Looking backward first, the Fed unsettled markets in mid December with a rate hike.  Japan lit gold’s fuse in January with the announcement of negative interest rates.  Today, Mario Draghi spent and fired his last shot, it will be seen as a blank.  Now we will get to see what sort of reaction is received from the markets.  Initially the markets went in the “favored” directions, that only lasted for about an hour.  The Euro is again strengthening, gold going higher and stock markets have turned negative as if asking “now what?  Do you have anything else”?

Before going further I want to break down what they are trying to do into its most basic form.  Systemically (including Europe) the world ran into “debt saturation” back in 2007.  The plan was to cure too much debt with …more and more debt.  The “experiment” has not worked and will not work …and Mario Draghi just ran into a wall where this is it, he has no more room to “experiment”.  No doubt this is being done now to try to support the Italian (Spanish and others) debt that has gone bad. 

  There is another little problem that few are talking about, the BIS.  The Bank for International Settlements has warned Mr. Draghi not to go to this wall of negative interest rates and further outright monetization.  The BIS has the ability to force Draghi to not only stop the madness but also reverse it.  So not only are the markets asking “what’s next?”, it is also wondering whether or not the BIS will step in.

We also have another piece to add to this puzzle, China.  They just announced they will  http://www.zerohedge.com/news/2016-03-10/china-proposes-unprecedented-nationalization-insolvent-companies-banks-will-equitize begin to take equity stakes for non performing loans via the banking system.  “Nationalization” no matter what they call it.  It had been speculated China would have to devalue the yuan in an effort to make their massive corporate debt payable and industry more competitive.  I would suggest this is simply wiping out current debt in an effort to make room available to create more debt and to reflate.  We will see how this works out but I do not believe this is any more credible than any of the other “serial reflators”.

Many times it is said “OK, so you see the problem but what’s the answer”?  The answer is obvious and we will get to it after looking at the true problem.  The world hit debt saturation in 2007, sovereign treasuries and central banks stepped in and sacrificed (destroyed) their own balance sheets in an effort to reflate.  We know it has not worked and the global economy (pie) is no longer growing.  The ONLY way for a country or region to “grow” is by taking an inordinate size of the pie and the only way to do this is by devaluing currency faster than your competitors.

  The problem today is ALL currencies are competing against each other in debasing (devaluing).  If you devalue too slowly you lose.  If you devalue but not enough, again you lose.  This is the problem with and misunderstanding of the USDX index, the currencies are all valued against each other and NONE OF THEM ARE REAL!  The “answer” as it was back in 2008 is still the same, rather than race “against” each other THEY ALL need to collectively devalue!  The only way to do this is to collectively devalue against “something” …and that something is what it always has been, GOLD!

A collective devaluation will do several things.  First, it will create “inflation” and thus make the existing debt payable if the devaluation is deep enough.  Business will get “reflated” and main street will actually participate in the better business conditions.  Most importantly, for those nations who actually do hold gold, their balance sheet holes will be filled up and patched.  Sovereign treasuries with gold will suddenly see their coffers filled.  There is of course the problem of nations who either do not hold gold or have lied and no longer hold what they said they did.  In this case, these nations become the world’s new “cheap labor” and begin to dig their way out via industrial/commercial production.  This is a very long and hard process which also involves a huge drop in the standard of living.

  Do I know what the level needs to be for gold to perform its function as central bank reserve?  No, the number could be $25,000, $50,000 or $5 million or more, I do not have the answer.  The biggest holder(s) of gold on the planet could simply “mandate” a price or do it via the physical markets over a reasonable period of time …but they will do this as it is the only viable solution.

We now have a situation where central banks have lost their credibility.  This will lead to a loss of confidence in all things paper.  Either the central banks revalue their balance sheets with a wildly high gold price or the markets will do this for them by voting with their feet so to speak.  We are on the cusp of absolutely wild market gyrations and obscene price levels for gold.  So obscene you will either be in or you will be out forever.  Do not try to time anything, these last bazookas fired with blanks will be seen as a very large starting gun!

Standing watch,

Bill Holter

Holter-Sinclair collaboration

Comments welcome, bholter@hotmail.com

Global stocks and U.S. equity futures are fractionally higher (unchanged really) this morning (despite China’s historic NPL debt-for-equity proposal) as traders await the main event of the day: the ECB’s 1:45pm CET announcement, more importantly what Mario Draghi will announce during the 2:30pm CET press conference, and most importantly, whether he will disappoint as he did in December or finally unleash the bazooka that the market has been desperately demanding.

