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Thursday, November 24, 2011

German bond auction 'disaster' rocks markets

The German government was unable to sell about 35pc of the €6bn (£5bn) 10-year bonds it offered to the market, getting just €3.9bn of debt away. The setback came as Fitch Ratings issued a warning that France’s AAA credit rating would be at risk should the crisis result in a sharper downturn in the country than currently envisaged.

“The sovereign debt crisis may have had its most critical day yet,” said Kathleen Brooks, research director at Forex.com. “If Germany can’t sell debt then where does that leave the eurozone? While we all knew about problems in Italy, Spain and maybe even France, Germany was the black swan no one expected.”

Investors in German government debt were offered just a 2pc return annually over 10 years, despite the escalating risks posed by the sovereign crisis in the region.

There was increasing speculation yesterday that medium and long-term funding in Europe has now completely frozen, and European stock markets fell across the board. The CAC 40 in France closed down 1.7pc and the German DAX fell 1.4pc. The failed auction also sounded alarm bells in the City. Marc Ostwald, strategist at Monument Securities, declared it a “complete and utter disaster”.

The FTSE 100 endured its worst losing streak since 2003. The blue-chip index closed in negative territory – falling 67.04 points to 5139.78 – for an eighth day in a row. According to the FTSE Group, the last time the market fell for more than eight days in a row was between January 15 2003 and January 27 2003, when the blue-chip index fell for nine days.

The European Central Bank said the auction result was due to “technical issues”, which analysts said referred to the German Bundesbank retaining bonds to maintain demand and therefore a low yield, which in turn depresses the so-called repo rates paid by banks to the central bank.

However, analysts said that the result was unintentional, with bunds priced too high in the current environment.

There was more gloomy news for Germany from the manufacturing sector, after the Markit PMI fell to 47.9 in November, from 49.1 in October, where anything below 50 indicates contraction. But the services PMI improved, to 51.4 from 50.6. Yields on 10-year German and French bonds rose to 2.08pc and 3.67pc respectively, while yields on Italian bonds closed at 6.94pc.

French president Nicolas Sarkozy said he was working with the German chancellor, Angela Merkel, on proposals to modify the euro treaties “to avoid countries diverging in budgetary, economic and fiscal matters”.

Meanwhile, Mrs Merkel said that Greece would only receive the next tranche of bail-out funding if parliament committed in writing to austerity.

Fitch’s warning on France was echoed more broadly for the eurozone by Standard & Poor’s, which said credit ratings could come under renewed pressure if large parts of the region fell back into recession next year.

The Telegraph

Euro on ‘Death Watch’ After Investors Spurn German Bonds

Investors began to fear the worst for the euro after unusually weak demand at an auction for bonds from Germany, the region’s largest economy. One analyst went so far as to put the currency on a “death watch.”

Germany sold just 60 percent of the 6 billion euros in 10-year bunds it brought to auction, about the weakest demand seen for the country’s debt in the currency’s 16-year history, economists said. The rejection of debt from Europe’s safe harbor marks a new stage for the crisis.

“No bunds wanted equals no Euros wanted equals the Euro death watch,” wrote Mark Steele, an analyst with BMO Capital Markets. “We have seen many poor German auctions. This is not the issue. The issue is how badly the euro is doing after the weak auction.”

The euro [EUR=X 1.3328 -0.0015 (-0.11%) ] fell more than 1 percent against the dollar to a 7-week low against the Greenback. The currency threatened to break through the October lows that came amid the height of turmoil in Italy and Greece. Both countries would go on to install new Technocrat leaders, lifting confidence in the currency briefly.

Euro / US Dollar FX...
(EUR=X)1.3328 -0.0015 (-0.11%%)

The European Financial Stability Facility does not give the European Central Bank the same firepower or freedom of the Federal Reserve, which it utilized in the aftermath of the U.S. credit crisis with two rounds of massive purchases ofTreasurys (QE) . Germany has been reluctant to follow the Fed’s lead and buy up other countries bad debt because of fear over inflation.

German Chancellor “Merkel has been opposed to using the ECB as a monetizer of debt,” said Dennis Gartman of The Gartman Letter. “Germany doesn’t even like to think in these terms, but they may not have a choice.”

