening level and ran stops. Volume was average with higher average trade size coming in as we reached post-NFP highs (suggesting again professionals selling into strength as weak shorts are squeezed out in a hurry). The dovish comments sent Gold and Silver surging (and China rumors pushed Copper up - and WTI to around $104). VIX crumbled into the close - with its largest drop in over 5 months in percentage terms - though still higher than last Thursday's close. FX markets were noisy once again through Europe but USD ebbed higher in the afternoon - still very modestly lower on the week and day (with JPY leaking weaker today helping carry support risk a little). Treasuries also leaked higher in yield but remain at the immediate spike low yields post-NFP (pretty much in line with stocks generally) but between FX and TSYs, broad risk assets were not as excited as credit and equity markets specifically as we suspect this was weak recent shorts being shaken out suddenly. In context, the S&P 500 is down over 3% in gold terms from before the payrolls print.

The introduction of the “Mintchip” is really just another extension of the state’s effort to wield supremacy over private affairs.  It is creeping socialism under the guise of efficiency.  But, as anyone familiar with the nature of state understands, government efficiency is an illusion.  As anonymity in free transactions goes, so goes another barrier on further centralized planning. The trick here is that nothing government does is voluntary.  The forced usage of the Canadian dollar via legal tender laws renders the assertion of “voluntary” laughable.  The Mint claims the chip can be used anonymously but this assurance comes from the institution in cahoots with a central bank that can’t manage a simple metal standard for more than a few decades. 

ES (the S&P 500 e-mini futures contract) tested up to its 50DMA and rejected it early in the day (after some rhetorical enthusiasm from the ECB's new French contingent - surprise!). The 10pt rally in ES overnight into the open was the best levels of the day as we slid lower (within a small range) for the rest of the day making its initial lows around the European close and retesting (lower lows) into the US day session close. NYSE and ES volumes were about average (well below yesterday) as Stocks and HY credit underperformed IG credit (with HYG having a good day - after closing at a discount to NAV last night). The Beige Book took the shine off the day as hopes of QE3 faded (remember its the flow not the stock that counts) and that is when stocks began to leak lower - especially energy, financials, materials, and industrials. FX markets were relatively quiet (aside from Jim O'Neill's comments on the SNB which shook swissy) as the USD closed marginally lower helped by strength in EUR and GBP. AUD lost ground after the European close and JPY strengthened (derisking) which likely dragged on US stocks. The modest move in USD was echoed in commodities (apart from WTI where we broke above $103 and Brent-WTI compressed significantly - not forgetting the $1 handle on Nattie) as Gold and Silver largely went sideways all day with some weakness in Copper. Treasuries leaked higher in yield for much of the morning then stabilized after the European close as the long-end underperformed (steepening). VIX closed back above 20%  (though lower from the close) having drifted from below 19% near the open - we haven't closed above 20% two-days-in-a-row since 1/18.

Since Goldman continues to press clients into the worst trade recommendation in the firm's history (remember that once in a lifetime long equity, bond short? no? look here) it means that at least the Goldman version of Bruno Iksil who sits on the firm's prop desk (but only hedge for god's sake, don't go getting any ideas) is having a great time since he is on the other side across from Goldman's clients. Still, while we won't feel bad for them, it is always interesting to note what are the things that Goldman watches for during market wipe outs, such as today, the worst day of trading so far in 2012. So without further ado, here is Goldman's Tuesday roundup.

Equities suffered their largest single-day drop in 4 months as for once Apple was unable to single-handedly hold up the index letting it drop closer to its credit-oriented risk. A monster day for NYSE and ES (S&P 500 e-mini futures) volume saw Financials and Discretionary sectors underperforming and the Energy sector joining Utilities in the red for the year. The S&P closed at its lows as it broke its 50DMA for the first time since DEC11 as AAPL dropped 1.25% for the day (and -2.5% from the highs) but most notably equities and Treasuries are back in sync from early March as 10Y closed under 2% for the first time in a month. Gold and Silver surged around the European close, on little news, as we suspect safe-haven buying and an unwind of the gold-hedged bank-stress-test rally - with another relatively unusual divergence between Gold and stocks on the day. VIX broke above 21% closing just below it back near one-month peaks as the term structure bear-flattened (but notbaly pushing ahead of its credit-equity implied fair value). JPY strengthened all day (and AUD weakened) as carry trades were unwound in FX markets leaving the USD marginally higher on the day (and EUR marginally lower despite the turmoil in European markets). Oil fell back below $101.50 but it was Copper that has suffered the most - down almost 4% since Last Thursday. Credit markets were weak with HY marginally underperforming IG (beta adjusted) but still implying further weakness in equities as HYG closed just shy of its 200DMA.

Disappointing the liquidity-starved masses, the BoJ wholeheartedly believes that this time it's different and their economy remains more or less flat and shows signs of picking up leaving hope for another massive LSAP (and a disappointed SocGen) having to wait for the Fed to pick up the pieces of a global slowdown. The BoJ maintained the size of its asset-purchase fund, credit-loan program, and ZIRP noting that, via Bloomberg:

• *BOJ SAYS NO ONE PROPOSED EXPANSION OF STIMULUS AT MEETING

It seems the Japanese are following China's lead (since China's economy posted a trade surplus on expectations of a deficit and following the biggest import surge since 1989, this means that the hard landing is delayed as the PBOC is far more concerned about the pockets of food inflation noted yesterday and as such will be far less willing to proceed with the easing everyone demands) and deferring to the Fed for the next global liquidity pump (remember its flow not stock so this is bad news for risk-on - as can be seen in AUDJPY, Oil, and Copper). Gold is so far enjoying this as one by one global central banks check to the Fed's check-raise expectations.

