Portugal

If a trader knew nothing about the growth, the debt, the inflation, the exporters vs. importers, the serial defaulters, currency manipulators, hot-money or conversely deflation fighters; simply grouping the nations of the world on whether they were 'friend' or 'foe' to the US would provide an odd highly correlated value perspective on the interest rates paid on 1yr and 10yr sovereign debt... It appears your status with the central bank cabal was more important than your ability to repay the loaned money?

On September 9th, 1965, US Navy pilot James Stockdale was shot down over North Vietnam and seized by a mob. He would spend the next seven years in Hoa Lo Prison, the infamous “Hanoi Hilton”. When asked who didn't make it out? "Oh, that’s easy...The optimists." The lesson, he explains, is a valuable one for investors today: "you must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be."

Physical gold is migrating to the East (Russia, China) and, with it, power and influence. We see it with China and Russia progressively imposing their will, building consensus with a great many countries that wish to end American domination made possible by their capacity (privilege) of issuing the world reserve currency. The saying, “He who holds the (physical) gold makes the rules”, is truer than ever. The announcement of the creation of the BRICs development bank is just the first cornerstone in the new international monetary edifice. All we have to wait for is the first official announcement from the East of a new means of settlement of commercial trade based on one or more tangible assets, with gold. Afterwards, logically, an announcement of the convertibility of certain currencies into gold, or even the creation of a new currency that would be convertible to gold, should be made.

Gold is nearly 2% higher this week and its technical position has further improved (see key charts). On Wednesday, gold broke out of bullish descending wedge chart pattern that has formed in recent months. Another buy signal for gold came when gold rose above the 20 EMA and 50 EMA (exponential moving averages). Also positive is the fact that the price momentum oscillator (PMO) has turned up, indicating that a positive momentum shift has occurred.

GDP-weighted average sovereign risk for European nations has risen 14% in the last 2 weeks - the most since Nov 2012. European peripheral bond spreads finally started to 'adjust' for real risk this week with a dramatic 30-40bps decompression from the early week's tights to the closing wides. Portugal was worst (+23bps on the week) followed by Italy and Spain. Stocks were hammered - EuroStoxx 600 2-week drop is the biggest since May 2012 and Germany's DAX 2-week drop is largest since Nov 2011.

Update: And here it is - Draghi just said Russian sanctions could add to the "downside risk." Translation: all Putin's fault

With inflation tumbling, credit creation imploding, core European nations' economies floundering and the periphery re-collapsing, ECB's Draghi decided rates were negative enough and expressed no change in the statement which leaves just the press conference to jawbone the EUR lower, Bund yields even more negative, and explain why Portugal was a one-off... or admit OMT was make-believe.

At 2.43%, 10Y Treasury yields are back at June 2013 levels with the entire complex pressing low-yields of the day (down 5-6bps on the week). The USD is strengthening (now up 0.45% on the week) to new 11-month highs. Equity markets are reeling in US and Europe. All major US indices are now down almost 1% from last week's payrolls data, and the Dow and Russell 2000 remain notably red year-to-date. In Europe, it's getting ugly fast, the broad European stock market is now down for 2014 with the periphery suffering the most. For 2014, Portugal is worst but Germany's DAX is -3.5% YTD. European bonds are also hurting with Italy, Portugal, and Spain spreads up 12-22bps, with German 2Y yields at 1bps - their lowest in 13 months. Gold is up on the week, jumping above $1300 this morning as copper slides.

Greek 10Y yields, up 6 days in a row, have surged in the last few days to 2-month highs (bond price lows). The significant shift in sentiment appears related to two main factors. First, The Independent reports that Europe is considering pulling Troika (its economic oversight committee) - which has been likened to German Nazi occupation - out of Greece, forcing local politicians to come up with their own reforms by the start of 2015 (which clearly the market is not believing). Perhaps even more concerning is Goldman Sachs shift to neutral on European peripheral bonds, warning that "at current spread levels we think there is not enough of a buffer for investors to take credit risk in intermediate and long-dated peripheral sovereign bonds." Time for some more 'whatever it takes' we think.

• Second Ebola patient to arrive in U.S. on Tuesday (Reuters)
• Ebola Drug Made From Tobacco Plant Saves U.S. Aid Workers (BBG)
• Egypt plans to dig new Suez Canal costing $4 billion (Reuters)
• Apple Buybacks Pay Most Ever as CEOs Spend $211 Billion (BBG)
• DeMark Says Sell China Stocks Now After World’s Best Gain (BBG)
• Investors Stung by Losses After Exiting Struggling Property Fund in China (WSJ)
• B.A. in BTFD: MIT May Consider Granting Degrees in Less Than Four Years (BBG)
• Too late, money's already been spent: GPIF Needs Overhaul Before Asset Changes, Shiozaki Says (BBG)
• Oh look, another "truce": Israel withdraws troops, 72-hour Gaza truce begins (Reuters)

Another day, another case of unprecedented muppet brutality, or, as Cramer would say: "Bear Espirito Stearns is fine"...

Fearful of any impact to the Portuguese/European dream, EU commission leaders folded and bailed out Banco Espirito Santo. Bond and CDS traders are scrambling this morning to come to grips with the consequences of BES bail-out/bail-in. The $6.6 billion bailout's burden-sharing has wiped out shareholders and crushed subordinated debt holders (traded down to 16c on the dollar this morning) where "the likelihood of recovery for junior bondholders is minimal,” according to one trader; but leaves senior bond holders (+10pts to 100) and depositors unaffected. However, it is those 'smart' investors who bought insurance in the CDS market that are struggling this morning as the plan to transfer BES assets to a new company, Novo Banco, may constitute a so-called 'succession event' whereby all the contracts associated with CDS move to the new company (and this do not trigger the CDS to pay). CDS spreads ripped 350bps tighter.

Following a ghastly week for stocks, the momentum algos were desperate for something, anything to ignite some upward momentum and stop the collapse which last week pushed the DJIA into the red for the year: they got it overnight with the previously reported bailout of Portugal's Banco Espirito Santo, where the foreplay finally ended and after the Portuguese Central Bank finally realized that the bank is insolvent and that no more private investors will "recapitalize" it further, finally bailed it out, sticking the stock and the subs into a bad bank runoff entity, while preserving the senior bonds. So much for Europe's much vaunted bail in regime and spreading of pain across asset classes. At least the depositors did not get Cyprused, for now. 

Dispassionate, non-conspiratorial rant , fact-based high level discussion of the sigificant drivers of the week ahead.

The summer months frequently see seasonal weakness as has been the case in recent years and since gold became a traded market in 1971. Gold and silver often see periods of weakness in the summer doldrum months of May, June and July.

• Portugal may use the Resolution Fund to recapitalize Banco Espirito Santo, Diario Economico reports, citing unidentified people linked to the process.
• Resolution Fund may inject more than €3 billion
• A “bad bank” may be created for the toxic assets of the credit portfolio
• Solution aims to rescue Banco Espirito Santo without spending taxpayers’ money, and is being prepared by the government and the Bank of Portugal
• From Aug. 4, Banco Espirito Santo will leave the stock market and will be 100% owned by the Resolution Fund, an entity created in 2012 and financed by Portuguese banks and by revenue from the special contribution that the banking sector pays the Portuguese state