Month: June 2016

Just days after Goldman threw in the towel on its bearish gold call, the gold bulls are crawling out of the woodwork and none has been more vocal than Credit Suisse which moments ago hiked its gold price forecast to $1,500 which the world’s 3rd most systematically risky bank expects the yellow metal will hit in the first quarter of 2017.

According to CS, gold and silver are now its top picks in the metals space: “gold forecast to peak at $1,500/oz in Q1/17: We raise our gold price forecast by 8% in H2/16 to $1,413/oz and 10% in 2017 to $1,450/oz on prolonged macro and political uncertainty following the Brexit vote. We see an extended timeframe for a negative real rate environment in the US and abroad and continued gold buying by central banks and consumers to diversify wealth. Our silver price forecast increases by 12%, to $18.75/oz, in H2/16 and by 15%, to $19.03/oz, in 2017, following gold.”

 

More details:

Gold shines again, hits our prior peak price six months ahead on Brexit

 

A gold price of US$1,350/oz was achieved briefly last week. This level was the peak price that we previously expected by 1Q-17. The Brexit result has pulled forward gold prices. Prolonged strength, on prolonged macro uncertainty.

 

A common argument we hear from gold participants is that gold is currently benefitting from a fear trade on Brexit, and that may indeed be the case. But we think this recent fear trade leads to something more enduring (similar to the 1Q-16 catalyst of China weakness and global implications). We forecast the gold price to increase through 2016 and believe the $1,500/oz mark could be tested by late 2016 or early 2017 as the macro implications of the Brexit vote are clarified, and the 8 November US election weighs on sentiment. Even before the Brexit vote, we saw positive price drivers: a strong chance of additional QE from the Eurozone, a 12-18 month period of negative real rates in the US and continued wealth diversification globally from central banks and consumers given the uncertain macro environment.

 

We believe the surprise Brexit vote has solidified and intensified macro and political uncertainty and extended the timeframe for a negative real rate environment in the US (ETF buyers), and potentially abroad (bar & coin buyers). The Brexit time-clock could begin in October 2016 and extend to October 2018 when negotiations between Britain and the EU are expected to conclude. In the interim, Scotland and potentially (Northern) Ireland may seek independence referendums in order to remain in the EU. There may also be further votes tabled in other EU nations which will continue to raise the question of the Eurozone’s sustainability.

 

Gold price forecasts revised upwards

 

Gold market deficits in 2016 and 2017 drive our higher price forecasts. We increase our investment demand forecasts for 2016 and 2017 to reflect continued strength from ETFs and bar/coin hoarding. Meanwhile, we continue to expect mine supply to decline over the next three years. We forecast the gold price to increase through 2016, averaging $1,475/oz in 4Q-16 and $1,500 in 1Q-17 with a price average of $1,450 in 2017.

 

Our LT gold price forecast increases to $1,300/oz from $1,200/oz as we incorporate our expectation of long term gold demand from a variety of drivers; including central bank diversification and consumer asset diversification in light of the current global economic outlook.

CS on silver:

Stronger financial asset drivers

 

The silver price continued its rally and outperformance vs. gold in 2Q-16, up 12% QoQ in absolute terms (2Q-16 average: $16.8/oz), compared to the gold price increase of 6%. Demand for silver has increased, not for physical/industrial uses, but as a precious metal financial asset. We believe there are international capital flows towards safe-haven asset classes due to a higher geopolitical risk premium on other assets, the FOMC’s focus on “global risks”, and a potentially toxic US election weighing on the USD. Against the higher demand we note that there is lower silver mine supply.

 

Revised silver price forecasts including LT to $20/oz

 

Based on our multi-factor regression model, we have made upward revisions to our silver price outlook of 6% to 15% throughout our forecast period, primarily reflecting a stronger gold price forecast and lower expectations for mine supply growth. Most significantly, our LT price moves to $20/oz from our previous $17.9/oz.

