Daily Market Roundup by FXCC - November 24 am

“Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.” – Martin Luther, German scholar.

Germany was THE news on Wednesday, so much so that those commentators searching for the dislocating ‘Lehman moment’ wondered if we’d finally experienced it. The fact that Germany’s latest bond auction was “technically uncovered” is a huge issue and no one should underestimate the ‘tipping point’ this represents. For those who’ve used the kicking the can down the road metaphor the can has been kicked down the blind alley and finally hit the wall. Many financial news outlets and market commentators described the bond failure on Wednesday as “a disaster”, for once that description might not prove to be an understatement.

But that was only one issue relating to Germany the other, as mentioned in our previous notes, was German Chancellor Angela Merkel’s unequivocal and absolute resolution versus the ECB becoming the lender of last resort.

“The European currency union is based, and this was a precondition for the creation of the union, on a central bank that has sole responsibility for monetary policy. This is its mandate. It is pursuing this. And we all need to be very careful about criticising the European Central Bank. I am firmly convinced that the mandate of the European Central Bank cannot, absolutely cannot, be changed. I find it extraordinarily inappropriate that the European Commission is suggesting various options for euro bonds today – as if they were saying we can overcome the shortcomings of the currency union’s structure by collectivising debt. This is precisely what will not work.” – Angela Merkel..

Despite being portrayed as the obstinate obstacle to the supposed potential healing process, is Ms. Merkel actually the only sane voice of reason amongst the European elite politicians? Her dignified and calm navigation of the crisis, whilst so many are now rabidly salivating at Germany’s abject refusal to ‘print and be damned’, is admirable. Is the German stance in fact the correct medicine the system actually needs?

“How soon ‘not now’ becomes ‘never’.” “Peace if possible, truth at all costs.” – Martin Luther.

Germany failed to get bids for 35 percent of the 10-year bonds offered for sale, elevating borrowing costs in Europe higher and the euro lower on concern the region’s debt crisis is driving away investors. Total bids at the auction of securities due in January 2022 amounted to 3.889 billion euros, out of a maximum target for the sale of 6 billion euros, according to Bundesbank data. Six of the last eight bond sales by Germany have been “technically uncovered,” with fewer bids than the maximum amount on offer, Norbert Aul, a rates strategist at RBC Capital Markets in London, said in an e-mailed note.

Under the German auction system, the central bank retains securities at sales for the secondary market. In today’s offering, the debt agency allotted 3.644 billion euros of the securities, leaving the Bundesbank to retain 2.356 billion euros, or 39 percent of the supply. That’s the highest proportion of unsold debt at a 10-year sale since 1995, according to Bloomberg data. The securities were sold at an average yield of 1.98 percent. In the secondary market, the rate rose to 2.13 percent.

Banks and investors are reducing holdings of European government bonds as the debt crisis spreads. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, sold its entire holdings of Italian government bonds by Nov. 10, a report from the fund showed. BNP Paribas SA and Commerzbank AG said in earnings reports this month they’re unloading sovereign bonds at a loss.

German bonds have returned 8.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 0.9 percent and Belgian securities have dropped 3.3 percent, the indexes show.

Market overview for Wednesday 23rd November

The S&P 500 lost 2.2 percent to 1,161.79 at 4 p.m. in New York. The MSCI Emerging Markets Index extended its longest slide since 2009. Oil lost 1.9 percent, while the euro weakened to a six-week low after Germany failed to find buyers for 35 percent of the bonds offered at an auction. Ten-year German yields climbed 23 basis points and France’s rose 16 points.

The S&P 500 extended its November tumble to 7.3 percent. Stocks in the index are valued at less than 12 times estimated earnings, compared with 14.7 times at the end of last year. The index ended the session down 15 percent from a three-year high at the end of April and 26 percent below its record in 2007. The benchmark gauge of U.S. equity has rebounded 5.7 percent from its 2011 low in October, trimming a gain of as much as 17 percent. Financial shares in the S&P 500 have fallen 13 percent as a group to lead the market’s November slide, with Goldman Sachs Group Inc. and Bank of America Corp. trading at their lowest prices since the bear-market bottom in March 2009.

