The Daily Energy Technical Report: Stanton Analytics

11/03 /11        

6:45 A.M.

High 93.23

Low 90.87                                  

 

CRUDE: it appears that Mr. Papandreou has played Texas Hold'em before. He has gone all in on the austerity package called for by the ECU bringing the contingent aid up for a vote by the plebiscite. His ploy has angered those that were trying to aid Greece. Now it is time for the people of Greece to decide whether they want to be part of the Euro or not…Angela Merkel. It was news that the Greek government loses its majority that moved the markets off their lows of the night. A Greek bankruptcy will be a serious blow to the global economy. How many CDS's have been written to protect the European banks by U.S. banks? Things are just starting to get interesting. Stay nimble. Crude Continued:

Crude Continues: We are impressed with the strong performance of WTI. Dec has held trend support at 90.60. It is now probing 93.00 as we write. It appears that it is nearing a completion of the leg up from the 90.87 level. Our model suggests that it retreats from the 93.00 to 93.25 area. It is likely to have a setback to the 92.00 to 91.70 area. Depending on the news the pattern has the potential for a drop all the way back to 90.80 to 90.60. The minor upside pivot is 93.25. The key upside pivot to the short-term pattern is a daily settlement above 94.00.

 

RBOB: December has fallen nearly ten-cents since posting its high of 2.6880 Wednesday to its overnight low of 2.59. It is in the process of correcting that decline. We look at the correction to yield to another test of the 2.59 level. However, with a break thereof December will slip to 2.5450 to 2.54. There is resistance noted at the 2.64 to 2.6450 area. The minor upside pivot to this model is 2.6550. The key upside pivot to the short-term picture is 2.69.

 

HEAT: December probed the 2.97 key support overnight, but stopped short of the prime pivot at 2.9750. Our model suggests that there will be another turn towards that key level in regular trading hours. It is likely that December will find resistance at the 3.0250 to 3.03 area. The minor upside pivot is 3.04. The key upside pivot is 3.0650. There are stop-loss orders below the 2.97650 level. The market has bounced off 2.97 now three times. The trading adage is triple bottoms don't hold. We will see that adage put to the test today. With a break of the pivot a potential fall to 2.92 to 2.9150 is seen.

 

 

NAT: This is the day the bulls have to make their case. It will require that a 5-minute settle above 3.88 be seen just to have the market move back to a neutral pattern. The pattern will turn bullish with a violation of the100 DMA at 3.99. The bears reassert control by breaking December below 3.70. That will open the way to trend support at 3.52.

 

BRENT: December held our support level in overnight trading at the 108.00 area. It has since bounced back to test 110.00. The fluidity of the Euro situation will make this and other markets fluctuate wildly. But there is a growing sense that the crisis is coming to a head. So it is with a break of 110.50 that a more positive approach to the crisis will be signaled. This will then yield a rise to 111.40 to 111.70. December will have minor support at 109.00 to 108.60. The minor downside pivot is 108.25. The key downside pivot to the short-term picture is 106.10.

WTI-BRENT: our model sees the recent pullback to -18.00 as a correction that may be complete. If it s finished it was a shallow correction and a sign of strength for the short-term. This will likely mean that a daily settle above -16.00 will suggest that the arb has the potential for a rise to -15.00 to -14.75. The minor downside pivot is -17.30.

 

 

 

 NEWS

Europe's Greece Ultimatum

France, Germany Say the Nation Must Decide Whether to Stay in Euro or Go

CANNES, France—Europe's leaders, making it plain that they've reached the end of their patience with Greece, demanded that the beleaguered nation declare whether it wants to stay in the euro currency union—or risk going it alone in a dramatic secession.

"Does Greece want to remain part of the euro zone or not," German Chancellor Angela Merkel said. "That is the question the Greek people must now answer."

French President Nicolas Sarkozy said the Greeks would get no more euro-zone rescue aid—"no French taxpayer money, no German taxpayer money"—until the question is answered. Without aid, Greece would be bankrupt within weeks.

The extraordinary rupture with the rest of Europe—whose leaders have insisted for months that an exit from the currency union is simply inconceivable—follows Greek Prime Minister George Papandreou's stunning decision Monday to call a referendum on his country's bailout.