 

On supply & demand fundamentals, we forecast the physical market will be in a significant deficit of 114Moz in 2016 and 55Moz in 2017, and return to balance in 2019.

As for gold equities…

Gold equity outperformance to continue, upgrade Alamos and  Yamana to Outperform and IAMGold to Neutral:

 

We upgrade Alamos to Outperform from Neutral due to its strong project pipeline, favourable FX exposure, balance sheet and exploration opportunities. Yamana is upgraded to Outperform from Neutral as we see it continuing to benefit from gold leverage, with potential for a re-rating through portfolio optimization, execution on debt reduction and exploration success. IAMGold is upgraded to Neutral from  Underperform, as we believe it is turning the corner on operational and financial performance.

 

Gold top picks

 

In the gold space, our top pick is Agnico Eagle (AEM) for its strong exploration and project pipeline, favourable growth profile over the next five years, operational consistency and strong balance sheet. AEM trades at 1.44x P/NAV, a slight discount to the large cap average of 1.52x. AEM is on the Credit Suisse Global Focus List.

 

Eldorado (EGO) is a top pick for its potential P/NAV re-rating with a tighter focus on longer life assets. We note that EGO has delivered against production guidance for the past three years and is a consistent operator. EGO’s current valuation at 0.87x NAV is at a discount to our coverage average of 1.18x.

 

Detour (DGC) is also a top pick due to its long reserve life (+22 years), strong FCF, scale (+0.5Moz/year) and location in Canada. It trades at 1.11x P/NAV vs. our coverage average at 1.18x and senior gold equities at 1.52x.

 

Other Outperform-rated stocks are Barrick, Newmont, Yamana and Alamos: We like ABX for its gold leverage and capital allocation strategy, with a minimum IRR threshold targeted. Newmont for its operational consistency and attractive relative valuation vs. ABX and GG. AUY for its gold leverage and potential upside through portfolio optimization, balance sheet deleveraging and exploration opportunities. AGI for its strong project pipeline, favourable FX exposure, balance sheet and exploration opportunities.

Alas, now that the sellside’s attention is once again focused on gold, this only means that the BIS gold and FX trading desk will be extra busy; coupled with Goldman’s and Cramer bullishness on gold, this may be a near-term peak.

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With BoE’s Carney hinting at moar easing over the summer, cable is diving (testing back down to a 1.32 handle) and UK Gilt yields plunged to new record lows at 91bps…

 

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Bank of England Gov. Mark Carney is delivering a speech on Thursday, a week after Britons voted to leave the European Union, the central bank said Wednesday. Carney stepped in to soothe financial markets Friday in the immediate aftermath of the shock Brexit vote, pledging the BOE would backstop the financial system with at least £250 billion ($334 billion) of loans to banks that needed them.

And, as many suspected, he just announced that the BOE will likely ease further over the summer:

• BOE CARNEY: SOME MONETARY POLICY EASING LIKELY OVER SUMMER
  
• BOE CARNEY: MPC WILL DISCUSS FURTHER POLICY INSTRUMENTS IN AUG
  
• CARNEY: BOE MPC INITIAL ASSESSMENT JULY, NEW FORECASTS AUG IR
  
• BOE CARNEY: FACES TRADE-OFF STABILISING GROWTH, JOBS, OUTPUT
  
• BOE CARNEY: MONETARY POLICY CAN’T FULLY OFFSET NEGATIVE SHOCK
  
• BOE CARNEY: UNCERTAINTY DRAG MAY BE GREATER THAN FORECAST
  
• BOE CARNEY: PLAUSIBLE UNCERTAINTY ELEVATED FOR SOME TIME
  
• CARNEY: BOE POLICY TO JOIN UP MACRO-PRU, REGULATION, MONPOL
  
• BOE CARNEY: IF BANK RATE TOO LOW CAN HIT CREDIT AVAILABILITY
  
• BOE CARNEY: MATERIAL SLOWING DUE BREXIT NOW CENTRAL FORECAST
  
• CARNEY: BOE TO OFFER WEEKLY INDEXED LONG-TERM REPOS TO END SEP

HIs full speech can be found here. Watch him live after the jump:

