Yesterday’s no volume melt up confused many. The Dax is once again showing us the way down. Many of our risk markets are reversing into negative territory during the last hour. People bought yesterday’s rally in panic, and will soon be forced to sell those positions out. Greed and fear major driver, once again.

Markets threading water. No conviction in early European trading. European markets underperforming the US market as of yesterday afternoon. SPX is 10 points higher compared to yesterday afternoon, while the DAX and Stoxx slowly flirting with support levels. USD getting some support here. Don’t forget yesterday’s rally was on poor volume. Dax to lead us lower again?

Ft.com
Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, according to the body that sets their accounting rules. In a private letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt. “This is a matter of great concern to us,” Hans Hoogervorst, IASB chairman, said in the letter, which was seen by the Financial Times.http://www.ft.com/intl/cms/s/0/9582fb8c-cfe9-11e0-a1de-00144feabdc0.html#axzz1WOELnKbv

Silvio Berlusconi, Italy’s prime Minister, met Umberto Bossi, leader of the Northern League and his closest ally, on Monday in a bid to resolve differences within the ruling coalition over amendments to the government’s austerity plan. The meeting, held in Mr Berlusconi’s private residence in Arcore, just outside of Milan, was intended to convey a message of coherence to the coalition after days of feuding over proposed amendments to the package.  The €45.5bn austerity package, drawn up at the insistence of the European Central Bank, is currently being examined by the Senate, where any amendments must be presented by the end of the day on Monday. http://www.ft.com/intl/cms/s/0/0d751a02-d22a-11e0-9137-00144feab49a.html#axzz1WOELnKbv

Nordea, the largest bank in the Nordic region by market value, is to reduce its workforce by nearly 6 per cent in an attempt to protect profit amid a slowing economy and tougher regulatory environment. The Stockholm-based lender said it would cut about 2,000 of its 34,000 workers by the end of next year, joining a growing number of banks that have announced aggressive cost-saving measures as the economic outlook deteriorates. More than 60,000 jobs have been cut by European banks in recent weeks, including UBS, ABN Amro, HSBC, Barclays and Credit Suisse. http://www.ft.com/intl/cms/s/0/f99542ec-d269-11e0-9137-00144feab49a.html#axzz1WOELnKbv

Irish residential mortgages in arrears or restructured due to financial distress rose 10 per cent in the second quarter from the previous three months, heaping pressure on the government to come up with a solution for struggling homeowners.  More than one in 10 Irish home loans are not being fully repaid and the situation is deteriorating as the rate of unemployment remains stubbornly high and house prices continue to fall, marking a three-and-half year decline. http://www.ft.com/intl/cms/s/0/8c3a1412-d263-11e0-9137-00144feab49a.html#axzz1WOELnKbv

Algeria’s foreign ministry confirmed on Monday that Safia Gaddafi, wife of the embattled Libyan leader Muammer Gaddafi, had arrived on Algerian territory along with other family members.  The presence of members of the Gaddafi family in Algeria could prove an embarassment to the authorities there, not least as domestic public opinion has long been uneasy about the government’s ambiguous stance towards the conflict in Libya. http://www.ft.com/intl/cms/s/0/d6f9b5be-d283-11e0-a409-00144feab49a.html#axzz1WOELnKbv

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QE 3 or not, the US Economy and the Budget hasn’t changed much. This great graphics from earlier this year, is worth studying every now and then. Sovereign Debt is out of control. Courtesy Elefint Design.

What are Bernanke’s real options when it comes to stimulus? QE1 and QE2 have not accomplished much, but higher equity prices, so the Top earners can feel rich again. Did Bernanke pull a bluff last Friday, and can he do another QE experiment? By Macro Story;

The repurchase agreement or “repo” market  is where primary dealers finance their inventory of US Treasuries, where companies find short term financing and where money market funds invest much of their capital. With daily “repo” transactions estimated at $2-4 trillion USD it is truly amazing how few understand the grease that keeps the US economy functioning.

The product itself is very simple. A company requiring short term financing pledges their US Treasuries as collateral with another party who lends them cash. Because of the little to no risk involved money markets invest heavily in the repo market. Below are a few oversimplified examples of how the market works.

Company X, a primary US Treasury dealer has $100 billion in US treasuries. They pledge those treasuries as collateral in the repo market and receive $98 billion cash in exchange. They take that $98 billion and buy more US Treasuries and so on. In a repo even though Company X pledged those treasuries they still in fact own them and receive the interest payment.

Company Y has $100 million in surplus cash each night and wants to invest that money to earn interest versus leaving it at the bank interest free. They agree to lend that money to Company X overnight with Company X’s US Treasuries as collateral.

The key to this whole market is having collateral. For example in the mortgage market there are millions of homeowners who want to refinance to stay in their homes. There is also plenty of money available to lend. What there is not enough of is equity in homes to be used as collateral. The result, new loans are not created and the market is collapsing.

With QE1 and then QE2 the Fed “printed money” to purchase Mortgage Backed Securities (MBS) and US Treasuries. The result they removed the very collateral from the market needed to make it function causing two serious problems.

Repo Rates have declined not because of lack of demand for credit. The demand is still there but lack of collateral (i.e. US Treasuries).

With the decline in rates money market funds are at risk of permanently leaving in search of higher yielding investments.

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Despite today’s “great bull”, volumes are very low. The HFT melt up is taking equities higher, in perfect timing, as hedge funds are running high levels of ES shorts and Gold longs. DAX index, the leader on the downmoves is showing “disturbingly” low volume. The market is continuing to confuse everybody.

Markets fooling everybody once again. People have sold out equities and rushed into safe heaven Gold. Well now the squeeze is starting to feel. Overleveraged Alpha Chasers are now short ES futures and long Gold. Interesting times ahead, especially if you consider Bernanke is about to reload some ES futures. Greed and fear.

From Goldcore;

Gold has fallen in U.S. dollars and in most currencies but is higher in Swiss francs due to concerns of fees on Swiss franc deposits. Asian (except for China’s CSI300) and European equities are higher as investors judge the recent sell off as excessive. Risk appetite has risen on hopes that the U.S. and global slowdown will not be sharp.  

Gold is trading at USD 1,818.80, EUR 1,254.10, GBP 1,110.90, CHF 1,482.50 and JPY 139,340 per ounce.

There is no London AM Fix this morning with London closed due to a holiday. Friday’s London AM Fix was USD 1,787.00, EUR 1,237.10, GBP 1,094.17 per ounce.

Sterling did not see weakness despite U.K. house prices falling for a fourth month in August. Property researcher Hometrack said demand for homes may weaken further this year due to “weak consumer sentiment, pressure on household incomes and the uncertain economic outlook.”

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The Market tanked big time in August. September, is historically a bad month for bulls, but as the market is tricking everybody, we could see further short term upside in the market, and a decline in volatility. As we argued last week, volatility should come down short term, as people started pricing risk too aggressively. Some chart levels below, DAX; STOXX;SPX;NDX and VIX.

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