There's At Least One Thing You Can't Say About This Morning's Bond Routing

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Decoupling might be my least favorite word to describe financial markets.  Almost every time I’ve ever heard any thesis about decoupling, it has turned out to be a sham in retrospect.  Decoupling is a comfortable intellectual crutch, but rarely an apt description of today’s financial world.  Money flows too quickly, too easily across borders.  Severe distress in large swathes of the world economy quickly lead to at least some distress in practically all parts of the global economy.

That’s the main reason I’ve been focused so intently on the emerging market meltdown over the past month.  I mentioned the large moves lower in emerging market currencies a couple weeks ago, and those routs have only gotten worse since then.  Meanwhile, overnight, some of the equity market leaders of the emerging market rally over the past few years were slammed.  Here are the 4 year daily charts of the Southeast Asian equity markets that got hit last night by 3-5%:

Indonesia:

MorningWord 6/11/13: WWDC- “Glamorous” This, “Magnificent” That, We’ll Be The Judge of That, Thank You. $AAPL Macro Wrap – Decouple This, America $SPY, $EEM, $FXY Too Many Options – $AAPL, $BAC, $FB, $SPLS, $VOD 4 year daily chart of Jakarta Composite Index, Courtesy of Bloomberg

Philippines:

Philippine Stock Exchange Index 4 year daily, Courtesy of Bloomberg

Thailand:

Bangkok Stock Exchange of Thailand Index 4 year daily chart, Courtesy of Bloomberg

 

All three markets are still above their 200 day moving averages (black), though all are now trading below their 50 day moving averages (pink).  The long-term charts are very similar, showing the strength of the equity market rally in Southeast Asia (one of the better long-term economic and demographic stories for the next decade).  However, the short-term weakness is one more sign of the cracks building in global financial markets.

The warnings signs have been building in the last few weeks, kicked off by Japan’s 7% down move on May 23rd.  I discussed the importance of Abenomics to the desire for risk appetite in all assets in my Macro Wrap that day, which turned out to be my most read post of the year.  Since then, we have continued to see a strong correlation between movements in the Yen and risk appetite in general.  We are greeted this morning by a Yen stronger by 2% against the dollar, and lo and behold, SPX futures are down 1%, European equity markets are down 2%, and commodities are down 1-2%.

That is not a picture of a global investor base moving its assets based on the attractiveness of individual investments.  It is the definition of a COUPLED world, not a decoupled one.  So manage your risks accordingly.  And please, please, please, don’t mention decoupling to me. 

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"Decoupling", don't even try it.

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10 Things You Need To Know This Morning (LULU, S, SPY, DIA)

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. Good morning. Here's what you need to know. Asian markets were lower in overnight trading with the Nikkei down 1.45%. Europe is selling off with Italy down nearly 2%. U.S. futures are down.Apple's Worldwide Developers Conference continues on Tuesday. On its first day, Apple unveiled the OS X Mavericks, its latest operating system for Mac computers. It also unveiled new MacBook airs priced at $999 and a new operating system for the iPhone and iPad.Edward Snowden has checked out of his Hong Kong hotel and it's unclear if he is still in Hong Kong. Snowden is the 29-year old Booz Allen Hamilton contractor that came forward as the NSA whistleblower. Meanwhile, the FBI is reportedly preparing charges against him. Please Note: Business Insider will never share your information with any other companies. You also have the ability to unsubscribe from these newsletters at any time simply by following the unsubscribe link located at the bottom of each email

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The Market Has Made A Staggering Comeback

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Markets opened in the red this morning with the Dow down 151 points.

The S&P Nasdaq were both off about 1%.

But they're paring their losses now.

The Dow is now down 57 points, while the S&P 500 is off about 0.5% and the Nasdaq is down 0.31%.

The dollar is also starting to come back against the yen. 10-year Treasury yields have also come off their highs of the day.

Here's a quick look at the S&P 500

Fin VIz

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The World Now Has So Much Shale Gas That The Price Of Oil Will Have To Come Down To Compete

Rob Wile | Jun. 11, 2013, 10:21 AM | 1,080 | Reuters' energy columnist John Kemp makes an eye-popping argument in his latest column: there is now so much shale gas in the world that the price of oil will have to come down to compete with it.

He refers to the EIA report that came out yesterday showing new estimates of worldwide shale gas deposits now augment the global natgas supply by a whopping 47%.

The report also said shale oil deposits boost overall oil supplies 11%.

But there's a key difference between shale oil and shale gas: the recovery rate — how much ultimately gets pumped out of a given play. It's been topping out at around 10% for the former, while it reaches up to 30% for the latter.

Given those factors, oil, which costs almost four times as much as gas: doesn't stand a chance. Kemp:

Until now it has not been clear whether the gap will close mostly through a rise in the price of gas, a fall in the price of oil or some combination of the two. The comparative abundance of shale gas suggests oil prices are much more likely to converge down to gas, rather than the other way around.

Given the geological differences, natural gas looks set to be the lower cost way of adding reserves over the next couple of decades.

Read the full Kemp piece here --->

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Four Tail Risks That Could Cause A 'Butterfly Effect' In Global Financial Markets

Summer gets underway with a lot of beating wings as millions of butterflies travel home. This week, many northern states are seeing their first Monarch butterfly of the season. Monarchs migrate from their winter home in Mexico to summer homes across the United States.

The “butterfly effect” is a term from a pioneer of chaos theory, Edward Lorenz; his 1972 presentation Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set Off a Tornado in Texas? describes the idea that a tiny event can start a chain reaction and have large and wide-reaching effects. It is why those seven-day forecasts for the weather are only right a small percentage of the time, and why it can be so challenging to predict markets with millions of seemingly random and tiny events each triggering a ripple effect that could cause a major impact half a world away.

