Copper

Gold coin purchases gained 13% last year and will increase 2.7% in the first half. Purchases of gold bars increased by 36% to nearly 2,000 (1,194) metric tonnes, concentrated in China, Germany, Switzerland and Austria. East Asia demand for gold bars rose 53% to 456 metric tonnes. India rose 9% to 297 metric tonnes and western markets demand for gold bars rose 41% to 335 metric tonnes. Central banks increased net purchases by a massive fivefold to 430 tons last year, and may buy another 90 tons in the first half, GFMS said. Combined official holdings stand at 30,788.9 tons, data from the London-based World Gold Council show. “Attitudes among central banks haven’t really changed,” Thomson Reuters GFMS annual survey said. “There’s still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings.” The Thomson Reuters GFMS annual gold survey also predicts that gold will struggle in the first half of the year, increasing in the later half towards $2,000. It also says the gold bull market is losing steam and predicts an end to the run as economies recover next year and interest rates begin to rise.

UPDATE: ES leaking lower as Packers fans sell (and China's Shanghai Composite -0.8% at open and Hang Seng -1%)

Following EURUSD's modestly weak opening (though managing to hold above Friday's lows and inching higher), EURJPY has pushed to fresh new 11-year lows (and JGB yields at one-year lows). Asian equities are trading notably lower with Japan's Nikkei down 1.6% in early going (coming back a little now) and South Korea's Kospi down 1.1% so far. ES (the e-mini S&P 500 futures contract) opened lower, tried to get back up to Friday's close, failed and is now down around 6pts (at 1285) - still shy of where broad risk assets (CONTEXT) would expect - around 1280 for now - though AUD weakness (housing data bad not totally dire though carry being lifted), JPY strength (government comments on the flatness expected in Japan's recovery and safety flow) and Treasuries not open is undermining support for stock futures so far. The economically-sensitive commodities are leaking lower with Silver having given back its earlier gains and Copper down 0.75%, Oil is holding near $99 and Gold is down a smidge (and more stable than the rest) at -0.23% ($1635). The market's message is risk-off for now and we would expect Bunds to benefit (as JGBs are for now while corporate credit leaks wider) as without Treasuries open, where is risk capital going to flow.

The post-European-close rally-monkey was in full force today, with somewhat average (though NYSE volume is 30% lower than last January's average!) volumes in stocks, as ES (the e-mini S&P 500 futures contract) made it almost back to unchanged in a post-cash-close squeeze (on notably lower than average trade size). However, close-to-close, the cost of protecting equity and credit (in options volatility, implied correlation, and CDS) all rose (underperformed) significantly. It seems everyone believes everything bad (event-wise) is priced in but perhaps they are missing the reality of mundane macro data and earnings.

Thanks to disappointing macro data early on and better-than-expected European auctions (and ECB not cutting), the EUR went bid early on, accelerate after the Europe close, and stayed that way for most of the day (EURUSD squeeze? or ES-EUR convergence?) ending a one-week highs. Credit markets gapped tighter around their open (thanks to Europe's early strength) but leaked back as the morning wore on. Stocks underperformed credit overall as IG and HY credit rallied into the European close and held gains - while HYG (the high yield bond ETF) significantly underperformed on the day (compressing its NAV premium further despite a modest late day pullback) which should be mildly concerning for bulls (given the size of flows and momentum behind it recently). ES (the e-mini S&P futures contract) converged with VWAP and CONTEXT around lunch then pulled higher into the close managing to tag the day-session open but broad risk-drivers did not participate so much (and we saw higher average trade size volume come in covering at the close). Oil is down 2.6% on the week (sub $99) seeing its biggest 2-day drop in a month and while Gold and Silver leaked lower from midday highs, Copper managed to hold onto its gains (now up over 6% on the week). Volume ended about average for the year in NYSE stocks and ES (though still well down from December).