Crude fell 1.9 percent to $96.17 a barrel in New York. Gold for December delivery lost 0.4 percent to $1,695.90 an ounce as the stronger dollar decreased demand for the precious metal as an alternative investment, while copper futures retreated 1.7 percent.

Italian 10-year bond yields rose 15 basis points to 6.97 percent even as the ECB bought the nation’s debt, according to three people with knowledge of the transactions, who declined to be identified because the trades are confidential. A spokesman for the ECB in Frankfurt declined to comment today.

The dollar strengthened against all 16 major peers and the Dollar Index, a gauge of the currency against six major counterparts, rose 0.9 percent to 79, the highest on a closing basis since Oct. 4.

The euro weakened against 10 of 16 major peers, falling 0.6 percent against the yen and slipping for a fourth straight day versus the Swiss franc, the longest run of declines in more than two months.

The pound declined 0.6 percent to $1.5538 as Bank of England minutes from this month’s meeting showed policy makers were unanimous in their decision to keep the target for asset purchases this month, as some officials said an increase in stimulus may be needed in the future. British bonds advanced, pushing 10- and 30-year gilt yields to record lows.

Economic calendar data releases that may affect the morning market sentiment

09:30 UK – GDP Q3
09:30 UK – Index of Services September
09:30 UK – Total Business Investment Q3
11:00 UK – CBI Industrial Trends Survey November

Analysts surveyed by Bloomberg gave a median quarterly prediction of 0.5% for UK GDP, the same as the previous quarter. Year-on-year the figure was also predicted to be 0.5%, also remaining unchanged from the previous figure.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/november-24-am/

Daily Market Roundup by FXCC - Six Degrees Of Separation Now Shrunk To Three Or Four, But For Bank Contagion It’s One

Six degrees of separation refers to the idea that everyone is approximately six steps away, by way of introduction, from any other person on Earth. A chain of, “a friend of a friend” statements can be made, on average, to connect any two people in six steps or fewer. It was originally set out by Frigyes Karinthy and popularised by a play written by John Guare.

Due to technological advances in communications and travel, friendship networks could grow larger and span greater distances. In particular, Karinthy believed that the modern world was ‘shrinking’ due to this ever-increasing connectedness of human beings. He suggested that despite great physical distances between the globe’s individuals, the growing density of human networks made the actual social distance far smaller.

As a result of this hypothesis, Karinthy’s characters believed that any two individuals could be connected through at most five acquaintances. In his story, the characters create a game out of this notion. He writes:

“A fascinating game grew out of this discussion. One of us suggested performing the following experiment to prove that the population of the Earth is closer together now than they have ever been before. We should select any person from the 1.5 billion inhabitants of the Earth—anyone, anywhere at all. He bet us that, using no more than five individuals, one of whom is a personal acquaintance, he could contact the selected individual using nothing except the network of personal acquaintances.”

This idea both directly and indirectly influenced a great deal of early thought on social networks. Karinthy has been regarded as the originator of the notion of six degrees of separation.

In 2001, Duncan Watts, a professor at Columbia University, attempted to recreate an original experiment on the Internet, using an e-mail message as the “package” that needed to be delivered, with 48,000 senders and 19 targets (in 157 countries). Watts found that the average (though not maximum) number of intermediaries was around six.

A 2007 study by Jure Leskovec and Eric Horvitz examined a data set of instant messages composed of 30 billion conversations among 240 million people. They found the average path length among Microsoft Messenger users to be 6.6 (some now call the theory, “the seven degrees of separation” because of this).

It has been suggested by some commentators that interlocking networks of computer mediated lateral communication could diffuse single messages to all interested users worldwide as per the 6 degrees of separation principle via Information Routing Groups, which are networks specifically designed to exploit this principle and lateral diffusion.

There have been new search techniques developed to provide optimal or near optimal solutions. The experiments are performed using Twitter, and they show an improvement of several orders of magnitude. The optimal algorithm finds an average degree of separation of 3.43 between two random Twitter users, requiring an average of only 67 requests for information over the Internet to Twitter. A near-optimal solution of length 3.88 can be found by making an average of 13.3 requests. – Wikipedia

Facebook’s data team released two papers in November 2011 which document that amongst all Facebook users at the time of research (721 million users with 69 billion friendship links) there is an average distance of 4.74. Probabilistic algorithms were applied on statistical metadata to verify the accuracy of the measurements. It was also found that 99,91% of Facebook users were interconnected, forming a large connected component.