We know the big changes and events the markets face in the second half of 2013: the potential end of the Federal Reserve’s (Fed) bond-buying program, the need for Congress to craft a deal to avert the debt ceiling, the German elections and path of growth in Europe are a few examples. These 2,000 pound butterflies will be closely watched. But what are the less watched, smaller changes and events taking shape that, through a rippling chain of events, may have just as great an effect on the world’s markets?

Farmland – Over the past several years, U.S. farmland prices have soared as grain prices rose and the Fed drove interest rates to historic lows. What happens now is that grain prices are falling as global output surges, yet U.S. farmers are suffering from a swing from a drought last year to too much rain this year, limiting their production as they lose global market share to foreign competition. Furthermore, the Fed is contemplating ending its bond-buying program later this year, which is already pushing up borrowing rates. These trends could lead to a reversal in land prices that could in turn be felt well beyond the farm. The U.S. Farm Credit System is a government-sponsored enterprise that provides federal guarantees for bad loans—much like Fannie Mae and Freddie Mac helped to fuel the U.S. housing boom. While a much smaller potential financial fiasco than the housing bust, financial companies with exposure may suffer. Also, investors around the world have poured billions into farmland as a “real asset” in recent years and may see losses.

LPL

State Budgets –  An unexpected state budget surplus in California and other states is turning the fiscal policy debate around. Policymakers are now focusing on what to spend on rather than cut. While long-term budget challenges remain unaddressed, the current year surplus is estimated to be over $1 billion by the California Office of the Governor and the Legislative Analyst’s Office and comes just after the state was facing a deficit of nearly $60 billion. In states recently reporting budget surpluses, including Texas, Iowa, Indiana, Tennessee, South Dakota, Utah, Hawaii, Florida, and Wisconsin, legislative battles have turned to tax cuts, rehiring workers, and spending on bridges and roads. If the small series of improvements in state budgets continues, the fiscal drag that for years has been felt at the state and local level on hiring and spending may turn to a fiscal boost, with all potentially positive ramifications?—?U.S. growth, employment, and profit?—?for the stock market. While a stronger credit profile may be a plus for municipal bonds, rising rates may result from better economic growth prospects and pressure municipal bond prices.

Manufacturing – This week’s data reveal a tough climate for manufacturing. On Monday, June 3, the widely-watched Institute for Supply Management (ISM) Manufacturing Index dropped below 50, indicating output is no longer expanding. And on Friday, June 7, the employment report revealed that the U.S. economy lost manufacturing jobs for a fourth straight month and that manufacturing jobs have been stalled for about a year. However, with wages rising in China and the boom in U.S. energy production, there are some small changes taking place that if part of a larger series of ripple effects could herald a renaissance for U.S. manufacturing. U.S. oil production has reversed its three-decade decline. The International Energy Agency forecasts that the United States could become the world’s largest oil producer by 2020 and may be energy self-sufficient by 2035. In the 1940s and 50s when the United States was the world’s largest producer of oil, U.S. manufacturing also led the world. Companies are taking notice. With U.S. manufacturing plants running above full capacity, Ford recently announced plans to increase North American manufacturing capacity by 200,000 vehicles in 2013, adding jobs and expanding production lines. In late May, Apple revealed that Texas will be the site of a new $100 million plant that will make Apple products in the United States for the first time since the 1990s. Could the recent spate of weak readings on the state of U.S. manufacturing merely be the calm before the storm?

Weather – In 2013, the United States experienced the coldest spring in 16 years, measured in heating degree day deviations from normal. This followed 2012’s warmest spring in over 25 years. This has likely acted as a drag on economic activity. A cool wet spring can have many small effects on behavior. It depresses sales of warm weather clothing, people avoid shopping for cars and mountain bikes, fewer head out to restaurants or the mall, and it hits hard on businesses that depend on outdoor activity such as beach hotels or concessions. This cloud over the spring economic data may lift and may lead to a pickup in economic activity as pent-up demand is released. In turn, this could lead to stronger-than-expected economic reports in the coming months that could prompt optimism about the state of the economy and prompt the Fed to feel the pace of growth warrants a slowdown in the pace of its bond-buying program.

Monarch butterflies are one of the few insects that can cross the Atlantic; if the winds are right they can make it from North America to the United Kingdom. Wherever they are, anywhere in the world, small events can interact with others to start the winds of change to blow and shape the investing environment.

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Here's The New Ad Texas Is Pumping Out Across The Country To Attract Businesses

Rob Wile | Jun. 11, 2013, 12:06 PM | 24 |

Here is the latest salvo in Texas Gov. Rick Perry continues his blitz to lure businesses to the Lone Star state: we just saw the following ad play on CNBC.

He brought out the big guns, including Emmitt Smith and Robert Rodriguez, the director of "Sin City" and "Spy Kids."

The full website of the campaign — TexasIsOpenForBusiness.com — is also not to be missed.

This story was originally published by CNBC.

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10 Countries That Are Losing A Fortune On The Collapse In Gold (GLD)

Gold prices first fell below the $1,400 per ounce level in April.

For central banks that bought up 534.6 metric tons of gold last year this hasn't been a good time. Gold is well off its 52-week high of $1,804.

Global gold holdings totaled 31,793.9 tonnes as of June 2013, according to the latest report from the World Gold Council. This is up from 31,735.4 in May.

Note: CBGA refers to the Central Bank Gold Agreements. The first Agreement (CBGA 1) ran from September 27, 1999 to September 26, 2004.  The second Agreement (CBGA 2) ran from September 27, 2004 to September 26, 2009. The third Agreement (CBGA 3) will run for five years from September 2009.

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