Despite a grumpy open in the major cash equity indices - which opened pretty much in line with where S&P futures had closed on Friday morning - equity indices provided some BTFD reassurance for any and everyone who wanted to get on TV today. In sad reality, a lot of this equity index performance was due to Apple's 2% rally off pre-open lows, as it made new highs and vol continued to push higher. Financials, Industrials, and Materials all underperformed on the day (and Utes outperformed but still lost 0.5%). The majors were hurt most once again but remain notably expensive still to their credit-market perspective. On an admittedly quiet volume day (with Europe closed), the credit market (especially HYG) underperformed equity's resilience open to close but an after-hours reality check dragged ES down to VWAP once again on notably above average trade size and volume for the day. VIX managed top almost reach 19%, leaked back under 18 before pushing back up to near its highs of the day by the close - breaking back above its 50DMA (as the Dow broke below its 50DMA but the S&P remains above). Treasuries shrugged off the equity resilience and stayed in very narrow range near their low yields as stocks diverged once again (until after hours). FX markets were very quiet with JPY crosses getting some action as EUR and AUD managed to drag the USD down a little. Commodities were mixed off Thursday's close with Copper the major loser and Gold outperforming. Oil managed a decent intraday recovery today most notably back over $102. The weakness after-hours in ES (the S&P 500 e-mini future) is worrisome as its lost the support of AAPL and its options. At the cash market close, ES peaked for the day at 1382.75 and has since drifted back all the way to 1374.25 - just shy of the day's lows.

Nothing is going on this morning that did not already happen at 8:30:01 am on Friday. As a result, the three robots who are the sole churners of stocks this AM will keep risk where it was just after NFP, because that is part of the new regime, one in which USD weakness is now stock weakness, and one where stocks have a ways to drop before NEW QE is greenlighted. Also with Europe offline all day, the robots won't even be able to frontrun the European close. Bank of America summarizes the lack of events shaping the market this morning.

China reported strong copper and copper product imports in February. However, rather than a sign of strong end user demand, a lot of the stockpile copper will never get shipped out to end-users.

While most of the time, it seems, investing in Emerging (or Growth) market countries is entirely focused on just that - the growth - with little thought given to the lower probability but high impact event of a growth shock. Goldman uses a variety of economic and corporate factors to compile a Growth Vulnerability Score including excess credit growth, high levels of short-term and/or external debt, and current account deficits. Comparing growth expectations to this growth shock score indicates the BRICs are now in very different places from a valuation perspective. Brazil remains 'fair' while India looks notably 'expensive' leaving China and Russia 'cheap'. It seems, in Goldman's opinion that markets are discounting large growth risks too much for China and Russia (and not enough for India). Finally, for all the Europeans, Turkey is richest of all, with a significant growth shock potential that is notably underpriced. Goldman's China-is-cheap perspective disagrees with Nouriel Roubini's well-below-consensus view of an initially soft landing leading to a hard landing for China as 2013 approaches as he notes the pain that commodity exporters feel in 2012 is only a taste of the bleeding yet to come in 2013.

Treasury yields retraced more than 60% of their rise post-FOMC yesterday leaving them only marginally higher on the week as, despite another late afternoon light volume surge to VWAP, stocks closed with their second biggest daily loss of the year. Three days in a row now, ES (the S&P 500 e-mini futures contract) has closed at its VWAP - suggesting institutional blocks continue to look for opportune/efficient selling levels (as opposed to buying the dips which we are so used to). After Spain's auction debacle and the ISM Services miss, it seems that with no Fed standing guard that good is good but bad is not better anymore as the S&P 500 cash lost over 1% (down 2% from Monday's peak to today's trough). Financials underperformed and the majors (which we noted on Monday sagging after Europe's close) have been really hurt with Citi, BofA, and MS down 6 to 7% since then. Equity markets in the US and Europe played catch up once again to credit's more realistic assessment of the world as HYG (the high-yield bond ETF) is back at one-month lows, down 2.7% from its end-Feb highs (or five months worth of yield, oops). Investment grade credit (which remains rich to its fair-value) was not helped as Treasuries were the place of refuge for the day as 30Y yields dropped their most in 2012. Commodities suffered significant damage as Silver tumbled to meet Gold's loss for the week, both down 3% Copper and Oil also dropped notably and are now back in sync with the USD for the week -1% or so. Most major FX remained USD positive except for JPY which retraced its snap lower from yesterday as carry trades were generally exited (with EUR and AUD weakness mirroring JPY strength post-FOMC) leaving DXY near 3-week highs. Who-/What-ever was doing the buying in the afternoon clearly levered the position (using AAPL or options) as VIX dumped once again out of nowhere intraday - closing near its lows of the day. However, VIX did close up near one-month highs as it catches up to Europe's VIX flare. Given the drop in implied correlation (and in-line VIX-S&P move) we suspect the covered-call strategy of the year was coming undone a little at the seams as single-name vol underperformed.

Today’s Spanish auction results were, in a word, awful. Not just higher yields, but a terrible bid-to-cover and perhaps even worse; all of the funding could not be accomplished. The effects of the LTRO are rapidly diminishing as the money has now generally been utilized and the national banks of a nation can no longer support the funding needs of the countries in the periphery. We have reached the turn here and I predict much higher yields to come now for the troubled nations in Europe including Italy. What could be accomplished by liquidity has been accomplished but solvency problems cannot be cured by liquidity alone and that lesson is about to be re-learned again.

Dear Ben:

You have publicly gone on record with some off-the-wall assertions about the gold standard.  What made you think you could get away with it?  Your best strategy would have been to ignore gold.  Although I concede that with the endgame of the regime of irredeemable paper money near, you might not be able to pretend that people aren’t talking and thinking about gold.  You can’t win, Ben.  In this letter I will address your claims and explain your errors so that the whole world can see them, even if you cannot.