PM Daily Market Commentary – 3/9/2016
Gold fell -8.10 to 1253.90 on heavy volume, while silver dropped -0.05 to 15.31 on moderately heavy volume. Gold was hit early in Asia trading, and also sold off immediately prior to the US open touching 1243.60, but managed to recover about half of its losses by end of day.
The failed rally yesterday led to continued selling today. Gold was driven below the 9 EMA, managed to recover, but only somewhat. Line in the sand is (as always) that 9 EMA, which is right around 1250. A convincing close below 1250 would likely lead to a fair amount of selling in gold.
Silver managed to find support on its 9 EMA. I think one reason it did so was copper, which managed to rally, but it does feel like PM is in retreat right now and momentum is to the downside. You can see that although copper had a decent day, silver declined anyway.
Miners opened down, but then rallied sharply back into the green relatively soon after market open. Even though gold was down on the day, GDX managed to close up +0.46% on moderate volume, while GDXJ lost -0.59% on moderate volume. But while the dip-buyers did show up, it was only enough to drag the miners barely back above the 9 EMA. Once again, up-day volume is lower than down-day volume, and that’s a sign that the big money is selling off their holdings, which is bearish. The bid under the mining shares remains, but it does feel like a big bag of equities are being transferred here right at the top of the cycle.
Platinum fell -0.46%, palladium rose +1.37%, while copper climbed +1.88%. After correcting yesterday, copper looked reasonably strong today. A continued bid under copper seems to be helping silver, at least to some degree.
The buck tracked sideways, losing just -0.08 to 97.16. Commodity currencies rallied strongly today, with CAD up +1.25 and AUD up +0.68% on the strength of both commodities as well as oil.
SPX rose, climbing +10.00 to 1989.26 led once again by energy, which was up +1.62%. Financials brought up the rear, up only +0.14%. Its largely commodities that are keeping SPX afloat right now. VIX fell -0.33 to 18.34.
TLT is not catching a bid right now, falling -0.68% and dipping back below its 9 EMA. TLT is not giving a risk off signal right now.
JNK rose +0.24%, a modest rally given the strong performance in oil and commodities. I’d say risk on, except the rally seemed weak. It feels like JNK is topping out for this cycle.
CRB rose +1.62%, a strong move that resulted in a new closing high for the CRB this cycle. Today’s rally wipes out yesterday’s loss and then some. The commodity rebound continues.
WTIC climbed +1.85 [+5.09%] to 38.18, recovering all of yesterday’s loss plus a little bit more, making a new closing high for this cycle. While oil moved steadily higher in Asia and London, the big move came after the Petroleum Status Report at 10:30, which showed a build in oil inventories of 3.9 million barrels, but also showed that demand for gasoline was up 7% year over year, a very large gain. Inventories of gasoline also fell -4.5 million barrels.
While oil equities did rally on the day, the XLE:$WTIC ratio continues to fall, and XLE itself printed a doji. WTIC may have made a new high, but XLE did not. It feels like traders are buying oil and selling XLE.
While commodities continue to come back, it feels like momentum in PM is in the process of shifting. Here’s another chart for gold I just noticed – gold in Euros, which seems to be in the process of topping out. The uptrend for gold in Euros is much clearer than in dollars, but right now momentum appears to have topped out, and gold is quite close to breeching its 9 EMA. It has already executed a clear bearish MACD crossover.
Having said that, we have an ECB meeting coming up tomorrow, where the ECB is expected to move rates further into negative territory as well as print more money. I’m not sure I’m well-connected to market gestalt, but my feeling is that the past set of problems in the Eurozone may have been addressed using the printing press, but the current set of problems feel immune to such gimmicks. Migrants won’t stay in Turkey nor will the UK stay within the EU no matter how much printing Draghi does. More and more, he seems irrelevant to the problems of the EU.
And negative rates – are they really the solution to anything? Market will render its current feeling tomorrow after the meeting. Its hard for me to know which way it will jump, but the market in Japan sure wasn’t impressed by negative rates when they landed over there.
I’m not sure there is a “right move” for Draghi here. The market may not like anything he ends up doing.
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So, today, Draghi prints more wealth to save the world, and China releases a massive trial balloon that casts an ominous shadow over the Earth.
In what may be the biggest news of the day, and certainly with far greater implications than whatever Mario Draghi will announce in a few hours when we will again witness the ECB doing not "whatever it takes" but "whatever it can do", moments ago Reuters reported that China is preparing for an unprecedented overhaul in how it treats it trillions in non-performing loans.
Recall that as we first wrote last summer, and as subsequently Kyle Bass made it the centerpiece of his "short Yuan" investment thesis, the "neutron bomb" in the heart of China's impaired financial system is the trillions – officially at $614 billion but realistically anywhere between 8% and 20% of China's total $35 trillion in bank assets – in non-performing loans. It is the unknown treatment of these NPLs that has been the greatest threat to China's just as vast deposit base amounting to well over $20 trillion, which has been the fundamental catalyst behind China's record capital flight as depositors have been eager to move their savings as far from China's domestic banks as possible.