Given the deep unpopularity of the budget-cutting measures that the bailout requires, a "no" vote in a Greek referendum is a real possibility. That could send Greece, and possibly the euro zone itself, into chaos.

Mr. Papandreou said the referendum, which must be approved by the Greek Parliament, could be held Dec. 4 at the earliest. He said Wednesday he had tried for a broader political consensus on Greece's bailout but "this wider consensus did not exist." He said he hoped the Greek people would vote affirmatively.

"The people are wise and capable of making the right decisions for the benefit of our country," he said. "A positive decision by the Greek people is not only a positive decision for Greece, it is a positive decision for Europe."

The wait opens a month-long stretch of uncertainty for Greece, for Europe and for global financial markets. Wednesday, to prepare the bloc, its leaders moved to accelerate efforts to expand their bailout fund and fortify their countries' banking systems. There was a troubling sign Wednesday when the bailout fund, which raises money for its operations on financial markets, pulled a bond offering, citing unfavorable financing conditions.

The call for a referendum, particularly if presented as a question of euro or no euro, is a risky bet. Should the referendum fail, Greece would come unmoored from the euro zone and likely default on its €350 billion ($480 billion) of debt—sending a giant shock wave that could test the resilience of other weakened euro-zone countries. But should it succeed, the Greek government would have a strong mandate to push through austerity measures and proceed with the European Union's plan.

World leaders are gathering in this Riviera city, more accustomed to movie stars than motorcades, for the annual summit of the Group of 20 industrial and developing nations.

But the deliberations of the G-20 are now a sideshow to the Greek main event. Europe had hoped this summit would be an opportunity to demonstrate to the rest of the world that it has its debt crisis under control. An all-night euro-zone meeting just last week had fashioned a "comprehensive" plan to aid Greece, bolster the bloc's bailout fund and recapitalize the region's banks. That is now in tatters, and the image Europe is presenting is one of more confusion and uncertainty than ever.

In a series of hurriedly scheduled meetings on Wednesday, Europe's top powers huddled to plot their strategy for responding to the new uncertainty posed by Greece and to dress down the Greek prime minister.

In the evening, before the official kickoff of the G-20 summit Thursday, Mr. Sarkozy, Ms. Merkel, International Monetary Fund chief Christine Lagarde and the two top officials of the European Union, José Manuel Barroso and Herman Van Rompuy, met in a strategy session. In a phone call earlier in the day, Mr. Barroso told Mr. Papandreou that the referendum proposal threatened Greece's lifeline of aid.

Later in the evening, Mr. Papandreou arrived to join them, walking alone into the Palais des Festivals.

After his meeting, it appeared the European leaders had scored one victory by pulling the proposed referendum forward to early December. Greek officials had earlier signaled that it would be held in January, after the completion of negotiations on a new Greek bailout.

The European leaders also appeared to have changed the focus of the referendum from the bailout plan, with its uncomfortable budget cuts, to euro-zone membership itself. Polls show that while a majority of Greeks are dispirited by the bailout, most want to hold on to the common currency.

The latest eruption in Europe's debt crisis is particularly damaging considering how much the region now needs the rest of the world. Voters in Germany and other strong countries in the euro zone's north have insisted they will provide no more money to propping up Greece and the rest of the periphery.

Thus the EU is turning to China and other emerging countries with surplus cash. Mr. Sarkozy dined with Chinese President Hu Jintao Wednesday; no specific commitments emerged from that meeting, and the Chinese have said they want more detail and clarity from Europe on its plans.

Mr. Papandreou stunned Europe and financial markets this week when he called for a plebiscite on the latest, €130 billion rescue package for Greece, which is tied to deeper austerity policies in the economically suffering country as well as the restructuring of Greek bonds.

Analysts say the referendum idea was a Hail Mary pass by the increasingly isolated premier, aimed at gaining a popular mandate for his overhauls of the Greek state and economy and putting opponents on the spot.

The enormous stakes, and the high risk of a "no" vote in the referendum amid Greeks' anger about steep government spending cuts and tax hikes, have triggered a revolt by some lawmakers in Mr. Papandreou's ruling Socialist party.

On Wednesday it appeared he might muster enough votes to scrape through a vote of confidence in Parliament set for Friday.

Even if Mr. Papandreou survives in office, he may lack enough lawmakers' support to stage the referendum.