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The IMF appears set on making sure the exuberance in stocks is not mistaken for any reflection on optimism. Having warned of the systemic fragility due to Deutsche Bank, Madame Lagarde's pre-Brexit fearmongering has now been confirmed post-Brexit as IMF spokesman Gerry Rice warns the near-term risks from U.K. vote to leave the European Union "arising mainly from the macroeconomic and financial market impact of a sizable increase in uncertainty," including on political front.

In April, The IMF warned…

A British exit from the European Union would pose “serious downside risks” to an already slowing global economy, the head of the International Monetary Fund said Thursday.

 

“We have clearly elevated (so-called) Brexit as more of a serious downside risk to our forecast for global growth,” IMF Managing Director Christine Lagarde told reporters at the outset of the IMF and World Bank spring meetings attended by central bankers and finance ministers from 189 countries.

And now, as Bloomberg reports,

“Brexit has created significant uncertainty and we believe this is likely to dampen growth in the near term, particularly in the U.K. but with repercussions also for Europe and the global economy. Prolonged periods of uncertainty and associated declines in consumer and business confidence would mean even lower growth”

 

“One notable source of this uncertainty concerns the terms of the future relationship between the U.K. and the EU, and these relate to questions about how long it will take to decide those terms, how the how the new relationship will impact business and other actors”

IMF will release updated version of World Economic Outlook on July 19 which will reflect its assessment of the Brexit impact.

“The IMF strongly supports the commitments made and the steps taken by major central banks, that includes the Bank of England, the European Central Bank, the U.S. Fed, the Bank of Japan and others, to provide liquidity and curtail excess financial volatility.”

 

“Market movements immediately following the referendum were large but not excessively disorderly.”

 

“More broadly, we think policy makers need to stand ready to act should the impact of financial market turbulence and higher uncertainty threaten to materially weaken the global outlook.”

 

“Decisive policies will make a difference.”

 

Says “the fund will continue to monitor developments closely and we are engaging with our members to maintain global stability in the period ahead. We also stand ready to provide support to our members as needed."

So – to summarize – The EU is going to suffer… as is The UK… but central banks will save the world so don't worry too much.

 

Finally, when asked about George Soros more dire comments, Rice urges against “rush to judgment” on Brexit impact.

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In the aftermath of Germany refusal to allow Italy to breach Eurozone regulations, and provide its banks with up to €40 billion in new capital, Italy has unveiled a new track to handle its insolvent banks and as Reuters reports, the Italian government may have to inject capital directly into weaker banks to bolster their financial strength, a government source said on Thursday, adding it was waiting for the results of stress tests being conducted by European banking authorities. The results of the tests are expected to be published at the beginning of the third quarter.

The source told Reuters the government was also working on a plan to increase the firepower of bank bailout funds Atlante, which was set up in April to help lenders raise cash and sell bad loans, by 3-5 billion euros ($3.34-5.57 billion) by the summer. The source said the government was in talks with private pension funds to seek additional contributions for Atlante.

Other contributions were expected to come from the state lender Cassa Depositi e Prestiti and from a public company called Societa per la Gestione di Attivita.

And then, in a surprising follow up, the EU appears to have once again backtracked when Reuters headlines emerged suggesting that Europe would provide up to €150 billion for Italian banks”

• LIQUIDITY SUPPORT FOR ITALIAN BANKS INCLUDES GOVERNMENT GUARANTEES OF UP TO EUR150 BILLION –EU OFFICIAL
• BANK LIQUIDITY SUPPORT WAS REQUESTED BY ITALY FOR PRECAUTIONARY REASONS –COMMISSION SPOKESWOMAN

But…

• LIQUIDITY SUPPORT APPLIES ONLY TO SOLVENT ITALIAN BANKS –COMMISSION SPOKESWOMAN

Which, technically is none of them, but practically any bank can – after the sufficient non-GAAP adjustments – pass for solvent.

