European Sovereign Debt Crisis Deepening - Risk of Contagion And Bond Market Crash, And Why Rising Rates Mean Gold StrengthSubmitted by Tyler Durden on 02/16/2011 09:26 -0500
There is a real sense of the “calm before the storm” in markets globally. Complacency reigns, despite signs that the sovereign debt crisis in Europe is deepening and that Japanese and US bond markets also look very vulnerable due to rising inflation, very large deficits and massive public debt. US Treasuries have been sold by some of the largest investors (both private and sovereign) in the world recently (see news). These include large creditor nations Russia and China but also PIMCO, the largest bond fund in the world. A global sovereign debt crisis is now quite possible. At the very least, we are likely to have a long period of rising interest rates which will depress economic growth. Contrary to some misguided commentary, rising interest rates will benefit gold as was seen when interest rates rose sharply in the 1970s. It was only towards the end of the interest rate tightening cycle in 1980, when interest rates were higher than inflation, that gold prices began to fall.
Markets mostly positive this morning, breaking its recent pattern. Today will show several retail industry-related releases, including advance retail sales and import price index. Surveys reflect expectations of bullish data. We also note a recent creep in LIBOR-OIS to 16bp (+4bp YTD). Emerging market stocks rallied yesterday after the release of China’s positive export figures and the announcement of Egypt’s intent to form a democracy. Inflation continues to rise in China, as its CPI increased 4.9% YoY missing expectations of 5.4% and PPI increased 6.6% YoY v 6.2%E. The CPI increase included a change in the basket of goods that reduced the weight of food which has recently risen in price dramatically. The BOJ left its target rate unchanged at 0.1%, in line with consensus estimates. Japan also saw a 3.3% MoM gain in industrial production over last month’s +3.3%.
No, snow was not blamed in this latest, and certainly not last, broke state snafu. But wait until you read the official excuse...
- Budget Forecasts Bigger 2011 Deficit (WSJ)
- Geithner Tells Obama Debt Expense to Rise to Record (BusinessWeek)
- Hussman: Rich Valuations and Poor Market Returns (HussmanFunds)
- Amazon.com said it is closing Irving facility, will not hire 1,000 people in retaliation over sales tax issue (DallasNews)
- China in talks over Panama Canal rival (FT)
- Rising China Bests a Shrinking Japan (WSJ)
- In placing stock bets, listen to the shorts (Reuters)
- Rallies Draw Crowds against Berlusconi (FT)
- Roubini’s Next Crisis Is Scary Food for Thought (Bloomberg)
- Egypt Army Suspends Constitution, Meets Protester Demand (Bloomberg)
The gradual drain of COMEX silver inventories seen in recent months continues and COMEX silver inventories are at 4 year lows. Total dealer inventory is now 42.16 million ounces and total customer inventory is now at 60.68 million ounces, giving a combined total of 102.847 million ounces. The small size of the physical silver market is seen in the fact that at $30 per ounce, the COMEX silver inventories are only worth some $3 billion....Talk of a default on the COMEX is premature but the scale of current investment demand and industrial demand, especially from China, is such that it is important to monitor COMEX warehouse stocks. The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which could see silver surge as it did in the 1970s.
The market rallied on Friday as Hosni Mubarak abdicated his manipulatedly elected throne, walked out of the country like...
Some pretty amazing developments in the past 48 hours in the world's 2 largest "easy money" central banks, that very few are talking about. If you are a conspiracy theorist this is one you are going to enjoy....First over in Europe, the ECB's head Trichet is facing the end of his term soon. It has been long thought German hawk (hawk = favors fiscal discipline and tighter money) Axel Weber was the shoo in for the job. But he is against handing money out in every direction to any country with its hand out (Greece, Ireland, Portugal, Spain... and someday Italy, France). I was actually fascinated to see how Weber would handle what Europe is doing (which is some combination of TARP + QE lite) since much of it seemed to go against his personal beliefs. But now there will be no opportunity to see how it would have played out. Out of the blue this week, he has withdrawn his name from a job that was presumed to be his... In the U.S., hawks are a rare breed. But there was one sitting very close to Ben B by the name of Kevin Warsh. He is a guy who has been vocally against QE infinity. Yesterday he decided its time to take his services elsewhere.
