Blackrock

• Germany Can Ratify ESM Fund With Conditions, Court Rules (Bloomberg)
• Obama Discusses Iran Nuclear Threat With Netanyahu (Bloomberg)
• Stocks, Euro Gain as Court Allows ESM; Irish Bonds Climb (Bloomberg)
• U.S. cautions Japan, China over escalating islands row (Reuters)
• Draghi alone cannot save the euro (FT)
• 'New York Post' Runs Boldest Anti-Obama Ad Yet (Bloomberg)
• Another urban legend: Fish Oil Pills Don’t Fix Heart Ills in 24-Year Data Review (Bloomberg)
• Troika Says Portugal’s Program is ‘On Track’ (Bloomberg)
• Russia Wants to Steer Clear of 'Gas War' (WSJ)
• U.S. Said Set to Target First Non-Bank Firms for Scrutiny (Bloomberg)
• Wen Says China’s Policy Strength Will Secure Growth Targets (Bloomberg)
• UK faces clash with Brussels on City (FT)

In a sad case of deja vu all over again, the over-reliance on 'shaky' collateral and concentration of risk is building once more - this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses. However, the safety bid combined with Central Banks monetization of every sovereign risk asset onto their balance sheet has reduced the amount of quality collateral available; this scarcity of quality collateral creates liquidity problems. The dealers, ever willing to create fee-based business, have created a repo-like program to meet the needs of the desperate derivative counterparties - to enable them to transform lower-quality collateral into high quality collateral - which can then be posted to the clearing house or exchange. This collateral transformation, while meeting a need, runs the risk of concentrating illiquid low quality assets on bank balance sheets. In essence the next blow up risk is the eureka moment when all banks are forced to look at the cross-posted collateral. Last time it was the 'fair-value' of housing, now it is the 'fair-value' of 'transformed' collateral that is pledged at par and is really worth nickels on the dollar - "The dealers look after their own interests, and they won’t necessarily look after the systemic risks that are associated with this."

While the attached interview between the Casey Report and HFT expert Garrett from CalibratedConfidence will not reveal much unknown new to those who have been following the high frequency trading topic ever since ZH made it a mainstream issue in April of 2009, it will serve as a great foundation for all those new to the topic who are looking for an honest, unbiased introduction to what is otherwise a nebulous and complicated matter. We urge everyone who is even remotely interested in market structure, broken markets and the future of trading to read the observations presented below.

The jawboning party has come and gone, leading to a nearly 100 bps move tighter in Spanish spreads (from all time records of 7.6% just three days earlier), and now the hangover is here. Or, as Bloomberg puts it, Draghi is now in a box. "European Central Bank President Mario Draghi has boxed himself into a corner. Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today." If this seems like a Catch 22 in which the ECB loses regardless of the outcome, that's because it is. Luckily, no matter which path Draghi chooses, the time for talk is over, and now he has to act. Because with every day the ECB does nothing, the more credibility it loses.

• Bundesbank Maintains Opposition to ECB Bond Buying (WSJ)
• Greek Budget Talks Stumble as EU Urges Samaras to Deliver (Bloomberg)
• Fortified by euro, Finns take bailouts on the chin (Reuters)
• China Job Market for Graduates Shows Stress on Slowdown (Bloomberg)
• China Exports Fade as Inflation Eludes Targets: Cutting Research (Bloomberg)
• Japan Falters as Ito Calls for Euro Buys to Rein in Yen: Economy (Bloomberg)
• Government weighs social insurance reforms (China Daily)
• Colombia’s Split Central Bank to Weigh First Rate Cut Since 2010 (Bloomberg)

• Who Needs the Euro When You Can Pay With Deutsche Marks? (WSJ)
• Now it's personal and ad hominem: Is German Economist Exacerbating Euro Crisis? (Spiegel)
• Bernanke Outlines Range Of Options For Additional Easing (Bloomberg)
• Italy's Monti says serious worry Sicily region may default (Reuters)
• Libor ‘structurally flawed’, says Fed (FT)
• Some Firms Opt to Bring Manufacturing Back to U.S. (WSJ)
• ECB Signals Support for Easing Irish Debt Terms (WSJ)
• China’s Wen Warns Of Severe Job Outlook As Growth Yet To Return (Bloomberg)
• Hollande scraps tax breaks on overtime (WSJ)
• China’s June Home Prices Rebound As Sentiment Improves (Bloomberg)

• Looks like the troops won't be steamrolled: JPMorgan Blaming Marks On Traders Baffles Ex-Employees (Bloomberg)
• The Goldman "Huddle" goes to Blackrock - Surveys Give Big Investors an Early View From Analysts (NYT)
• At least housing has bottomed: London House Prices Plunge As Supply Rise Adds To Lull (Bloomberg)
• Christine Lagarde and Nicolas Sarkozy embroiled in new corruption inquiry (Telegraph)- at least that fraud they created: Others helped them create it.
• Heat Leaves Ranchers a Stark Option: Sell (NYT)
• Merkel Gives No Ground on Demands for Oversight in Debt Crisis (Bloomberg)
• The euro skeptics have the best lines again (FT)
• Wen Says China’s Economic Recovery yet to Show Momentum (Bloomberg)
• Europe’s Banks Face Tougher Demands (FT)
• Madrid Region To Sell 100 Office Buildings Amid Austerity (Bloomberg)
• China eases taxes for foreign companies (FT)

Today's AM fix was USD 1565.50, EUR 1281.10 and GBP 1011.96 per ounce.
Yesterday’s AM fix was USD 1576.50, EUR 1284 and GBP 1012.91 per ounce.