So is another major bank bailout event on the horizon? It appears so. And Italy may not be alone. In comments that were little noticed yesterday, Germany’s Schauble said that Portugal may see another bailout too, saying “It would have to apply for a new program, which it would get. But the terms would be severe and it is not in Portugal’s interests.”

As Reuters reported, German Finance Minister Wolfgang Schaeuble pressed Portugal on Wednesday to stick to its European fiscal targets and said that if it were to apply for a new aid program the terms would be harsh. Portugal’s left-leaning government has set out to reverse its predecessor’s austerity policies, aiming to grow its way out of trouble by boosting demand and set an example for other post-bailout euro zone countries.

“Portugal would be making a big mistake if it does not stick to its commitments,” Schaeuble told a news conference in Berlin.

Pressed by journalists, Schaeuble stressed that Portugal would not need a new aid program if it sticks to EU rules. “They (the Portuguese) don’t want it (a new package) and they don’t need it if they stick to the European rules,” he said. Portugal insists it will meet this year’s budget deficit target of 2.2 percent, which is half last year’s gap, and that no new measures will be necessary after solid budget execution in the first five months of the year.

The Portuguese finance ministry said Lisbon was not considering asking for any new bailouts and was working to meet its EU targets and to cut its budget deficit.

“Regarding the remarks made by Wolfgang Schaeuble, although he himself immediately corrected them, the finance ministry clarifies that no new aid program is being considered for Portugal,” it said in a statement.

Still, was Schauble’s Freudian slip earlier that “it would get a new program” if it only just asked for it a hint of things to come?

And then there is, of course, the world’s most systemically risky bank, Deutsche Bank…

In retrospect, the UK may have exited Europe just in time.

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Authored by Bill Bonner of Bonner & Partners (annotated by Acting-Man's Pater Tenebrarum),

Scotland and Northern Ireland voted to remain in the EU. But the English, along with the Welsh, voted strongly to break out.

They dodged the searchlights, the hounds, and the barbed wire. Now, they are on the loose… and we and others are planning our escape.

“Frexit!” say the French.

“Nexit!” say the Dutch.

“Ciao!” say the Italians.

 

Beppe Grillo and Marine Le Pen – arguably, far greater threats to the EU than Boris and Nigel ever were…

 

“Italy may be next,” says the Financial Times, anticipating a crucial vote coming up in October. And after more than 1,000 years of empire building, even the United Kingdom looks less united.

Scotland is now likely to hold a second referendum on independence from the rest of Britain – which, if successful, would allow it to rejoin the EU.

And Irish republican party Sinn Féin is calling for a vote in Northern Ireland on whether it wants to rejoin the EU by unifying with the Republic of Ireland (which remains in the now 27-country EU bloc).

Here in the U.S., “Texit” – independence for the Lone Star State – has already been proposed. Maryland’s elders have so far held their tongues. (They remember that the last time they spoke in favor of “Maryexit” Lincoln put them in jail.) But other states must be considering their options.

 

For now, the crowds are still small…

And with the smell of freedom in our nostrils… wafting o’er the great seas… the spirit of liberty is stirring here at the Diary headquarters, too. If we had our druthers, we would exit from almost everything. The U.S. would LEAVE the Mideast, NATO, the UN… and all the “foreign entanglements” General Washington warned us about.

At home, we would exit the War on Poverty and the War on Drugs. Then, Maryland would withdraw gracefully from the United States. And we’re not finished. We don’t share much in common with the people from the West and the North of the state either. So we would encourage Anne Arundel County to break away from the Old Line State and declare its independence.

