Around the Globe 06.24.2013

Earnings Season Already Looks Like a Train Wreck.

From Zerohedge

From Zerohedge

Well, this won’t help.  Markets are already skittish due to the Fed admitting that it may stop printing money someday while the PBOC implicitly tightens the supply of yuan by cracking down on the shadow banking system.  According to the chart above, 2nd quarter earnings growth will be lackluster at best.  On the other hand, the chart above is from April, and the negative to positive guidance ratio remains around 7.  Perhaps, the market has already taken earnings into account setting us up for a relief rally in the coming weeks.

EU Leaders Try to Stave Off Bond Slump as Bank Talks Fail – Bloomberg.

Italy Spain 10YR 06.24.2013

From Bloomberg

PIIGS yields have been rising off recent lows since May. Today’s large, adverse move could indicate investors’ impatience with the EU’s stalled banking union negotiations.  Surprisingly, the bund and gilt actually had worse days in percentage terms.  Astute readers of Dareconomics have known since the inception of talks that the AAA rated FANG countries would never become joint and severally liable for financial system debts with the PIIGS.  There is no way that Merkel could sell adding contingent €1tr+ liability to the German balance sheet to voters right before an election.

This is what we call an impasse.  The FANG may accept joint and several liability with the weaker countries as long as they agreed to a severe reduction in national sovereignty, but this is a non-starter with those countries and France.

In order to resolve the impasse, there will be a typical EU compromise whereby a drastically watered-down banking union is introduced in an attempt to kick the can down the road a bit more.  Will investors buy it again?

Iran Rial Gains 15% Since Rohani Win on Optimism for Thaw – Bloomberg.

Iranian Rial 06.24.2013

The chart above shows the official rate for the Iranian rial, which also surged following elections.  Apparently, the new president is a “reformer,” but that is all relative.  He is still a cleric, and religious Muslims in Iran are not exactly at the cutting edge of the progressive movement.  The rial’s move reflects the relief that an out-and-out hardliner was not elected, but Iran is still behaving like Iran, threatening Israel and supporting the Syrian regime.

Analysis: Another China central bank worry; companies push into lending | Reuters.

Mark Mobius: China’s Problems as Big as US Subprime.

China’s cash squeeze caused by shadow banking: Xinhua | Reuters.

china-7-day-repo 06.24.2013

The red line in chart above, B0, is the 7 day repurchase rate.  The market has calmed down since the latest spike late last week, but funding remains tight in China.  This is not a short-term phenomenon either as all of the longer term rates have risen since early May.

The PBOC has a conundrum on its hands.  The bank is refusing to add liquidity in the hopes that it will be able to control the huge credit expansion from the shadow banking system, but there are consequences to this action or inaction, technically speaking.  The lack of money will stop credit from expanding, but bad loans will also stop being rolled over creating many defaults across the system and so on.

Ultimately, the PBOC will blink, but it may be too late by then.  Regardless, it will be a rough ride over between now and the end of the quarter.

Exclusive: BOJ’s Iwata says won’t act on temporary market turbulence | Reuters.

From Bloomberg

From Bloomberg

The head of the BoJ is telling markets that he will not increase the unprecedented level of easing to fight market volatility.  It is unclear why he said this.  Since Draghi’s pledge almost a year ago, the only word that seems to work is “unlimited.”  What he should have done is jawboned.  A vague promise to print as much as necessary may be one way to get the 2% inflation he desires.  Of course, no one will like what happens if that goal is attained.

Financial instability should figure into policy-making: Fed’s Dudley | Reuters.

When the Ben and Beijing party comes to an end | Reuters.

Fed QE versus SP500

Dudley opened his mouth to prepare the investors for Fed action in case this sell-off runs off the rails.  While a correction is not a problem, a sustained sell-off most definitely is.  The Fed will probably not increase its bond buying, but it will deploy other tactics to prevent a rout.  Keep in mind that each round of easing is returning less bang for the buck.  Fed intervention may be a given, but its efficacy is not.

Slow U.S. Economic Recovery Is Gaining Momentum –


There is no factual basis to support the headline above.  The recovery is not picking up momentum, and the chart above supports this view.  The fact that the consensus view of “indepedent” economists and the Fed is that growth is accelerating should be of no solace at this juncture and is actually more of a contrarian signal.  With slackening Chinese and European demand in the picture, don’t be surprised if the U.S. economy actually begins weakening in the 2nd quarter.



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