Recent reports have hinted at different workarounds of the euro treaty being discussed to effectively replicate quantitative easing in Europe. One option discussed was for the ECB to lend money to the IMF, which in turn would buy the toxic debt before it could spread to yet another country.

“It’s too late for a bazooka,” said Mitchell Goldberg, president of ClientFirst Strategy. “Now we need inter-continental ballistic missiles. This is getting worse very quickly.”

Investors had kept buying German bonds as they fled crisis after crisis in the region: first in Ireland, then in Greece and Italy, and now in Spain and Belgium. But Wednesday, 10-year bunds dropped significantly after the failed auction, pushing the yields above 2.05 percent, but perhaps more importantly above the U.S. treasury with the same maturity for the first time since early October.

“We are seeing the end of the euro currency as we know it,” said Brian Stutland of Stutland Volatility Group. “I don't see a single thing that causes the euro to rally other than the Fed announcing a ‘QE3’ in which they buy euro foreign debt.”


F-35 Stealth Fighter to Be Based in Negev

The F-35 stealth fighter planes purchased from the United States by Israel will be based east of Be’er Sheva, the IDF has announced. The aircraft is considered a keyasset in a future war, especially with Iran, but the first deliveries will not be until 2015. Pilots will be trained in the United States a year beforehand.

The planes will be based at the Nevatim base, located between Be’er Sheva and Arad. Among other options were the central Negev, between Be’er Sheva and Eilat.

The IDF said that operational and environmental considerations also played a role in the decision. The base was expanded three years ago and now is home to the longest runway in the Middle East.

The F-35 stealth fighter aircraft is being produced by the American Lockheed Martin company and is considered to be the most advanced fighter aircraft currently being developed.

It is a multi-mission aircraft, intended both for attack and interception.


Davies alerted King World News that his firm is seeing crash signals similar to those of 2008!

Ben Davies - CEO of Hinde Capital specializing in the precious metal sector.

When asked about these signals, Davies responded, “We’re seeing that lending spreads are widening.  Certain rates are starting to look stressed.  Clearly there’s a funding issue brewing within the banking sector with what’s happening in Europe.  High yield spreads are beginning to widen as the corporate sector is getting crowded out by the needs of the sovereign nations, who keep issuing unbelievable amounts of capital or pseudo capital.”

Ben Davies continues: 

“They need to keep rolling that over.  Just take Italy alone who’s got nearly $350 billion to do next year, that’s just one country in a 1.9 trillion debt market.  Over the next four years they will have to recycle 60% of their debt and this is the problem here.  So these crash signals are just showing us that there are severe stresses in the system and they are starting to get to the extremes that we saw in 2008, just before the Lehman crisis. 

What is potentially different this time, is the Lehman crisis, in many ways, although we were building up to it, no one thought that they would actually let a bank go under at that stage because JP Morgan effectively had to buy out Bear Stearns.   

So I think the difference now is that we all understand that Greece is effectively defaulting, whether it’s orderly or disorderly is another matter and that the contagion is happening.  We can see it.  And policymakers are really at a loss for what to do.   

Take the Germans, do they really want to go into a fiscal union and pay for profligacy of the periphery?  This is the ultimate question.  Although I see these crash signals starting to go off, I cannot again get too bearish on risk assets because I really feel, at this point, that the ECB is going to acquiesce...."

“I think they are going to go into full monetization.  I mean for all intents and purposes they have expanded their balance sheet over the last few years.  They may not be doing tacit purchases, but as far as I’m concerned they have been doing stealth QE for a long time. 

But I think they are going to be overt this time and I think they are going to say, just like the Fed, ‘Look, we’ve got real deflationary pressures.’  A bit like the RBA cut rates, citing deflationary pressures.  Now I think that means they will come and buy bonds across the curve in the secondary market.   

I’m talking here about Europe coming in and starting their official program of quantitative and potentially qualitative easing.  Should they (the ECB) not do anything, the Fed will have to step in.  I think they would want to stabilize the threat to the banking system over there in the US.  I think there will be a form of QE coming in the US. 

So they are going to have to introduce some financial repression tactics, which just means they will do some money printing.  Now if that happens I cannot be short risk assets, I cannot be short silver and I cannot be short gold.” 