Finally, our allegiance would be clearer… and dearer. Yes, we would stand and put our hand over our heart, misty eyed, and sing the stirring words of the Anne Arundel County anthem. (“Oh, AA County, you’re not so bad… with crabs and oysters, it’s never sad…”)

Free again, we would solemnly swear our undying loyalty. At least we would swear our loyalty to the part of the county south of the South River. It would be foolish and presumptuous for us to claim allegiance to anything north of the South River or west of the Patuxent. We don’t know them intimately enough to have any genuine affection for them.

 

Saints preserve us….

 

But wait. There, standing at the prison gate, a Taser in one hand and a billy club in the other… is Hillary Rodham Clinton.

“Stronger together” is her new campaign slogan. “And more easily controlled,” she might add.

Hillary is the candidate of the status quo. She is the ultimate insider, the warden, the Deep State champion whose entire program consists of building out the prison system set up by her husband, George W. Bush, and Barack Obama.

Making a getaway is what Brexit is all about. But the British vote is not the end of the process. It is more likely just the beginning.

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Over the past few days, the size of the Fed’s Reverse Repos have been rising rapidly, with yesterday’s operation jumping to $143 billion among 52 counterparties, the highest in months as the quarter end collateral scramble goes full throttle. Nowhere is this more obvious than in the overnight general collateral rate. As Stone McCarthy reports, the overnight general collateral rate has jumped to 0.75% this morning. The GC rate has spiked at the end of every quarter for over a year, as money funds face increased regulations and need to streamline their balance sheets at quarter end, in other word “window dress” balance sheets and make them appear better than they are for regulatory purposes.

Following previous quarter end spikes, the GC rate has dipped back to more usual levels the next day. However, this quarter end spike followed a week of highly elevated rates, so the decline may not be as abrupt as prior quarter end spikes.

The fed funds rate has dropped to 0.28% this morning, down from 0.42% yesterday. Even though the fed funds rate had been elevated for the past week, that didn’t stop it from its usual quarter end drop. The fed funds rate has dropped at month-end for over a year, with the largest moves tending to occur at quarter end. It then bounces back to usual levels by the next morning. Today’s drop followed a week of elevated fed funds levels, so it will be interesting to see if the fed funds rate reaches such high levels by tomorrow morning.

We look forward to today’s last of the month and quarter reverse repo for more insight on just how significant the regulatory collateral shortage remains.

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While we are sure stocks know better, it appears the considerably more massive and professionals-driven FX and bond markets seem far less enthused over the Brexit Bounce…

 

 

Four words – “window dressing is over!”

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By Chris at http://ift.tt/12YmHT5

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all it’s glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, I’m a capitalist.

In this week’s edition of the WOW we’re covering global bond markets

In truth it was a challenge to decide what to bring to your attention for this week’s “World Out of Whack”. A challenge made all the more daunting by the plethora of “out of whack” events cascading into my crosshairs.

On that note, feel free to send me any market observations that are seriously out of whack.

Speaking of out of whack, I’ll share two quotes with you before we head into this week’s WOW – one a blast from the past, and the other from the present. The latter serves as a poster child for the reason that Britain decided to exit the sclerotic, out of touch, undemocratic, bureaucratic, shambolic, “fustercluck” that is the European Union.

And before you call those Brits who chose to leave the EU a bunch of uneducated, xenophobic, right-wing bigots, I ask you, how would you feel being ruled by a foreign and increasingly imperialistic power with attitudes such as this?

Now that the votes have been cast we can let the Brits go back to their tea and scones, and the Eurocrats can continue back-slapping each other, wasting millions banning kettles and toasters. Perhaps they’ve failed to take notice of the thousands of potential ISIS members who they’ve welcomed into the EU, and who are now blowing people up in the streets.

Our bent here is not however to opine on what should or shouldn’t happen but rather to profit from these market events. The UK leaving the lunatic asylum has sent markets into a tailspin, causing the rest of the inmates to become increasingly restless.