Meanwhile, Greece is fast running out of cash.

Money is being supplied by the EU and the IMF under a €110 billion program agreed to last year. That aid is distributed in quarterly tranches, and the next tranche was expected to be paid imminently. But that was before the referendum call, and it is now clear that aid is contingent on resolving the political crisis.

Failure to make the next aid payment, valued at some €8 billion, would likely mean the country running out of money in December, officials said, potentially causing an unplanned default on bonds that come due that month.

A spokesman for the German Finance Ministry said Greece doesn't need urgent bailout payments now and won't require the next chunk of aid until mid-December.

Greek Crisis Hits Stocks

LONDON—European stocks fell Thursday, with bank shares leading the declines, as investors mulled the possibility that Greece might exit the euro zone and awaited the European Central Bank rate announcement.

Greek Prime Minister George Papandreou's hold on power was under threat again Thursday, after Greek Finance Minister Evangelos Venizelos came out against the prime minister's plan for a referendum on whether the debt-hit country should stay in the euro. The prime minister is holding an emergency cabinet meeting at 6:00 a.m. EDT.

French President Nicolas Sarkozy and German Chancellor Angela Merkel indicated Wednesday that Greece's referendum on the bailout plan, which has now been brought forward to Dec. 4, is essentially a vote on whether it wants to remain in the euro zone. In addition, the European Union and the International Monetary Fund said Wednesday that they will not release the next €8 billion aid payment to Greece until after the proposed referendum, prompting fears of a disorderly default.

"Even if the government survives (which seems less likely today) and the referendum is approved, the social unrest in Greece will continue, the government's ability to govern has been utterly impaired and Europe's patience has run out," said Lloyds Bank Corporate Markets.

http://online.wsj.com/article/SB10001424052970203804204577015163208399138.html?mod=WSJ_hp_LEFTTopStories

 

Bernanke and Banks Tested by Latest Market Strains

Three years after the global financial crisis, and a year after a U.S. regulatory overhaul, the world economy remains vulnerable to hazards that nearly broke the banking system last time.

Federal Reserve officials worry that investors could rush out of the $2.6 trillion money-market mutual-fund industry, where millions of Americans park their savings and where the world's banks come for short-term loans. There are still no rules among nations for picking up the pieces after the collapse of a global financial giant. Banks have been on a roller coaster for months. And governments can no longer afford a rescue.

"Concerns about European fiscal and banking issues have contributed to strains in global financial markets," Fed chairman Ben Bernanke said Wednesday in a news conference. Those concerns, he added, were "likely to have adverse effects on confidence and growth."

The collapse this week of MF Global Holdings Ltd., a Wall Street securities firm, reflected the reach and quick temper of the global market. Bad bets on European debt triggered a customer exodus that in days led to a filing for bankruptcy protection.

For now, the failure appears an isolated event. But it amplified the overarching worry among regulators and the public: that the world financial system has emerged from the 2008 crisis only partially fixed and still prone to instability.

An institution bigger than MF Global, and one more deeply intertwined with other financial firms, could end up exposed to bad loans from a borrower like Greece. Its failure could spread, causing markets to tumble and lending to dry up, a repeat of 2008.

For now, that seems unlikely—particularly with regulators, investors and bankers on watch for trouble. But with fault lines crisscrossing the international financial system, it remains a worrisome possibility.

"All it takes is some kind of panic for the markets to freeze up again," said Anil Kashyap, a professor at the University of Chicago Booth School of Business. "If trust vanishes and markets freeze up, it will still be a big problem."

These are among the issues facing leaders of the world's 20 largest economies who are meeting Thursday and Friday in Cannes, France.

Leaders of developed economies, burdened by large government debts, are in a weaker position to address a crisis than in 2008. They have less money and command less political will.

The financial system is sturdier in many ways than it was in 2008. The equity capital in the U.S. banking system—assets minus liabilities—has grown by $264 billion, or 20%, since September 2008, according to the Federal Deposit Insurance Corp. This gives banks a greater cushion against losses.

Banks also are more liquid. Cash holdings have more than quadrupled to $1.8 trillion since 2008, according to the Federal Reserve, thanks in part to vast sums the central bank has pumped into the system.