Davies also noted, “There is no doubt that we are hitting monetary and fiscal constraints.  The balance sheet of the Fed is 50 times levered relative to 2007 when it was 25 times levered.  That means that effectively 2% down on that portfolio and you wipe out all of the equity.  Effectively, without printing more money, they (the Fed) would be insolvent.” 

James Turk "History Will Repeat Itself, $11,000 Gold 2013-2015

Implications of the Recent Rise in Oil Prices

The price of West Texas Intermediate has risen almost $10 a barrel since the start of September, and briefly bumped back above $100 a barrel this week. Here's why I think that development may not be as worrisome for the U.S. economy as it might sound.

The first point to be clear about is what we mean by the price of oil. Two of the most popular benchmarks are West Texas Intermediate, which is a light sweet crude whose price is quoted for delivery in Cushing, Oklahoma, and Brent, which comes from the North Sea. The crudes are similar in terms of quality, and historically traded for a very similar price. But a year ago the two prices began to diverge, differing by as much as $28 a barrel at the beginning of September.

Blue: price of West Texas Intermediate, dollars per barrel, Aug 20, 2010 to Nov 18, 2011. Fuchsia: Brent price. Data source: EIA

That divergence resulted from a surge in production from Canada and the northern United States, coupled with a lack of transportation infrastructure necessary to move the oil from where it is now being produced to refiners on the U.S. coasts. For this reason, those refiners have been paying a much higher price for crude oil delivered by ship, with the Brent price representative of what U.S. refiners have been paying to import the oil from overseas.

The Keystone Gulf Coast Expansion Pipeline would today be providing some of that needed transportation capacity if the Obama Administration had given it the ok when the plan was first submitted for approval 3 years ago. However, the White House recently announced that it still needs at least another year to review the plan.

But there are other ways to ship the oil to where the market is signaling that the product is most needed. The Seaway Pipeline has rather astonishingly been transporting oil from the Gulf Coast, where it is expensive, to Cushing, where it is cheap, presumably because ConocoPhillips, part owner of the pipeline, wants to protect its Midwest refining margins. Craig Pirrong looked at this and suggested the logical solution would be for oil producers to buy the pipeline outright from Conoco and invest in the infrastructure adjustments necessary to get the oil flowing through the pipeline in the opposite direction.

And this week Enbridge announced it had entered into an agreement to pay $1.15 billion to buy out Conoco's interest in the Seaway Pipeline, and further announced its intention to make pump station additions and modifications necessary to use the pipeline to transport oil from Cushing to the coast. Enbridge anticipates that it could be ready to move 150,000 barrels per day from Cushing to the coast by 2012:Q2 and 400,000 b/d by 2013.

Although oil won't be flowing for a while, the announcement itself would be expected to cut into the Brent-WTI spread. This is because if someone in Cushing knows there's going to be a better market to sell the WTI to next year, it makes sense to put more into inventory today (driving today's WTI price up). Likewise, if someone on the coast knows there's going to be a cheaper alternative next year, it makes sense to buy less for storage there (driving today's Brent or equivalent price down). If we look at the broader trends since the start of September, what's happened is that the WTI price is up about $9 while the price of Brent is down almost $4.

Because gasoline is transported using different infrastructure from the crude oil, the differences in the cost of crude did not translate into equally dramatic regional differences in the cost of gasoline. Whenever transportation facilities are adequate, we'd expect the law of one price to hold. If you can transport gasoline across U.S. states, the refined product should sell at a similar price as a result of physical arbitrage of the gasoline market. A big effect of the Brent-WTI spread was thus to raise refiners' margins in the central U.S., with the price of gasoline in the U.S. tracking Brent more closely than WTI since the two prices diverged.

Blue: price of West Texas Intermediate, dollars per barrel, Aug 20, 2010 to Nov 18, 2011. Fuchsia: Brent price. Yellow: price of gasoline, scaled as 40 x (P - 0.80) for P the average U.S. weekly price of regular gasoline, all formulations. Data source: EIA, with last entry from NewJerseyGasPrices.com.

