Financial Market Report for November 9, 2011
1) … World stocks, ACWI, and VT, world small cap stocks, VSS, commodities, DBC, and major world currencies, DBV, emerging market currencies, CEW, turned lower, as Italian Bond interest rates skyrocketed,
Italy, EWI, and European Financials, EUFN, turned European shares turning lower, EPOL, EWO, EWG, EWQ, EWP, EWP, EWD, EWN, VGK, EZU, as Between The Hedges reports The Italian 10-year yield jumped +48 bps to 7.25% today, which is the highest since June 1997. And WSJ reports Bonds Sink As LCH. Clearnet Ups Margin Calls
Tyler Durden reports Financial shares collapsed, XLF, KCE, KBE, IYG, EMFN, FGEM, PSP, AUSE, BRAF. And Bloomberg reports Italy's Political Woes Spell 'Nightmare' for BNP, Agricole. BNP Paribas SA and Credit Agricole SA, France's largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk.
All the BRIC shares turned lower, BIK, EEB, EWZ, RSX, INDY, FXI,
China materials, CHIM, led China and Asia shares, YAO, CHII, CHIX, EWY, EWA, ENZL, lower,
Global small cap shares fell lower, SCIF, HKK, HAO, SKOR, BRF, GERJ, RSXJ, KROO, EWX, IWM,
Sector stocks falling lower included, SEA, SLX, FISN, TAN, PSCI, PSCT, PNQI, PSCD, WOOD, FONE, XSD, PAGG, VROM, BJK, IGV, IGN, MOO, REZ, FAA, RZG, ITB, IJK, RWR,
Mining stocks fell lower, EMMT, MXI, CHIM, COPX, ALUM, IYM, XLB, URA, KOL, XME, REMX, SIL,
Energy shares, turned lower, OIH, IEZ, WCAT, XOP, PSCE, XES,
VISTA shares turned lower, EGPT, IDX, EZA, TUR, ARGT,
Industrial Office REITS, FIO, fell 9%, Residential REITS, REZ, 4%.
The Morgan Stanley Cyclicals Index, $CYC, fell 4.6%.
Copper, JJC, led the commodities, lower, UNG, DBB, JJN, JJT, CUT, LD, FUD, JJA,
Junk Bonds, JNK, turned lower.
2) … World government bonds, BWX, and emerging market bonds, EMB, traded lower on sovereign angst and falling currency values, FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, BNZ, CCX, FXRU, and the US Dollar ,$USD, UUP, traded higher.
The USD/JPY traded up from 77.5 to 77.7, as seen in this ongoing chart of USDJPY. AP reports Euro falls to a 4-week low against the dollar.
Italy has lost its debt sovereignty, and as a consequence, it has lost its sovereign authority. Mike Mish Shedlock reports Italy has a debt rollover needs and the market just shut off efficient funding across the entire yield curve. There is no place to hide while waiting for the long-end of the curve to calm down. Expect emergency meetings at the ECB, IMF, EMU, EU, and Italian Government to start anytime.
3) … An inquiring mind asks, who or what will provide the seigniorage, that is the funding, for Italy’s fiscal spending.
I believe Sovereign Armageddon, that is a credit bust and global financial breakdown, is imminent, and that it will be accompanied by a contraction of credit in China, as reflected in the fall of the commodity copper, JJC, which has caused debt deflation, that is currency deflation, across the globe, turning the basic material stocks, XLB, and IYM, particularly, the copper miners, COPX, lower. This will drive China Materials, CHIM, and China Financials, CHIX, lower as these are intertwined in a ponzi financing scheme featuring stockpiles of copper.
Sovereign armageddon will come out of Gotterdammerung, the clash of the gods, that is the conflict between world leaders and investors.
Sovereign crisis requires a sovereign solution. One Leader, the Sovereign, and his banker, the Seignior, will arise to speak for and to the Eurozone, which will be transformed into a Federal Europe, as leaders meet in summits and wiave national sovereignty, and implement a Fiscal Union, empower the ECB as a bank, and develop a common European Treasury. Seigniorage, that is moneyness, will no longer be based upon debt, but rather will be based upon the diktat of austerity measures, structural reforms, pension overhauls, bank nationalization, and debt servitude; people will be amazed by this, and place their faith in it, and give their full allegiance to it.
Fate is working through the 1974 Clarion Call of the Club of Rome for regional economic government. Angela Merkel and Nicholas Sarkozy, the sovereigns of the age of Neoliberalism, have heard and headed its clear, distinctive and ringing message; and are acting with the call’s authoritarian imperative by calling for a “true European economic government”, in their Joint August Comminique. Destiny is destroying nations and national sovereignty, and all current forms of economic life, such as Capitalism, and Greek Socialism, by providing a European superstate, as part of a ten toed kingdom of regional economic government, where eventually ten kings will rule in each of the ten toes, that is the world’s ten regions.