Today saw NYSE trading volumes at their 3rd highest of the year and ES (the e-mini S&P 500 futures contract) saw its second highest volume of the year (though both still well below recent averages) as stocks managed marginal gains, outperformed handily by high yield credit. For the sixth day of the last seven ES closed only a smidge from where it opened but average trade size was dramatically higher (its highest since 8/31) which historically has suggested a short-term top (and certainly seems odd heading into tomorrow's European bond auctions). In a similar manner to yesterday, HY17 (the high yield credit index) surged (absolute and relative to ES and HYG) from the European close to US day session close (index RV to Europe and Index arbitrage seems much more of an effect than rerisking. The major Financials were among the best performers today once again (as XLF managed +1.13%) with BofA now up an impressive (if not ridiculous) 24% YTD (and Citi +19%). Perhaps of note is the fact that the major financial CDS rally stalled today with MS, GS, and JPM all leaking a little wider into the close. Treasuries continued their ain't-no-decoupling rally as the 10Y auction went well (beige Book mixed/weak) leaving longer-dated TSY yields near day (and year to date) lows and ES near day highs (sell EUR, buy anything USD-denominated?). The dollar is practically unchanged on the week now as EUR 1.27 (and GBP more so) weakness dragged it up (even as AUD rallied - helping stocks). Copper outperformed among the economically sensitive commodities as Gold gained modestly (slight beat of Silver) and Oil slid back to $101 and remains down on the week as Silver holds over 4% gains. As an aside, from the 12/30/11 close, Gold is up 4.95%, the S&P 500 is up 2.77%, and the Long Bond is down 0.65%.

• Europe’s $39T Pension Threat Grows as Economy Sputters (Bloomberg)
• Monti Warns of Italy Protests as He Meets Merkel (Bloomberg)
• Bernanke Doubling Down on Housing Bet Asks Government to Help: Mortgages (Bloomberg)
• Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash (Bloomberg)
• Europe Fears Rising Greek Cost (WSJ)
• ECB’s Nowotny Sees Risk of Mild Recession in Euro Region (Bloomberg)
• Republican Senators Criticize Fed Recommendations on Housing (Bloomberg)
• Spanish Banks Try to Build Their Way Out of Home Glut (WSJ)
• Europe Stocks Fluctuate After German Auction (Bloomberg)

All you need to read.

NYSE total volume was the lowest for the year today. Almost 20% below December's average and down 10% from Friday's already low volumes, US equity markets managed to limp higher post the European close. Notably, volume in ES (the e-mini S&P 500 futures contract) was also the lowest of the year (at around 1.43mm cars vs 2.11mm 50-day average) and what volume there was focused on the European trading session (and right at the close). Today saw the average ES trade-size rise to recent peak levels as we note trade-size picked up into the Europe close (considerably higher average trade size around the European close than normal) and then again at the close. Peaks in average trade-size have often pre-empted turning points in the market and we note that while markets closed quietly unchanged (practically), high yield credit lost ground on the day and broad risk assets (while mostly showing small net changes) did not as a whole rally off the European close lows as enthusiastically as stocks. VIX futures and implied correlation continue to diverge as we note that VIX actually closed higher for the first time in five days.

Against this highly deflationary backdrop, the one primary prop for the markets is hope of more juice/credit from the world Central Banks. However, even that prop is losing its strength: the gains of the last coordinated Central Bank intervention lasted just a few weeks.

Equities traded their lowest volume of the week (-19% from yesterday alone). The NFP print this morning provided ammunition for some vol early on but as we drifted into the European close, risk assets in general were pushing lower. Unlike the last few days the circa-Europe-close dip-and-rip only occurred in the equity market today as the USD stayed near its highs and TSYs near their low yields of the day (and high yield credit near its wides of the day) as stocks took off back into the green and meandered either side of VWAP for the afternoon. It seems odd that the afternoon's divergence between TSYs and stocks was not accompanied by Gold or USD weakness (QE hopes) and in fact as we got into the last few minutes, stocks started to push back lower on much larger average trade size but was trapped between VWAP and unchanged on the day. Gold outperformed on the week (+3.4%) just inching out Silver and Oil as they appeared to converge on a 3x beta of the USD 'appreciation' of around 1.2% this week. Treasuries rallied 4-6bps and the curve flattened overall as we saw duration reduction in corporate bonds (with highest quality names (Aaa-Aa3) being net sold). DXY stayed above 81 as the EURUSD scrambled back above 1.27 (down an impressive 1.85% on the week). AUD was the only major to gain relative to the USD on the week (and very marginally). Finally, we saw VIX dropping and stabilize and implied correlation diverged and rose this afternoon which combined with the divergence in risk assets suggests stocks are short-term overdone at best.

