Posts from Wednesday May 2 2012

Monte Carlo-simulated sovereign credit

And it’s all free and open source.

Presenting the Public Sector Credit Framework — a quantitative alternative to sovereign and muni credit ratings produced by the agencies. It’s just launched: Read more

The Closer


US stocks limped into the close. The S&P 500 closed down 0.25 per cent to 1,402 and the DJIA fell 0.08 per cent to 13268. Weak ADP numbers added to the gloom spread by awful European PMI data (Wall Street Journal). Read more

Making eurozonians, or not

Huge hat-tip to Paul Kedrosky for this – an eye-catching chart from JPMorgan’s Michael Cembalest’s ‘Eye on the markets’ note (click to enlarge):

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An AUD tale of correlation lost

The Australian dollar has veered away from its usual path. *Bad Aussie.*

But there is a widespread belief it will have to eventually find its way back. How quickly it does so, however,  is open to debate. Read more

Playing the CDS-bomb basis

After holding our heads in our hands and getting over a wave of nausea, FT Alphaville looked up and realised that yes, we really were looking at a trade idea involving credit default swaps that takes a view on the likelihood of an Israeli missile strike on Iran. It’s a ugly world. Thanks for the reminder, Nomura (emphasis ours):

The probability of a unilateral strike from Israel on Iran over the coming months has now fallen, while global concerns are shifting back towards Europe. We think this presents an opportunity to buy Israel credit against low-beta Europe.

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Hendry on Europe: ‘The reality is you just can’t make up how bad it is’

‘Is It Time to Invest in Europe?’, asked the Milken Institute Global Conference on Tuesday. Answers – Hendry’s included – for your viewing pleasure in the video below. It’s a long debate and veers off topic regularly, but nicely argued.

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No floating Treasuries for you – just yet

Floating Rate Notes

As noted in the February quarterly refunding statement, Treasury believes that there are benefits to issuing floating rate notes (FRNs).  In recent weeks Treasury has received a significant amount of feedback on the topic, in part through a formal request for information published in the Federal Register. Read more

Fed seeks to break up long-standing US bank lovefest

Earlier this year the Fed proposed new rules that would limit banks’ exposure to each other even more than the Dodd-Frank reforms, coming into force next year, already demand. The banks went away to think about it, and it’s safe to say they have some concerns. Goldman Sachs, in fact, has sent the Fed 20 pages-worth of its concerns just ahead of a meeting in New York today with Daniel Tarullo, the Federal Reserve governor, and assorted big bank executives.

In short, Goldman summarises, “parts of the Proposed Rules appear likely to damage, rather than strengthen, the systemic safety of the US financial sector and ultimately the US economy.” Oh, and it’s going to cost the US up to 300,000 jobs according to their calculations and cut economic growth by up to 0.4 per cent. Read more

Marginal oil production costs are heading towards $100/barrel

Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”:

Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl. Read more

Is curve alpha being arbitraged away?

Investors looking for commodity exposure through fund offerings usually have one of two basic choices. They can opt for pure long strategies via funds which take positions in the underlying physical commodities or which perpetually roll the same position over and over in the futures market, or they can opt for so-called ‘curve placement alpha’ strategies.

Ever since ‘contango’ became a problem for many commodity markets — a structural phenomenon which leads to capital decay over time — the latter strategy has become increasingly popular with investors. Read more

Markets Live transcript 2 May 2012

Live markets commentary from 

The (early) Lunch Wrap

Good morning, New York…


Core infection and eurozone PMIs

Eurozone manufacturing purchasing managers indices are out and it does not look pretty. The final Markit Eurozone manufacturing PMI hit a 34-month low of 45.9 in April, below the flash estimate of 46, as job losses accelerated to their fastest rate in over two years.

Significantly,  manufacturing weakness was no longer confined to the periphery. German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate. (When are those elections again?) Read more

So basically April sucked

Maybe it wasn’t that bad, but only 14 out of 37 risk assets analysed by Jim Reid and Colin Tan at Deutsche Bank had positive total returns for the month of April. Only eight managed a return of more than 1 per cent. Among those were flight-to-safety assets like Treasuries and Bunds, which doesn’t exactly scream of wellbeing in financial markets.

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About that whole “sell in May thing”

From Alan Ruskin at Deutsche Bank (with our emphasis):

Last year, saw one of the most dramatic deteriorations in US surprise indices, which has encouraged the mythology that spring has historically started a spate of surprising data weakness into the summer, consistent with the ‘sell in May and go away’ maxim. In fact, 2011 was the only year in the last 10, when US data surprise index did not  change in the direction of more positive surprises (see chart below).  The ‘seasonal’ shift in US data surprises for the better in May, is a more consistent than for any other month over the last 10 years. The ISM upside surprise, should then be regarded as befitting of the historic pattern of upside rather than downside surprises in May.

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Why China’s commodities demand is different

A lot of optimistic projections for China’s commodities demand look something like this:

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Further reading

Elsewhere on Wednesday,

– Krugman plan for world domination moves to Phase RedditRead more

The 6am Cut London

A UK parliamentary committee has declared Rupert Murdoch “not fit” to lead an international media company, in a damning report that criticised News Corp’s handling of the phone-hacking scandal, reports the FT. The MPs also accused Mr Murdoch and his son James of mismanaging the crisis at the company The UK’s broadcasting regulator Ofcom, which is currently investigating whether BSkyB is a “fit and proper” holder of a broadcast licence, said it would study the MPs’ report.

A significant number of UBS investors are planning to vote against the bank’s 2011 pay award on Thursday, reports the FT. Also in the FT, some 16% of shareholders in Xstrata lodged a protest vote over the re-election of Glencore CEO Ivan Glasenberg to the Xstrata board, signalling their support for the merger with Glencore should not be taken for granted. Read more

Overnight markets: Up

Most Asian stock markets were modestly higher Wednesday, says Dow Jones, and the US dollar remained well-supported after a surprisingly strong US ISM report for April, which topped forecasts and sent the Dow Jones Industrial Average to its best close in more than four years on Tuesday.

Samsung Electronics climbed 1.7 per cent in Seoul, says Bloomberg, while Japan Tobacco gained 2.8 per cent after the cigarette maker said it will raise its dividend payout. Read more