Under Neoliberalism, fiscal sovereignty came from sovereign nations issuing sovereign debt. But under Neoauthoritarianism, where nations have lost their sovereign debt authority, the Sovereign and the Seignior will have fiscal sovereignty. Credit will not come from the securitization of debt; but rather from the word, will and way of sovereigns and stakeholders appointed from industry and government. Lending will only go firms that are key to the region’s security and prosperity.
A EU ECB and IMF Troika is forming as the nucleus of a European economic government. The Economist reports A crisis? Call The F-Team. The Frankfurt Group, or GdF for short, is the latest addition to the proliferation of international political groups, the G7, G8 and the G20, among many. Consisting of the leaders of Germany, France, the Eurogroup of finance ministers, the European Central Bank, the European Commission and the International Monetary Fund, the F-team has quickly established itself as the cluster managing the euro’s crisis. It has no legal structure or secretariat, but it is now the core within Europe’s core. Sometimes outsiders are invited to assist, such as the American president, Barack Obama, who joined discussions the following evening. That stamp of approval will ensure that GdF is here to stay.
Some make the case for breakup of the Eurozone. Edward Harrison wrote in early September in Credit Writedowns stating breakup of the euro zone is likely. Mike Mish Shedlock in June, wrote “the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core”. Nouriel Roubini wrote the Eurozone could break up over a five-year horizon. And Mr. Shedlock writes: “We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible.” Ambrose Evans Pritchard relates German court curbs future bail-outs, bans EU fiscal union.
Libertarians and Austrian Economists have a hero in Ron Paul, whose philosophy is fathered by Murray Rothbard, Ludwig von Mises, and Friedrich Hayek, and continued today by Lew Rockwell of the Mises Institute. As a group, those of the Austrian School of Economics envision a world with sovereign individuals and sovereign nations each with its own currency. Mike Mish Shedlock writes It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation
Liberty, freedom and choice are mirages on the Neoauthoritarian desert of the real. The beast regime, which has come from the 1974 Clarion Call of the Club of Rome, with its seven heads, symbolizing mankind’s seven institutions, and ten horns symbolizing the world’s ten regions, is rising from the sea of humanity to rule globally. Neoauthoritarianism will manifest as statism and totalitarian collectivism.
4) … Reuters reports Merkel Calls for New Europe.
Merkel called for a “New Europe” saying Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin. "It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."Christine Lagarde of the IMF said: "Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand ... we could run the risk of what some commentators are already calling the lost decade."
Many outside Europe are calling on the ECB to take a more active role as other major central banks do in acting as lender of last resort. German opposition to that remains implacable, seeing it as a threat to the central bank's independence. The socialist and conservative parties had wanted former ECB vice-president Lucas Papademos to lead a government of national unity but he appears to have made demands about his level of influence which they could not swallow.
The global economic, political, and investment tectonic plates have shifted; democracy is being replaced by diktat. The former regime of Neoliberalism is being washed away in an authoritarian tsunami, and is being replaced by Neoauthoritarianism. The former regime was based upon the Spirit of the Cat in The Hat, where leaders waved magic wands and out competed one a with ponzi financing schemes, such as the issuance of all kinds of debt. As Doug Noland relates, it was characterized by wildcat finance. The current regime is characterized by a Spirit of Wilding, where lawlessness runs rampant and coups are commonplace, leaders yield authoritarian clubs, and participate in schemes of regional framework agreements. This age is characterized by wildcat governance, where leaders fiercely bite, rip and tear one another as reported by Der Spiegel Politicians and Business Close Ranks Against Berlusconi. Andas FT reports Allies Intensify Pressure On Berlusconi.
Greek Crisis relates that VOX reports that German Economists Urge Vast European Debt Redemption Pac. Such thinking is characteristic of the seigniorage of freedom of the bygone era of Neoliberalism. Neoauthoritarianism, on the other hand features the seigniorage of diktat.
5) … In today’s news
Open Europe reports PA reports that Nick Clegg will today warn MEPs that Europe faces a future of “perpetual decline” unless it reforms to make itself more competitive. He will argue, “Too many European economies suffer from low productivity or inflexible workforces. Or red tape that strangles businesses.” The BBC’s Political Editor Nick Robinson said on the Today programme that Nick Clegg will also warn that there should not be “two clubs in Europe.” PA BBC Today
The Nord Stream pipeline, which will transport gas directly from Russia to Germany via the Baltic Sea, was officially opened yesterday in the presence of the leaders of Germany, the Netherlands and Russia, the Prime Minister of France, and EU Energy Commissioner Günther Oettinger, reports EUobserver. EUobserver Gazeta Wyborcza CIRE
Les Echos reports that, according to a poll of voting intentions conducted by IFOP, the French Socialist presidential candidate François Hollande, at 32.5%, far surpasses French President Nicolas Sarkozy, who attracts only 25.5%. Front National leader Marine Le Pen, is credited with 19% of support. Les Echos
Euro Intelligence, is a paid news service; it provides the best of reporting of which I provide a small sample. La Repubblica has a letter by Olli Rehn to the Italian government, highlight 39 points on which Italy needs to report back to the European Union in terms of fiscal adjustment and economic reforms. The letter started with a statement that the economic deterioration has blown the balanced budget projection off course, as a result of which Italy needed to pass a new mini-budget to take account of the deteriorating fiscal position. (The EU is still chasing deficit targets in a recession, which is likely to prolong and deepen the recession. We expect that Italy will, as ever, comply with any fiscal demands, but will be more resistant to structural reforms. The combination of the two will be severely negative for economic growth, and thus to debt sustainability.)