Commodities such as copper have led the market for years; recently they've rolled over while the stock market surges higher. Once again, either historic correlations have been decisively severed or there is a gargantuan divergence that's about to be resolved. Sentiment readings are firmly in extreme bullish territory, but hey, maybe the market will reward the majority with a rally that feeds on rising complacency. And maybe the truism "volume is the weapon of the bull" is also voided, as low volume rallies may well lead to lower-volume rallies. The market has been acting as if all these signs are bullish. Maybe, maybe not. Meanwhile, the witches are cackling quietly over their bubbling brew, and it certainly sounds like some evil is being conjured up.

UPDATE: EFSF said to get EUR4bn of orders for 3Y issue is providing some cover (at what rate? We offer to buy 1tn at 300% yield...)

With plenty of time left until France unleashes its supply (and a dismal consumer confidence print earlier), there is a plethora of notable market moves: Unicredit is halted down 7.9% (seems to be the culprit for the initial risk-off turn in Europe), but Deutsche Bank is down over 5% on liquidity problem rumors, EURUSD traded under 1.2850 at its lowest level since September 2010, 10Y Italian bonds have pushed well above 7% yields and 510bps spread to Bunds as Unemployment rises to 8.6%, Belgian 10Y yields are over 4.5% - highest in 3 weeks, and the rest of European Sovereigns are all leaking wider (near wides of the year). Risk assets (CONTEXT) broadly are under pressure but ES (the S&P 500 e-mini futures contract) is holding off yesterday's early morning lows for now. Commodities are all dropping fast with Gold (actually outperforming in this slide) back at $1615, Oil at $102.50, and Copper approaching $340. Treasuries are bid but trading in line with Bunds' movements so far in general. Some chatter of ECB buying in the last few minutes is stabilizing things a little here.

The S&P 500 closed practically unchanged today - recovering from decent selloff to a late-Europe-session low - amid volume that was over 30% lower than at the same time last year. Investment grade credit, the high-yield bond ETF HYG, and broad risk assets in general kept pace with ES (the e-mini S&P 500 futures contract) but high yield credit (tracked by the HY17 credit derivative index) outperformed considerably - moving to its best levels since late October. This disconnect appeared as much driven by technicals from HY-XOver (Long US credit vs Short EU credit) and HYG vs HY17 (a high premium-to-NAV bond ETF vs relatively cheap high yield spread index) trades as it was a pure risk-on trade. Elsewhere, the USD retraced only marginally the earlier gains of the day (with EUR hanging under 1.2950 by the close) as Treasury yields jumped 5-7bps more (30Y +14bps on the week now) as we can't help but notice the correlation between TSY weakness and EUR strength for a few hours this afternoon (repatriation to pay up for tomorrow's French auction?). Commodities were very mixed with Copper sliding notably (decoupling from its new friend Gold which rose and stabilized this afternoon over $1610) as Oil pushed higher all day (over $103) on Iran news and Silver leaked back this afternoon (under $29.5).

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications. And critically, it has a particular impact on food.

We are 30 minutes into the day session. Do you know where your sanity is? Silver and Oil (over $102) are up 3.5% from last week's close, Copper and Gold up 1.5-2% and the USD down 0.7%. The USD weakness, along with Treasury selling, is enough to juice stocks up nicely as they catch up to yesterday's European extravaganza. European sovereigns are giving back a lot of their gains from yesterday so far but ECB buying chatter is supporting BTPs at the moment. US financials are up 2.8% as the Treasury-Stock disconnect of last week converges rapidly.