Recall that for the past month, it has been a case of deferred expectations when first the Shanghai G-20 meeting let traders down, then it was the Chinese Congress last weekend, and now it is all up to the ECB: it is all downhill from here, as next week we get the BOJ, which after the NIRP fiasco won’t do anything, and the Fed which if anything, may be unexpectedly hawkish.

All economists in a Bloomberg survey expect a rate cut, and 73 percent forecast the ECB will boost the amount of money put into the financial system through bond purchases. “We are waiting in anticipation of what Draghi will say– there is a good chance that the market could rally a bit on that,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “There has been some positioning ahead of the ECB meeting but there are also investors waiting on the side-lines. So there will be more cash ready to put to work if the ECB actually delivers on both a the rate cut and an increase of QE.”

Below, courtesy of @bondvigilantes, is a summary of what the major investment banks expect today from the European Central Bank:

As Bloomberg notes, stocks have become more and more responsive to ECB updates, with the moves in the Euro Stoxx 50 Index on rate-decision days exceeding the monthly average since last July. In December, when investors were disappointed by the extent of additional stimulus, the gauge swung 4.9 percent intraday, the most since at least 2012.

In other words, Draghi better not disappoint or a replay of the December market reaction is almost assured.

Aside from US futures which are modestly up, Europe trades little changed ahead of ECB meeting, Asian equities gain for first day in four. Oil, copper, gold, most food commodities fall.

The Stoxx Europe 600 Index is up 0.1% as of this moment. It earlier erased a gain of as much as 0.4 percent to fall 0.2 percent. The benchmark has rebounded 12 percent from a 2013 low reached last month, helped by a rally in miners and speculation of further ECB stimulus, a possibility signaled by Draghi in January.

Below is a snapshot of where key markets stood before the ECB:

• S&P 500 futures up 0.3% to 1985
• Stoxx 600 down less than 0.1% to 339
• FTSE 100 down 0.4% to 6122
• DAX up less than 0.1% to 9725
• German 10Yr yield down 3bps to 0.22%
• Italian 10Yr yield down 2bps to 1.39%
• Spanish 10Yr yield down 2bps to 1.54
• MSCI Asia Pacific up 0.5% to 126
• Nikkei 225 up 1.3% to 16852
• Hang Seng down less than 0.1% to 19984
• Shanghai Composite down 2% to 2805
• S&P/ASX 200 down 0.1% to 5150
• US 10-yr yield down 2bps to 1.86%
• Dollar Index up 0.19% to 97.35
• WTI Crude futures down 0.9% to $37.94
• Brent Futures down 1% to $40.64
• Gold spot down 0.4% to $1,249
• Silver spot up less than 0.1% to $15.30

Looking at regional markets, we start in Asia where the Nikkei 225 (+1.2%) outperformed as exporter names benefitted from JPY weakness, while ASX 200 (-0.1%) failed to hold onto its early energy-led advances amid profit-taking in defensive stocks. Chinese markets traded mixed following the latest inflation data where CPI rose to its highest in 19 months but PPI declined for the 48th consecutive month, with the Shanghai Comp (-2.0%) pressured after the PBoC kept its inter¬bank liquidity injections reserved and reports that China is seeking to rein in on property prices. 10yr JGBs initially traded with mild gains amid short-covering following yesterday’s significant declines and ahead of the 5yr auction. However, prices then returned flat on resumed selling following a relatively in-line auction.
Chinese CPI (Feb) Y/Y 2.30% vs. Exp. 1.80% (Prey. 1.80%); highest in 19-months. – PPI (Feb) Y/Y -4.90% vs. Exp. -4.90% (Prey. -5.30%); 48th consecutive monthly decline.

Top Asian News

• Shanghai Authorities Said to Discuss Ways to Cool Housing Market: Possible steps weighed incl. tightening mortgage policies for 2nd-home buyers
• How Global Investors Turn Negative Japan Yields Into Big Returns: Discount offered to yen borrowers reaches record 102.5 basis points this week
• Abe Aide Honda Says BOJ Will Add Easing Soon, But Not Next Week: Etsuro Honda says BOJ should use negative rate, asset purchase “combination”
• Swire Properties Sees Weaker Demand for Retail Space, Housing: Drop in tourist spending, falling retail sales at Hong Kong malls hurt developer
• Lenders Seek to Claw Back $1 Billion From India Beer Tycoon: Court case to bar flamboyant former billionaire’s travel abroad comes days too late
• Daewoo Shipbuilding Says Worst Is Over, Sees Profit This Quarter: World’s second-largest shipbuilder is aiming to win $10.8b in orders this year

European trading has seen a slow start, as many would have expected given the heavy focus on the ECB rate decision later today with European equities trading relatively mixed/flat. In terms of a sector specific basis, materials and energy names lead the way lower with Asian equity markets failing to inspire sentiment overnight. Fixed income markets illustrate the tentative sentiment felt today, as Bunds trade around 162.50 after drifting higher throughout the morning amid particularly light newsflow. In a similar fashion, with many remaining on the sidelines for now.