John Plender warns in his FT column that one should not place too much faith in technical governments, options that are now under consideration in both Greece and Italy. Historically, technical governments in Italy have failed to implement big reforms. And the environment in which a technical government could function is not good, especially, as Plender puts it, “if the electorate thinks the government is taking dictation from punitive German politicians.”
New Democracy holds up nomination of interim government. The two parties were close to naming a new prime minister, with Lucas Papademos back in the picture, but the process was held up by New Democracy leader Antonis Samaras who objected to eurozone demands for a written commitment to the fiscal targets and measures. He insisted that his verbal commitment should be enough. Samaras faces internal party divisions since his staged U-turn on the package last week. He is expected to write to the European Commission and eurozone officials to explain that he is committed to the existing agreements and fiscal targets but wants to reserve the right to change the policy mix, according to Kathimerini report With Lucas Papademos poised to become PM, Samaras objection to eurozone calls create obstacle. But Commissioner Olli Rehn warned that, without the signed documents, Greece would not receive the loan instalment of €8bn it is expecting. New Democracy sources insist that the standoff would not damage coalition talks.
Le Monde, argues that the debate about a banking licence for the EFSF will resurface soon, given the problems of Italy. “Led by France, the Latin countries have not abandoned the idea of anchoring the European financial stabilization fund at the central bank in order to turn it into a bank”, Le Monde writes. “The idea is not on the table of negotiations, but it is in everybody’s head”, several sources told the paper. “It will come up again if the difficulties continue to escalate.”
Angela Merkel’s CDU wants to turn Germany in an ECB superpower and seeks to dramatically increase Germany’s influence in the ECB’s decision making, Financial Times Deutschland writes in a position paper for the party convention next week in Leipzig, the CDU will ask that “the presidents of the national central banks vote on all decisions in the governing council with weighted votes according to the economic power of the national economies”, a draft says. “Additionally a majority of the board’s members is required for the adaption of a decision.” Should the CDU request one day become reality, it would give the Bundesbank president a weighted voting power of 27%, which is Germany’s capital share in the ECB and which is by far the largest share of any euro country. Such a decision making modus would represent a dramatic shift away from the current one-man-one-vote practise where the Bundesbank president has the some voting power as Malta’s central bank governor. The party’s request is a reflection of the revolt in Germany’s political and economic establishment against what they perceive as a takeover of the ECB by the southern European countries.
Tyler Durden reports Jefferson County Files Chapter 9 Bankruptcy.
Bespoke Investment Blog reports While the widening of yields between Italy and Germany balloons out to record levels the next stop for the debt contagion could very well be France. As shown in the chart below, spreads between French and German 10-year yields are also coming unanchored. As of this morning, yields on 10-year French sovereign debt have widened out to 145 bps more than similar duration German debt. That's a widening of more than 50 bps in the last two weeks. At this point, the spreads between France and German debt (145 bps) are nowhere near the spreads between Italian and German debt, but the direction and the velocity is alarming.
Economic Policy Journal reports The average rent for a Manhattan apartment in October was $3,341, that's 7% higher than October, 2010, reports the NY Daily News. Rents are just $53 off their all-time high of 3,394 reached pre-crisis in May 2007. The vacancy rate in October was 1.18%, below October 2010’s rate of 1.24%
The Telegraph reports Eurozone Ministers Fail To Create €1 Trillion Bail Out Fund
Reuters reports India October Car Sales Suffer Biggest Drop In A Decade. Car sales in India fell 23.8 percent in October, the biggest percentage drop since December 2000, an industry body said, on higher interest rates and vehicle costs and labour unrest at the country's dominant carmaker, where sales fell by half. (Hat Tip to Between The Hedges)
Reuters reports 2-Year Swap Spread at Widest Since June 2010. The spread on two-year U.S. interest rate swaps over Treasuries moved on Wednesday to its widest since summer 2010 after clearing house LCH Clearnet SA increased the margin on Italian government bonds at a time when their bonds yields are close to levels deemed unsustainable. The two-year swap spread, which grows with risk aversion, touched 40.50 basis points, a level not seen since June 2010. (Hat Tip to Between The Hedges)
Robert Wenzel of Economic Policy Journal reports Ron Paul tells it like it is, once again. He says President Obama's continued use of the executive order "brings the modern presidency dangerously close to an elective dictatorship."
John Daly of OilPrice.com writes U.S. Government Confirms Link Between Earthquakes and Hydraulic Fracturing.