"Off the highs" is perhaps the phrase that the mainstream should be using. The S&P gave up allits post-EU-close gains into the US close. It seems, as we noted earlier, that AAPL capturing its 50DMA, relative strength in VIX and Bonds, and a total lack of volume just could not lift the S&P 500 to new highs. The early short squeeze provided the momentum but that faded into the last hour or so. USD weakness supported the risk rally (as very little else did) and commodities were all higher on the day with the Brent Vigilantes on the prowl once again as WTI topped $94.50 back to near 3-week highs. AAPL's best day in over 3 months (up to its 50DMA) led Tech to lead the day (and the Nasdaq was the notable outperformer). The exuberance led stocks rich relative to all risk-assets and the slide into the close merely corrected to that risk-asset-proxy. JPY carry was not helpful as JPY tried and failed to recover the 98.00 level. Silver outperformed. With the Japanese on vacation last night, JPY's rip into the close is a little worrying for the risk-on crowd but month-End here we come...
In the past months and right after implementing Quantitative Easing Unlimited Edition, the Fed began surfacing the idea that an exit strategy is at the door. With the latest releases of weak activity data worldwide, the idea was put back in the closet. However, a few analysts have already discussed the implications of the smoothest of all exit strategies: An exit without asset sales; a buy & hold exit. We have no doubt that as soon as allowed, the idea will resurface again. Underlying all official discussions is the notion that an exit strategy is a “stock”, rather than a flow problem, that the Fed can make decisions independently of the fiscal situation of the US and that international coordination can be ignored. This is logically inconsistent as we address below...
Over the years, Jim O'Neill, former Chairman of GSAM, rose to fame for pegging the BRIC acronym (no such luck for the guy who came up with the far more applicable and accurate PIIGS, or STUPIDS, monikers, but that's neither here nor there). O'Neill was correct in suggesting, about a decade ago, that the rise of the middle class in these countries and their purchasing power would prove to be a major driving force in the world economy. O'Neill was wrong in his conclusion as to what the ultimate driver of said purchasing power would be: as it has become all too clear with the entire world drowning in debt (and recently China), it was pure and simply debt. O'Neill was horribly wrong after the Great Financial Crisis when he suggested that it would be the BRIC nation that would push the world out of depression. To the contrary, not only is the world not out of depression as the fourth consecutive year of deteriorating economic data confirms (long since disconnected with the actual capital markets), but it is the wanton money (and bad debt) creation by the central banks of the developed world (as every instance of easing by China has led to an immediate surge of inflation in the domestic market) that has so far allowed the day of reckoning, and waterfall debt liquidations, to take place (and certainly don't look at the stock index performance of China, Brazil, India or Russia). Despite his errors, he has been a good chap having taken much of the abuse piled upon him here at Zero Hedge somewhat stoically, as well as a fervent ManU supporter, certainly at least somewhat of a redeeming quality. Attached please find his final, farewell letter as Chairman of the Goldman Asset Management division, as he moves on to less tentacular pastures.
The week ahead will be driven by the heavy end-of-month data schedule. In addition to the usual key releases like ISM and payrolls and ECB meeting, this week we also get an FOMC meeting - though it will hardly see much more than a nod to the weaker activity data of late. For the ECB meeting a full refi but not a deposit rate cut are priced now. Outside the FOMC and the ECB meeting there will be focus on the RBI meeting in India, with a 25bp cut priced in response to lower inflation numbers recently.
With China and Japan markets closed overnight, activity has been just above zero especially in the critical USDJPY carry, so it was up to Europe to provide this morning's opening salvo. Which naturally meant to ignore the traditionally ugly European economic news such as the April Eurozone Economic Confidence which tumbled from a revised 90.1 to 88.6, missing expectations of 89.3, coupled with a miss in the Business Climate Indicator (-0.93, vs Exp. -0.91), Industrial Confidence (-13.8, Exp. -13.5), and Services Confidence (-11.1, Exp. -7.1), or that the Euroarea household savings rates dropped to a record low 12.2%, as Europeans and Americans race who can be completely savings free first, and focus on what has already been largely priced in such as the new pseudo-technocrat coalition government led by Letta. The result of the latter was a €6 billion 5 and 10 year bond auction in Italy, pricing at 2.84% and 3.94% respectively, both coming in the lowest since October 2010. More frightening is that the Italian 10 year is now just 60 bps away from its all time lows as the ongoing central bank liquidity tsunami lifts all yielding pieces of paper, and the global carry trade goes more ballistic than ever.
Macro perspective of this week's events. Hint: the ECB meeting may be the most interesting.
The recent slide in the gold price has generated substantial demand for bullion that will likely bring forward a financial and systemic disaster for both central and bullion banks that has been brewing for a long time. To understand why, we must examine their role and motivations in precious metals markets and assess current ownership of physical gold, while putting investor emotion into its proper context. The time when central banks will be unable to continue to manage bullion markets by intervention has probably been brought closer. They will face having to rescue the bullion banks from the crisis of rising gold and silver prices by other means, if only to maintain confidence in paper currencies. This will likely develop into another financial crisis at the worst possible moment, when central banks are already being forced to flood markets with paper currency to keep interest rates down, banks solvent, and to finance governments’ day-to-day spending. History might judge April 2013 as the month when through precipitate action in bullion markets Western central banks and the banking community finally began to lose control over all financial markets.