Even so, corners of the financial system are under stress. Borrowing costs for commercial real-estate loans, for instance, have jumped since June. European banks are paying more to borrow U.S. dollars.

Financial firms remain intertwined in the three years since the collapse of Lehman Brothers—so when one wobbles, others brace for trouble.

Investors' worries have subsequently spread from fears about European banks to concerns about U.S. banks. The Stoxx index of European bank stocks is down 38% this year, while bank stocks in the S&P 500 index are down 18%. Credit Suisse and Nomura Holdings said Tuesday they would respond to losses by cutting jobs and expenses.

"Some people have asked, 'How would you have contagion from Europe to the United States?' Arguably, to some degree, we've already got it," Eric Rosengren, president of the Federal Reserve Bank of Boston, told economists last month.

The cost of insuring against debt defaults by such U.S. banks as Morgan Stanley, Citigroup and Bank of America has risen substantially in recent months, tracking European banks.

While U.S. financial firms have pared their exposure to Greece—$8.3 billion in June—they have a great deal of exposure more broadly to Europe, about $1.8 trillion in June, according to the Bank for International Settlements. That was up from $1.2 trillion in mid-2009.

They also have exposure through guarantees on European debt through contracts known as credit-default swaps. Such guarantees totaled $1.6 trillion in June, according to the BIS.

Some of that is hedged in other trades. But the actual exposure to these contracts, and the value of the hedging, is uncertain. Some of the contracts might be worthless if Greece avoids a formal default, as European governments are pushing, by asking banks to voluntarily forgive debt.

"What I learned in 2008 is that we don't really know or fully understand all of the linkages in our banking system and all the connections that can be discovered when things go awry," said Carl Weinberg, chief economist at High Frequency Economics.

Fed officials worry about tremors traveling through parts of the financial system and triggering earthquakes. One potential fault line is the $2.6 trillion money-market mutual-fund industry, which was barely addressed under Dodd-Frank, the set of new financial rules passed into a law a year ago.

The funds hold savings that are lent to banks and corporations around the world through the purchase of short-term debt. A panic could quickly drain resources from borrowers or destabilize the funds themselves, leading to losses among savers.

Unlike U.S. bank deposits, money funds aren't guaranteed by the government. When Lehman collapsed in 2008, it triggered losses in a money-market fund called the Reserve Fund, which held Lehman debt, sparking a broader panic in money market funds. The U.S. Treasury backstopped the industry as investors fled, a move now forbidden by the Dodd-Frank law.

The industry, Mr. Rosengren said, is a "source of vulnerability" that needs to be addressed. Investors also worry. Money-market holdings have contracted by nearly $1 trillion since Lehman's collapse, including a reduction of $118 billion since May.

The Securities and Exchange Commission imposed tougher rules to ensure the money funds make very short-term loans so they keep more money on hand if needed for mass withdrawals by panicked investors.

Industry executives say they are making progress. "Money-fund risk is much less now than it was in 2008, by choice and also by mandate," said John Donohue, the chief investment officer for J.P. Morgan's $491 billion money-fund business. Still, he said, "there is risk in money-market funds and that is one of the things that people now understand that got lost in the good old days before 2008."

One worry is the exposure to markets overseas, particularly Europe. Foreign financial institutions searching the globe for dollars turn to U.S. money funds for short-term cash. Foreign exposure has increased since the collapse of Lehman Brothers, partly because there are fewer U.S. dealers looking for short-term loans.

In 2006, 24.6% of assets in the nation's 10 biggest money-market funds were in the U.S. As of September, just 9.6% of their investments were with U.S. firms, according to a report by Fitch Ratings. In September, some 38% of the industry's loans were to firms in Europe, most notably France, Germany and the U.K., according to Fitch Ratings.

The funds have been aggressively scaling back their European exposures, trying to steer clear of trouble. In May, 52% of their holdings were in Europe. J.P. Morgan and many others are shifting assets to firms in Canada, Japan and Australia.

The failure of a global bank would be another threat. Even with new powers under the Dodd-Frank law, the ability of regulators to close banks in the U.S. won't do much good without reciprocal rules abroad.

The FDIC, which insures the deposits of the nation's more than 7,000 banks and thrifts, is working with foreign regulators to identify conflicts among countries that could impede resolution of a big bank failure. But the legal gaps are wide and international authorities are far from agreement, many observers say.