Users on Twitter can follow other users creating a network. According to a study of 5.2 billion such relationships by social media monitoring firm Sysomos, the average distance on Twitter is 4.67. On average, about 50% of people on Twitter are only four steps away from each other, while nearly everyone is five steps away. In another work, researchers have shown that the average distance of 1,500 random users in Twitter is 3.435. They calculated the distance between each pair of users using all the active users in Twitter…

Yesterday a great deal of media column inches was dedicated to Facebook’s claim that they’d reduced the six degrees to below four, however, it would appear that their claim could be simply a public relations stunt given their social media tool lags behind Twitter’s empirical results. For the banking fraternity no such degree of separation exists, the inter relationship and contagion is immediate.

It’s fascinating to watch how the mainstream news is managed, it’s as though the short attention span of the general populous is groomed by a higher authority. Over recent weeks the main news items across many of the networks in Europe concerned Libya, Italy and Greece, casting a jaundiced eye over the tv news yesterday evening not one of the subjects were mentioned, neither was Iraq or Afghanistan, Egypt received a two minute spot despite tens of protestors being killed for objecting to the current interim military rulers. The only reference to the Eurozone crisis was Germany’s bond offering being circa 35% under subscribed, a complicated issue lost on many of the viewers. Similarly the looming general strike, due to take place in the UK on November 30th, was given no coverage despite the huge impact it will have, not least to the economic data the current coalition government obsess over.

Despite the advances and benefits of Twitter and Facebook in relation to communication, most clearly demonstrated by the Arab spring uprisings, the observation is that the mainstream news has never been more dumbed down with its delivery and content, the creation of the celebrity industrial complex being concrete evidence. Should this banking, sovereign debt crisis and social unrest explode when the austerity measures, (created by governments to ring fence the wealth of the political, banking and other elite groups), really take hold you have to wonder how the general populous will cope. The education on who, what, when, where, and why in the western media has been noticeably absent, the end result could be hysteria and panic given the degree of separation between banks and retail customers is only one..

Market Overview
U.S. financial markets are closed today for the Thanksgiving national holiday. German private consumption expanded 0.8 percent from the second quarter, the German Federal Statistics Office has reported. Gross domestic product advanced 0.5 percent from the previous three months, the office said, confirming an initial estimate published on Nov. 15, that was an acceleration from the 0.3 percent growth recorded in the second quarter.

The 17-nation shared currency climbed from a six-week low versus its U.S. counterpart as Germany’s Federal Statistics Office said company investment jumped in the third quarter, contributing to a 0.5 percent increase in output. The yen pared gains after Standard & Poor’s said Japan’s lack of progress in tackling its public debt burden puts it at risk of a credit-rating downgrade.

The euro rose 0.2 percent to $1.3373 at 8:06 a.m. London time, after slipping to $1.3320 yesterday, the lowest level since Oct. 6. The currency traded at 103.16 yen from 103.15. The yen climbed 0.2 percent to 77.14 per dollar, after earlier rising as much as 0.4 percent.

The shared currency tumbled 1.2 percent against the dollar yesterday after Germany received insufficient bids at a bond auction, fuelling concern that Europe’s sovereign-debt crisis is driving away investors from the region’s assets.

Market snapshot as of 9:15 am GMT (UK time)

Overnight and early morning saw mixed results from Asia. The Nikkei closed down 1.80%, the Hang Seng closed down 0.4%, the CSI closed up 0.19%. The main Australian bourse index the ASX 200 closed down 0.17%.

European markets have experienced mixed results in the early part of the morning session, the STOXX 50 is currently up 1.28%, the UK FTSE up 0.37%, the CAC up 1.37%, the DAX is up 1.31%. Brent crude is up circa 96 pips and gold is up $6 an ounce. The SPX equity future is currently up circa 1%.

Economic calendar data releases that may affect the sentiment for the afternoon session

There are no significant data releases for the afternoon given the USA market is closed due to the national Thanksgiving holiday.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/six-degrees-of-separation-now-shrunk-to-three-or-four-but-for-bank-contagion-its-one/