Gold rose by 0.5% in New York yesterday and closed up $8.20 to $1,576.60/oz. Silver rose 0.93% or 25 cents to close at $27.09/oz.

Gold gradually ticked lower in Asian trading and has seen further slight weakness in European trading. Still robust physical demand is supporting gold at these levels and strong support is at the $1,500/oz level. 

By now we can only hope (pun intended) that everyone has seen the David Einhorn chart showing the circularity of the European "summit-based" decisionmaking process - somewhat relevant since we have had 21 summits since 2008 and Europe has never been in a condition quite as bad as last week when a historic move by the ECB to lower the deposit rate to zero and the refi rate below the critical threshold of 1.00%... and nothing happened. (that's not quite true: JPM, Goldman and Blackrock all made it quite clear European money markets are now officially dead). However, as the following empirical analysis from Credit Suisse shows, the "Einhorn" chart is not just a conversation piece at cocktail parties: there is an actual trade pattern which has made traders lots of money, and which makes Eurocrats the best friends of not only Belgian caterers, but short-sellers everywhere: go long into a summit when the clueless algos read headlines and send risk soaring, only to short the inevitable fizzles days if not hours later.

Update: BlackRock to restrict subscriptions into 2 Euro money funds

We were the first to bring news that overnight JPMorgan has halted investment in its European money market funds following the ECB's decision to cut the deposit rate to 0%. Now, it is Goldman's turn:

• GOLDMAN HALTS INVESTMENTS IN EURO GOV MONEY FUND AFTER ECB CUT
• GOLDMAN SAYS MARKET CONDITIONS WILL DETERMINE WHEN FUND REOPENS
• GOLDMAN DECISION AFFECTS EURO GOVERNMENT LIQUID RESERVES FUND

And finally the conclusion, which is rather obvious:

• GOLDMAN FUND MEMO: EUROPEAN MARKET IN `UNCHARTERED TERRITORY'

• Mario Monti: We Have a Week to Save the Eurozone (Guardian)
• Europe Central Bank Prepares to Relax Collateral Rules (WSJ)
• EU Banks' Risk in Eyes of Beholder: Worry Is That Lenders Are Boosting Gauge of Their Health (WSJ)
• Europe finally learns about subordination: Bailouts' Creditor Hierarchy Scares Private Bondholders (WSJ)
• Merkel Isolated in Race for Euro Crisis Solution (Spiegel)
• Fed’s Re-Twist May Lift Treasury Repurchase Agreement Rates (Bloomberg)
• China Said to Propose Keeping Limit on Local Government Loans (Bloomberg)
• Moody’s Downgrade Hits 15 Top Banks (FT)
• IMF Challenges Berlin’s Crisis Response (FT)
• Colombia to Auction Rights in 2013 to Gold and Coal, Not Coltan (Bloomberg)

Two weeks ago, when we remarked with great satisfaction that Wall Street's original pentagram of bull had now been cut to three, with the departure of BlackRock's hypermabull Bob Doll, we had one lingering question: why would a strategist, and not a trader, leave Wall Street in the "prime" of his CNBC prime-time years? After all, it is not like Doll ever was right, or was judged by the quality of his predictions - if that was the case he would have been fired years ago. Basically, there was a big question mark surrounding this departure. Today, we may have gotten our answer: as Reuters reports, it appears Doll may have been dipping into the wrong model. Financial model that is.

And since it's Mr. Moneybags, one "bonus" question for the readers regarding Maiden Lane fraud and the subsequent cover up when the GAO came a knockin'

Gold took a tumble for the first time in 7 sessions in Asia as Antonis Samaras, leader of the Greece's New Democracy Party (pro-bailout) was victorious.  Today, Samaras plans to form a coalition with other parties backing the bailout – meaning that Greece’s future in the euro is secure – for now.  Gold’s dip in Asia was thought to be due to profit taking and increased risk appetite after the Greek election. However, this increase in risk appetite has been quite short lived with Spanish and Italian 10 year bonds again coming under pressure resulting in record Spanish yields over 7.13% and Italian 10 year over 6% again. Initial gains in equity markets have subsided and the lessening of risk appetite is seeing gold supported. Greece’s exit from the Eurozone is no longer a short term risk however it remains a real risk as does the risk of financial contagion in the Eurozone due to insolvent banks in Spain, Italy and France.

Overnight, Goldman's Robert Boroujerdi released a report whose conclusion we have been warning about for the past 3 years, which also happens to be its title: "ETFs: An Imperfect Hedge?"  Goldman's findings in a nutshell: "The rise of investor usage of ETFs as hedges continues. In a bid to gain quick exposure to evolving markets, avoid single stock M&A risk or take sector views, we believe the use of “blunt force” hedging via ETFs may impair portfolio returns and potentially create negative alpha." Read that again: not zero alpha, i.e., same returns as market, but negative alpha. In other words, the great cottage industry that has been the basis for so many riches for the likes of BlackRock, and that has ensnared so many gullible retail investors, is essentially a guaranteed money losing get rich quick scheme?

Who da thunk it.

What is more curious, are Goldman's observations on historical cross industry correlations because they show that in the grand scheme of things, virtually everything trades as one!