It's worth noting that despite the big run-up in WTI, the average retail price of gasoline has followed Brent down, being about 30 cents per gallon cheaper than at the start of September. What matters most for U.S. consumers at the moment is the cost of oil imported by tanker. Insofar as the latest developments put downward pressure on that, the seemingly paradoxical result is that a higher cost of WTI may actually mean lower costs of gasoline for U.S. consumers.

But we've put off the problem long enough, and the size of the challenge is big enough, that more infrastructure is still needed. The Wall Street Journal reports:

U.S. oil production is expected to grow to 6.4 million barrels a day by 2016 from 4.2 million barrels a day today, according to data provided by Bentek Energy, a consultancy. And oil producers in western Canada are expected to ratchet up production to 3.5 million barrels a day by 2015 from 2.8 million in 2010, according to the Canadian Association of Petroleum Producers.

There are conflicting reports in the media ([1], [2]) as to whether Enbridge, now that it controls the Seaway, still plans to build the Wrangler Pipeline that the company announced in September, which could transport an additional 800,000 b/d from Cushing to the coast. But even if Wrangler gets canceled, the WSJ also reports:

Magellan Midstream Partners LP still plans to reverse its 700-mile Houston-to-El Paso Longhorn pipeline to deliver up to 225,000 barrels a day of crude oil from west Texas to the Houston by mid-2013, said company spokesman Bruce Heine.

The President may wish to declare that the Atlantic Ocean should be 10 feet lower at New York than it is in Florida. But the water will find a way to get there anyway.

And markets are going to figure out how to sell oil to the highest bidder.

Oil price

Dramatic video: No end to chaos & clashes in Egypt

Celente on the Michael Harris show

Iran's Revolutionary Guards dare Israel to attack

TEHRAN — Iran dares Israel to attack, because the retaliation would send the Jewish state to "the dustbin of history," a senior Revolutionary Guards commander said, according to the Fars news agency Monday.

"Our greatest wish is that they commit such a mistake," the chief of the Guards' aerospatial division, Amir-Ali Hadjizadeh, was quoted as saying.

"For some time there has been a hidden energy we hope to expend to consign the enemies of Islam forever to the dustbin of history," he said.

"Our ballistic (missile) capacity never ceases to grow," he added.

The comments were one of the most belligerent reactions yet by an Iranian official to speculation that Israel was considering launching air strikes on Iranian nuclear facilities.

The threat -- raised recently in Israeli media reports, and by Israeli President Shimon Peres -- comes amid rising international tensions over Iran's nuclear programme.

A November 8 report by the UN nuclear watchdog, the International Atomic Energy Agency, said intelligence strongly suggested Iran was researching nuclear weapons.

Iran has denied its nuclear programme has any military dimension.

Government officials have said they are willing to cooperate with the IAEA, while Iranian military officers have talked up their country's ability to counter-attack if strikes are launched.


US to cease observing arms treaty with Russia: State Dept

The United States said Tuesday it would no longer provide data toRussia on conventional weapons and troops in Europe, citing non-compliance by Moscow with a two-decade old treaty that governed the information exchange.

State Department spokeswoman Victoria Nuland told reporters the United States will cease to observe the provisions of the Treaty on Conventional Armed Forces in Europe (CFE).

Adopted in November 1990, it was seen as a groundbreaking accord credited with greatly advancing global security. But Russia suspended its observance of the treaty in 2007.

"This is an issue that we've been working on ever since the Russians withdrew," Nuland told reporters.

"After four years of Russian non-implementation and after repeated efforts... to save the treaty, we think it's important to take some counter-measures vis-a-vis Russia," she said.

The US will now no longer accept Russian inspection of its bases.

Despite Moscow's non-compliance, the United States and allies had also continued to meet the treaty's obligations by giving Moscow data on their forces over the past four years, but that will also stop.

The CFE treaty signed in Paris aimed to establish military parity and stability in the conventional military forces and equipment of Europe between the NATO countries and those of the Warsaw bloc.

The accord set ceilings on troops and weapons, and created unprecedented provisions for the exchange of information, bilateral inspections and onsite monitoring of the destruction of weapons.

"The US will not accept Russian inspections of our bases under the CFE, and we will also not provide Russia with the annual notifications of military data called for in the treaty," Nuland said.

"It's our understanding that a number, if not all US NATO allies will do the same," the chief US diplomatic spokeswoman said.

Yahoo News