As a result, conventional thinking such as that proposed by Bass, Ray Dalio, KKR and many others, speculated that China will have to devalue its currency in order to inflate away what is fundamentally an excess debt problem as the alternative is unleashing a massive debt default tsunami and "admitting" to the world just how insolvent China's state-owned banks truly are, not to mention leading to the layoffs of tens of millions of workers by these zombie companies.
However, China now appears to be taking a surprisingly different track, and according to a Reuters report China's central bank is preparing regulations that would allow commercial banks to swap non-performing loans of companies for stakes in those firms. Reuters sources said the release of a new document explaining the regulatory change was imminent…
So why is China doing this?
As Reuters correctly noted, by equitizing trillions in bad loans, it frees up the corporate balance sheets to layer on fresh trillions in bad debt, the same debt that pushed these zombie companies into insolvency to begin with.
What this grand equitization does not do, is make the underlying business any more profitable or viable: after all the loans are bad because the companies no longer can generate even the required cash interest payment – as a result of China's unprecedented excess capacity and low commodity prices which prevent corporate viability. It has little to do with their current balance sheet.
That, however, is irrelevant to the PBOC which is hoping that by taking this step it can magically eliminate trilliions in NPL from commercial bank balance sheets in what is not only the biggest equitization in history, but also the biggest diversion since David Copperfield made the statue of liberty disappear, as instead of keeping the bad loans on the asset side as NPLs, thus assuring at least some recoveries, the banks are crammed down and when the next NPL wave hits, their exposure will be fully wiped out as mere equity stakeholders.
Well, the people wanted a "bazooka-sized" surprise from Draghi, and they got it.
Moments ago the ECB announced not only a 10 bps cut to the deposit rate expected pushing it to -40%, but also announced a 5 bp rate cut to the refinance (pushing it to 0.00%) and the marginal lending rate (now at 0.25%), and also boosted QE by €20bn to €80 billion per month, the addition of afour new targeted TLTROs each with a maturity of 4 years, but the most surprising announcement was that the ECB would also for the first time include investment grade euro-denominated bonds issued by non-bank corporations along the list of assets that are eligible for regular purchases.
In other words, Draghi finally delivered his bazooka.
I keep thinking people are silly for saying the central banks "don't have any ammunition left to use." They sure do, since it's all just printed out of thin air. They can also still change ""the rules"" anytime they need to to benefit themselves. ""Rules"" and money from thin air: that's a lot of "ammunition." What they can't absolutely control so easily is mass psychology, and that appears to me to be the final fraying thread holding the whole stinking mess together. So now all we have to do is sit back and watch to see if the "ammunition" being announced today still keeps mass psychology in their straightjacket. Personally, my psychology called B.S. on their circus six years ago and I set out on a divergent path to survival. I do look back over my shoulder at times like these, though, to see if I can spot the final snowflake triggering the avalanche.
First reaction after the announcement, the Euro dropped about 2 points. Market thought about that for about an hour, listened to Draghi speak at his press conference, and then the Euro rallied – and rallied – and rallied. Euro now up 2 points, a 4 Euro swing in about three hours. Almost certainly, Draghi did not want this outcome.
I'm sure there is teeth-gnashing and chest-beating and wailing going on behind the scenes. I expect them to appear Friday and this weekend in an attempt to instruct the market why it didn't react properly to the announcement. Stupid market, never does what they want.
Oh those wacky central bankers.
Gold is up, but its just a currency effect. GLD:$XEU is actually slightly down on the day.
Well normally I'd be in favor of a debt/equity swap. But how will this one play out?
State owned banks lent money to state-owned companies. Loans went bad. So now state-owned banks are receiving equity in the state-owned companies. But since everything is owned by the state…what really just happened?
Well, if the shares of the SOEs were listed on the exchange (meaning the SOEs were just partially owned by the state), then the unfortunate existing shareholders are the ones that end up paying for this via dilution, or by being wiped out. I guess that's why they call it "nationalization". Private shareholders are socked with the loss.
Second issue: the state-owned bank's balance sheet. If the state owned bank has a billion RMB out in loans to a company, and that loan gets converted into equity, what's the value of that equity? If its not a billion RMB, bank takes an immediate hit to capital. So that's probably a no-go option.
Of course one trick would be to wipe out the existing shareholders, yank the company off the market, execute the debt -> equity swap, and then simply assign whatever valuation (say, a billion RMB) you want so the balance sheet of that state-owned bank stays happy and needs no new capital.
But the bank then has on its balance sheet all those deposit liabilities, and they are only offset by…this new equity in the SOEs, plus whatever other assets are outstanding.
Basically this ends up loading the bank's balance sheet with a bunch of unrealized losses. Japan did this too, as I recall. Outcome was those two lost decades.