It didn’t take very long before we heard talk of Grexit, Fruckoff, Departugal, Italeave, Czechout, Oustria, Finish, Slobakout, Latervia, and Byegium took hold with only Remania staying.

In all seriousness, and as I mentioned last week:

“The macro landscape is shifting underneath as at warp speed, and in today’s world capital shifts in minutes. With the Blockchain it shifts in seconds. The politicians and central bankers are increasingly behind the curve, scrambling to catch up and each and every turn sees them exacerbating and compounding problems. Brexit should stand as a wake up call not only to central bankers but to the political class globally.”

The markets’ knee jerk reaction is based upon linear thinking. This thinking goes that the most liquid and most stable of all investments are government bonds.

The fact that government bonds have been in a bull market lasting three and a half decades has provided investors with a false sense of security. And even though we know that the longer any bull market persists, the greater the inherent risks. The markets’ perception is – of course – just the opposite.

So let’s look at how this is playing out in real time.

• Japan’s long yields are on the road to zero. The 40-year hit 0.08% and unbelievably over 80% of the JGB market is now sub-zero.

• And it’s not only Japan: the entire world is rushing into the “safety” of government bonds.

In an equally stunning move, Fitch, Moody’s, and S&P all decided it was time to put the UK in the naughty corner, adorned with a dunce hat by downgrading their debt from AAA to AA. The French will be overjoyed to see the Brits cut down to their rating level.

That the UK had a AAA rating prior to Brexit while sporting some pretty horrific numbers will, at some point in the future, likely form an entire chapter in a book written about this period in time.

Not that the rating agencies are of any use at all. But this is like having a company’s earnings falling and investors turning around wildly buying the stock. And so in this crazy world investors are rushing into UK gilts, pushing yields below 1% for the first time in its history.

Not to be left out, the Irish followed suit, pouring money into their sovereign bond market, pushing the yield to a record low.

Let’s examine this for a minute, shall we?

Sovereign nations can print money to pay for their debts. That is, if those debts are issued in their own currency.

Back in the good old days investors used to be concerned that the printing of money would wipe out the purchasing power of the currency. And so governments were constrained by the markets with yields more closely reflecting risks. This is why Zimbabwe no longer has a bond market.

Today the impossible is not only possible – it’s happening. The grease that oils this is belief. A belief in Central banks.

While investors lurch violently into the “safety” of government bonds, central banks are warming the digital presses for additional stimulus. Stimulus – like anything financial has a debit and a credit column – and it certainly doesn’t sit in the credit column but as the Mad Hatter so correctly points out: it’s only a problem if you believe it is.

These are some of the headlines:

• Brexit: Bank of England to boost post-Brexit markets with $460 billion
• Norway’s central bank provides $2.7 billion liquidity to banks after Brexit

From Reuters:

“The Bank of England offered to provide more than 250 billion pounds ($347 billion) plus “substantial” access to foreign currency to ease any squeeze in markets and Governor Mark Carney said it would consider more measures if needed.

The U.S. Federal Reserve said it was ready to provide dollar liquidity through its existing swap lines with central banks, “as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy”.

“The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks,” it added in a statement.

The European Central Bank said it could provide additional liquidity and would protect euro zone financial stability, while the People’s Bank of China pledged to keep the yuan basically stable and said it would maintain ample liquidity.”

If we were to read a news article stating, “Man amputates leg in bid to run faster,” we’d laugh at the absurdity. And yet today we have a deluge of such articles to choose from in the financial media.

Question

Investors sure aren’t buying sovereign debt for the yield. They’re buying it for the certainty – or at least the perceived security – and so I’m curious to know where are you seeking security?

Cast your vote here and also see where other investors seek security

Know anyone that might enjoy this? Please share this with them.

We’d love your feedback and if you have a market you think worthy of covering please send it to me here.

– Chris

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