Gold, and particularly silver, lease rates (see chart) have been rising recently. The rate is found by subtracting the silver forward offered rate from the London Interbank Offered Rate (LIBOR). This likely signals increasing tightness and illiquidity in the bullion markets (as recently said by Sprott Asset Management, and UBS yesterday). The rise in silver has been very sharp, having gone from 4.29 basis points (0.0429%) to 77.65 basis points (0.7765%) since the start of the year (31 December 2010). While the rise is very sharp, it is important to put it in context, and silver lease rates remain well below the levels reached after the Lehman Brothers systemic crisis in late 2008 when silver lease rates surged to 2.5%. At the same time, the very small silver bullion market is clearly under strain as seen in the continuing backwardation. This clearly shows that demand for physical is robust, evident from retail demand in the US where there were record US Mint silver eagle sales last month. There are delays (3 to 4 weeks) to get branded LBMA silver bars (100 oz) in volume.
Markets down for a second day this morning. Look forward to the release of initial jobless claims this morning which may provide some additional insight into last week’s unemployment numbers. NYSE shares rallied yesterday off of Deutsche Boerse AG’s announcement of its negotiations to buy the exchange, which would make it the country’s largest market for derivatives. While speaking in front of the House Budget Committee yesterday, Fed Chairman Ben Bernanke reminded Congress that the Fed is not solely responsible for the U.S.’s overwhelming deficit. He defended QE2 but hinted that there is a limit to its effectiveness. The chairman acknowledged that fiscal adjustments "occur at some point." On a related note, today will see the release of the U.S.’s monthly budget deficit.
Knight Capital has released a sovereign roadmap Catalyst Calendar which is a must read for anyone who trades with more than a 15 millisecond eye on the markets. And while everyone is now focused on what is going on with the Chinese tightening regime (with expectations of two-three more liquidity tightening steps over the next several months) with much speculating over just how priced in all this is (not much if one looks as the Bombay Sensex or even the SHCOMP for that matter), the real focal point should once again be on Europe. The reason: March is coming fast, and March will likely be the cruellest month for Europe, and possibly for the stock markets, and serve as the catalyst to introduce QE3 in all its glory.
Ireland Hikes Insolvent Bank Funding, To Acquire Another €12 Billion In Bank Loans, Brings Total Discount On Loans To 58%Submitted by Tyler Durden on 02/09/2011 08:11 -0500
Remember when in December, to much fanfare, the Irish bail out was announced, which included a package of €85 billion financed by everyone, up to an including the country's Pension fund (the NPRF)? Well, less than two months later, it has become clear that the funded component is woefully low as the true extent of losses is starting to be appreciated. According to the Irish National Asset Management Agenc, the country's two key insolvent banks will need a fresh infusion of €12 billion. What this means is that as a result of current estimate of full pay outs by NAMA, the property loans underwritten by the banks, are now being discounted by a ridiculous 58%! For the captcha challenged, this means a more than half write down on loans. And Ireland is solvent how again? At least the country's pension funds are being depleted to fund a good cause: banker (read senior bondholder) well-being...
Markets slightly positive this AM after data showed that consumer credit expanded by over $6.1B in December (v $2.4BE) and consumer credit balances expanded for the first time since August 2008. Revolving credit rose $2.3B in December. The question remains one of jobs. Consumer electing to spend on holiday purchases for the first time since the crisis is a good sign, as is the makeup of the GDP gains we have seen which reflect an increasingly less timid consumer. Without jobs growth, however, we are merely getting a more levered consumer after some debt retrenchment. In the aftermath of a credit crisis – and possibly on the verge of a new one at the sovereign level – is that really such a good thing? China hiked rates 25bp for both of its benchmark rates.
Global institutional pension fund assets in the 13 major markets increased by 12% during 2010 to reach a new high of US$ 26 trillion according to Towers Watson’s Global Pension Assets Study. Despite the impressive rise in assets, the global asset/liability ratio is still well down from its 1998 level, highlighting the fact that global pensions remain vulnerable...
Markets in positive territory in the early going as Friday’s mixed-message job data continues to be debated. We believe that it will be another month at least before the data is confirmed/denied, but the changes to the denominator do not give us a lot of faith despite the headline. The week’s light calendar will put focus on geopolitical issues including Egypt and Euro sovereigns. 10s and 30s are scheduled for issuance later in the week after long dated purchases on Tuesday. This should test the selloff observed last week. Implied Fed Funds point to an opportunity in the front end, though we are still a bit off of the hike expectations that were priced in mid December. Bernanke testimony to the House Budget Committee on Wednesday will generate sound bites ahead of the debt ceiling debate.
The garlic eaters don’t want to repay their debts, and the beer drinkers don’t want to lend them any more money. That pretty much sums up the financial tensions that exist within Europe right now. Time to Short the Euro.