Top European News

• Draghi Marks a Year of QE With Suspense of ‘No Limits’ Stimulus: Investors expect at least a 10 basis-point cut in deposit rate to minus 0.4 percent, as indicated by swaps on the euro overnight index average.
• Merkel Threat Lurks in Baden-Wuerttemberg From AfD Party: Having made her case for open borders in Europe, Merkel faces test of her stance Sunday when 3 states vote.
• Carrefour Maintains Plan for IPO of Property Unit Carmila: Unit still plans an IPO, CFO Pierre-Jean Sivignon said on a call to reporters.
• Apple’s Privacy Fight Could Be Even Worse in Europe: Law enforcement has generally counted on cooperation from the private sector in obtaining data for police investigations.

In FX, ahead of the key ECB meeting today, few were expecting any fireworks in the market, with the EUR pairs notably quiet as pre decision positioning extremely light. EUR/USD continues to hold the upper 1.0900’s, with 1.1000+ levels clearly too rich under the circumstances, The is market ready for some disappointment, and will be looking for more than the 10bp cut in the deposit rate, though changes to the APP are unquantifiable. EUR/GBP has also been resisting .7700 on the downside, which in turn is limiting Cable upside, though not for the want of trying. NZD/USD has recovered some ground after the surprise RBNZ rate cut, though topping out around .6680-85 for now. AUD/USD is holding off .7500 in the meantime. The JPY pairs have all eased off better levels, though the lead USD rate still looking comfortable on a 113.00 handle. Oil steady, so CAD ranges kept tight accordingly.

In commodities, price action in Oil has been choppy this morning but Brent crude has managed to stay above the pivotal USD 40/bbl level with WTI staying above USD 37/bbl respectively. Gold has moved lower by USD 3.00/oz but many traders will be looking ahead to the ECB rate announcement and meeting later today. Iron ore is still extending its gains after a minor reprieve yesterday with many analyst citing profit taking as for that brief decline.

In addition to the ECB announcement, today on the US calendar we have the latest US initial jobless claims data along with the February Monthly Budget Statement.

Bulletin Headline Summary From RanSquawk and Bloomberg

• European markets have seen a tentative start to the session with all eyes firmly fixated on the ECB
• Overnight saw mixed inflation data from China with CPI rising to its highest level in 19 months but PPI declining for the 48th consecutive month
• Looking ahead today’s highlights include ECB Rate Decision, ECB’s Draghi’s (Dove) press conference and US Initial Jobless Claims
• Treasuries higher in overnight trading; global equity markets mostly lower ahead of ECB rate announcement; week’s auctions conclude with $12b 30Y bonds, WI 2.65% vs 2.50% in Feb., was lowest 30Y auction stop since record low 2.430% in Jan. 2015.
• Given the pressure on current 10Y, 30Y in repo, it’s likely “both issues will trade special even after their auction settlements on March 15,” according to Stone & McCarthy
• The ECB is forecast to ease policy via measures including an interest-rate cut and an expansion of its quantitative easing, according to economists surveyed by Bloomberg. That would add to a wave of global monetary stimulus this year
• The euro weakened, cementing its position as the world’s worst-performing major currency over the past month, as traders braced for the European Central Bank’s decision on whether to expand stimulus
• China’s central bank is preparing new regulations to allow commercial banks to directly swap non-performing loans with firms for shares in their cos, Reuters reports, citing 2 unidentified people with direct knowledge of the new policy
• New Zealand’s central bank unexpectedly cut interest rates to a fresh record low and said further easing may be needed, joining global counterparts in adding stimulus to an economy struggling to generate inflation
• Foreign banks including HSBC and Deutsche Bank are pushing back against the Federal Reserve’s proposals on implementing rules designed to end too-big-to-fail, saying they are burdensome and unfair to the U.S. units of the world’s biggest lenders
• Goldman Sachs hired the daughter of an ally to Malaysian Prime Minister Najib Razak around the time the firm’s bankers were pitching business to the country’s government investment fund, the Wall Street Journal reported, citing unidentified people
• The Sao Paulo state prosecutor’s office on Wednesday charged Luiz Inacio Lula da Silva on allegations of hiding assets, delivering a second blow to the former president in less than a week
• John Gutfreund, who was proclaimed the “King of Wall Street” in 1985 for harnessing the egos and fiefdoms of Salomon Brothers into one of the most profitable investment- banking firms, has died. He was 86
• $8b IG corporates priced yesterday; WTD $40.895b, 4th straight week to top $40b; MTD $82.72b, YTD $376.97b
• Sovereign 10Y bond yields mixed; European, Asian markets mixed; U.S. equity-index futures rise. WTI crude oil, copper drop, gold rises

