Recap 11-17-11

Main Items:

  • Rumors early today that the ECB could lend to the IMF to lend to EU countries.
  • US Initial Jobless Claims declined to 388k last week vs 395k exp and 390k prev
  • Philly Fed declined to 3.6 in Oct vs 9 exp and 8.7 prev
  • Housing starts and Building Permits both surprised to the upside for Oct
  • Fitch said Italy’s rating could be cut to low investment grade


  • The French bond auction went better than expected. 5y notes @ 2.82% vs 2.31% prev. The Spanish auction was poor, with the 10yr hitting 6.98%, +20bp vs last, and bid to cover was just 0.9.
  • PBoC said in a 3Q report that while inflation may continue to moderate, “the foundation of price stability is not yet solid,”


There is a sharp squeeze going on in the forward inter-bank funding market. The 2nd rolling Eurodollar contract has made new lows, and the 2nd Euribor contract is now implying a higher Euribor setting in March than the current refi rate. This is particularly worrying because the ECB’s refinance operations allow banks to borrow via repo at the refi rate. This is the main reason Euribor settings were close to the expected refi rate for much of this year, despite the funding stresses. Now, however, there appears to be aggressive expected demand for unsecured lending, which suggests that market participants are expecting some EU banks to run out of ECB-eligible collateral and thus tap unsecured credit lines. This is supported by an article in Dealbook discussing how Italian banks are running out of lenders and has to resort to borrowing from the clearinghouse on a super senior basis.

Another possibility is that a large hedge fund was liquidating positions, which was rumored during the day. The sharp move lower in gold early in the day on minimal news or moves in other assets supports this theory.

Despite the gold sell off today, there were some interesting bullish bits from the World Gold Council 3Q report, (even though it isn’t the most neutral source):
1) Gold demand (ex central banks) in the third quarter of 2011 reached 1,053.9 tonnes, an increase of 6% compared to the same period last year. Demand growth was driven by investment demand, which rose by 33% year-on-year to 468.1 tonnes. Central bank buying hit a 40 year high of 148 tonnes. The majority of CB buying took place in September after prices fell sharply from record levels.
2) Investment demand in Europe reached a record quarterly value of €4.6bn, equating to 118.1 tonnes – a year-on-year increase of 135%
3) Jewellery demand declined 10% vs Q3 2010. Indian jewellery demand in Q3 saw a 26% decline in tonnage, when compared to the same quarter in 2010, to 125.3 tonnes. Jewellery demand destruction appears to be wide spread across countries, which was mostly offset by a jump in Chinese demand.
4) Over the past 10 years, India and the Far East jewellery demand has increased from 36% of total demand to 66%. Jewellery demand represents ~50% of total demand. China is now the largest consumer of gold jewellery in the world, consuming 4.5x US demand.
5) The conclusion appears to be that with supply stable, investment demand is now squeezing out jewelry demand as prices ratchet higher. Also, it appears that strong central bank demand was able to absorb simultaneous sales by Paulson as well as MF Global customers. This is interesting because this occurred at a time when EM currencies were weakening and reserve accumulation had slowed or reversed. This suggests that the CB buying is a result of a shift in allocation as versus reserve accumulation.