In the U.S., for instance, the Dodd-Frank law gave the FDIC authority to manage a firm's derivatives contracts in the event of a failure. During Lehman's bankruptcy, many of its trading partners fled contracts, causing broader instability in derivatives markets. But the new rules don't apply in such global trading centers as London and Tokyo.

Failure of a big firm "would be a real mess," Donald Kohn, the Fed's former vice chairman and now an FDIC adviser, said at a recent Fed conference.

Without global rules, regulators in a crisis might freeze subsidiaries in their own countries, blocking assets from leaving the country to protect domestic creditors, say some critics of the Dodd-Frank law.

U.S. regulators face a tough time persuading other countries to go along with any agreement on global bankruptcy rules for big firms. U.S. law strongly favors domestic creditors over foreign ones, giving other countries little incentive to cooperate, said H. Rodgin Cohen, a banking lawyer at Sullivan & Cromwell LLP. "You are being given an impossible task," he told FDIC officials at a June meeting on the issue.

Regulators also worry about a large but little understood corner of the financial system. New York Fed president William Dudley scolded the financial industry for failing to move quickly enough to strengthen the $1.6 trillion lending market known as "tri-party repo." He said more regulation might be needed.

Every day, this market performs a high-stakes dance, with banks using their vast securities portfolios as collateral for short-term loans. Lenders, including money-market funds and other institutions with lots of cash, hand over vast sums late in the afternoon to borrowers who want very short-term funding for their securities holdings. The lenders get the money back the next day, rebalance their books, and then do it all over again in the afternoon.

Serving as middlemen for these transactions are just two banks, J.P. Morgan and Bank of New York Mellon. For hours during the day, while the lenders and borrowers balance their books, the two banks bridge the gap by putting up immense loans to borrowers, with substantial exposure.

Darrell Duffie, a professor at Stanford University's Graduate School of Business, calls the arrangement "the key pipe in the plumbing" of the financial system, with many institutions depending on extremely short-term funding via two institutions. Fed officials worry it could be a source of instability.

Progress has been made. In 2008, the big clearing banks acted as lenders in this market 8:30 a.m. through late afternoon. Trading took place by phone with sometimes shoddy confirmation. The gap has since been narrowed to a few hours in the afternoon with trades confirmed more formally.

But the industry has failed to meet October deadlines to further close the gaps. "There is a fair amount of progress that has been made but there is still more that needs to be done," said Darryll Hendricks, a UBS executive who is chairman of an industry task force to make the sector more efficient.

 

 

DATA POINTS

Jobless Claims

Market Consensus Before Announcement
Initial jobless claims for the October 22 week came in at 402,000. The four-week average of 405,500 was 10,000 below the month-ago period. Continuing claims in data for the October 15 week fell 96,000 to 3.645 million with the four-week average of 3.701 million nearly 50,000 lower on the month-ago comparison. Improvement for continuing claims is an uncertain mix between hiring and benefit expiration.

 

Productivity and Costs

Market Consensus Before Announcement
Nonfarm business productivity in the second quarter fell an annualized 0.7 percent, compared to a 0.6 percent decrease in the first quarter. Unit labor costs rose a revised 3.3 percent in the second quarter, compared to the first quarter's 6.2 percent. Based on third quarter GDP growth of 2.5 percent, compared to 1.3 percent the prior quarter, we should see improvement in third quarter productivity as both measures use many of the same source data for output.

ECB Announcement

8:45 AM ET

 

 

Factory Orders

Market Consensus Before Announcement
Factory orders fell 0.2 percent in August. Orders for durable goods were down 0.1 percent while nondurables fell 0.3 percent. The dip in nondurables reflected price declines for energy products. More recently, new factory orders for durables declined 0.8 percent in September after slipping an unrevised 0.1 percent the prior month. Excluding transportation, durables rebounded 1.7 percent, following a 0.4 percent decrease in August.

ISM Non-Mfg Index

Market Consensus Before Announcement
The composite index from the ISM nonmanufacturing survey posted at 53.0 in September, above breakeven of 50 and barely down from August's 53.3. The new orders index rose a very solid 3.7 points to 56.5, over 50 to indicate monthly growth and was well above August to indicate an accelerating rate of monthly growth.