DB’s Jim Reid concludes the overnight event wrap

As we head into the big event, the last 24 hours or so have proven to be relatively constructive for risk, with price action yesterday a bit of a mirror image relative to that risk-off move which had swept over Tuesday’s session. In line with the recent trend, much of the focus was on the resumption of gains across the energy space after we saw WTI (+4.90%) more than wipe out the prior day losses to surge above $38/bbl and in the process settle at the highest level since December 4th. A greater than expected decline in gasoline stockpiles last week was attributed to the move. It was a positive day across much of the metals space too with Copper (+1.38%), Zinc (+2.10%) and Nickel  (+3.49%) all in rebound mode. Iron ore (-8.82%) did however manage to give up some of those huge gains from Monday while the FT ran an interesting/amusing story suggesting that a horticultural show in the Chinese industrial city of Tangshan was the major cause of that rally as steel mills rushed to buy before being forced to close in order to keep skies blue for the show!

By the closing bell last night the S&P 500 had edged up +0.51% meaning this month the index has closed higher on six of the seven trading days so far. European equity markets closed up similar amounts with the Stoxx 600 announcing the 1y anniversary of the start of ECB QE with a +0.49% gain. Unsurprisingly some of the more volatile moves came in the form of the Euro which was at one stage down 0.6% versus the Dollar, before paring all of that move into the close to finish more or less unchanged around 1.10 (although it is a touch softer this morning). Rates markets were weaker on the whole, although that appeared to reflect a reversal in the price action for JGB’s after that big rally the day prior. 10y Bund yields in particular closed nearly 6bps higher yesterday and are hovering around 0.239%.

Flipping our focus over to the latest in Asia now where the attention this morning is on China with the latest inflation numbers having been released. Last month saw an uptick in prices with CPI printing at +1.6% mom. That’s helped nudge the YoY rate up to +2.3% (vs. +1.8% expected) and by fivetenths relative to January, with the print now the highest since July 2014. The move higher does however appear to be driven by a big surge in food prices (+7.3% yoy vs. +4.1% in January) with much of the commentary attributing this to the timing of Chinese New Year. Services inflation on the other hand slowed last month. Encouragingly PPI also saw an uptick to -4.9% yoy (as expected) from -5.3% in the prior month.

Bourses in China have seemingly reacted negatively to the data with the Shanghai Comp (-0.48%) and CSI 300 (-0.39%) both down just after the break, although we warn that markets there have been especially volatile again recently post the midday break that occurs as we go to print. Elsewhere markets are largely following the lead from the US last night and trading with a positive tone. The Nikkei (+1.42%), Hang Seng (+0.57%) and Kospi (+1.18%) in particular all up, while Oil markets are little changed.

There’s also been some focus on New Zealand after a surprising rate cut out of the RBNZ late last night (25bps cut to 2.25%). That caught the vast majority of commentators by surprise with only 2 of 17 economist estimates on Bloomberg forecasting a cut. The Kiwi Dollar is down 2% (vs. the Dollar) from the moments prior to the cut, with the bond curve rallying in tune. This comes after the Bank of Canada left rates unchanged yesterday (as expected). In terms of yesterday’s data, the January wholesale inventories report for the US saw an unexpected +0.3% mom rise, after expectations had been for a – 0.2% decline. That said, trade sales were much weaker than expected during the month (-1.3% mom vs. -0.3% expected) which has pushed the inventoryto- sales ratio to the highest since April 2009. Meanwhile, during the European session yesterday we saw the January industrial production data from the UK modestly undershoot expectations with a +0.3% mom rise (vs. +0.4% expected), although manufacturing production (+0.7% mom vs. +0.2% expected) was markedly better than consensus.

Taking a look at today’s calendar, this morning in Europe we’ll be kick off in Germany where we’ll get the January trade numbers including the export and import data. Swiftly following this will be the January industrial production data out of France before market attention turns towards the ECB meeting at 12.45pm GMT. As a reminder we’ll also hear from ECB President Draghi shortly after. Away from that the latest US initial jobless claims data is due along with the February Monthly Budget Statement.

This Is The $1 Trillion In European IG Bonds Which The ECB Is Now Buying

Well that escalated quickly…

From 9,700 to 10,000 to 9,500 in 4 hours…

end

Goldman Turns Bearish: “Relief Rally Was Too Fast, We Do Not Feel Comfortable Taking More Risk”