Bulls are still in charge of markets despite the shallow 2 to 3% correction the previous week. The conundrum for most investors remains, where else are you to put your money despite obvious risks and deceptive conditions? The Fed is forcing people into stocks, period.
Gold has surged 4.9% in dollar terms so far this week and is headed for its biggest weekly gain in one-and-a-half years. Gold has recovered in all currencies and is up by 4.8% in euro terms and 3.7% in sterling terms.
Therefore, gold has recovered nearly half of its recent sharp decline and is now just 7% below its price ($1,560/oz) prior to the futures induced sell off on April 12th and 15th.
- Reinhart and Rogoff: Responding to Our Critics (NYT)
- Differences with centre-right delay Italy's Letta (Reuters)
- Italy's Letta moves forward to shape government (Reuters)
- China’s leaders warn on financial risks (FT)
- Norway oil fund makes big move from bonds to stocks (FT) - worked wonders for the Bank of Israel
- Smuggling milk is the new smuggling heroin in HK: Milk Smugglers Top Heroin Courier Arrests in Hong Kong (BBG)
- RenTec's mean reversion models fail on BOJ lunacy: Yen Bets Don't Add Up for a Fund Giant (WSJ)
- From 'Fabulous Fab' to Grad Student (WSJ)
- BOJ in credibility test as divisions emerge over inflation target (Reuters)
- Boston Bombing Suspect Moved from hospital to prison (WSJ)
- Provopoulos Says ECB May Never Need to Use Bond-Buying Program (BBG) which is good because, legally, it doesn't exist
While the main, if completely irrelevant, macroeconomic news of the day will be the first estimate of US Q1 GDP due out later today, perhaps the best testament of just how meaningless fundamental data has become was the scheduled BOJ announcement overnight in which Kuroda's merry men simply stated what was expected by everyone: the Japanese central bank merely repeated its pledge to double the monetary base in two years. The lack of any incremental easing, is what pushed both the USDJPY as low as 98.20 overnight (98.60 at last check), over 100 pips from the highs, and has pressured the Nikkei into its first red close in days, and shows just how habituated with the constant cranking up of the liqudity spigot the G-7 market has truly become.
We are a long way from really resolving the argument between the Keynesian and Austrian economic theories, despite some so-called experts proclaiming Krugman's victory this week. The discovery of the calculation error in the Reinhart/Rogoff study does little to change the overall premise that excessive debt levels impede economic growth and have, historically, led to the fall of economic empires. All one really has to do is pick up a history book and read of the Greeks, Romans, British, French, Russians and many others. Does fiscal responsibility lead to short term economic pain? Absolutely. Why would anyone ever imagine that cutting spending and reducing budgets would be pain free? However, what we do know is that the path of fiscal irresponsibility has long term negative consequences for the economy. In the meantime we can continue to ignore the long term conseqences in exchange for short term bliss.
Following the dramatic change in tone from Washington regarding Syrian "Weapons of Chemical Destruction", the phrases "Middle East" and "geopolitical risk" are suddenly back in the same sentence on the lips of those sitting around trading desks, leading to a powerful jump in the oil complex where Brent is having its best day in four months, and WTI in give. Yet the feasibility of an armed conflict with Syria which Russia has made very clear in the past is a strategic ally in the region aside, is the probability of an incursion truly imminent? For that we go to Stratfor's latest weekly update of US naval assets, which shows that if indeed Obama is planning to do a flyover showing off his Nobel Peace prize above Damascus, there will be a waiting time of at least several weeks as there is nothing in the immediate Syrian offshore vicinity. It appears that the 5th Fleet only has CVN-69 Eisenhower in the vicinity of Bahrain, as well as one big deck amphibious ship, the Kearsarge keeping an eye on the Straits of Hormuz.
When tin-foil-hat wearing digital dickweed blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox. As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the 'free' markets. Rick Santelli is rightly concerned that, "there is a danger that everyone is loaded in the same direction," asking what happens if all the Central Bank pump-priming does not work, given these equity valuations, "who gets caught holding the bag? What chairs are left when the music stops?"
There are growing supply issues and a range of gold and silver coins and bars are in short supply internationally and premiums are rising globally. Many smaller dealers have been cleared out of their bullion inventories.
Gold prices are expected to recover in the coming weeks and months according to the Reuters Precious Metals Poll of analysts.
Most of the 29 banking and brokerage analysts and consultants polled expected prices to find support and stay above the $1,400 mark. The majority of analysts, 20 out of 29, expect gold to end 2013 above $1,450 per ounce and 6 analysts, including GoldCore, saw gold above $1,650/oz by the end of 2013.
Interestingly, the majority are bullish at these price levels with average price forecasts for the year of 2013 much higher than today's prices - at a mean of $1596/oz and a median of $1627/oz.