Cyprus Risk-Off Trade Pulls Equities Lower
The S&P 500 and the Dow Jones Industrials both closed off slightly today as this was a risk-off kind of day in most every way. Following up Friday’s weakness into the close with today’s drop is creating a pause in equities as fresh fears over the stability of the European banking system have been raised due to the confiscation of depositor’s accounts in Cyprus.
Oil, however, rallied against the equity markets asserting its place next to gold in a safe haven bid. The Gold to Brent crude ratio, a true measure of Gold’s demand since it is the collateral in all international oil trades, stood firm at 14.65 barrel to the ounce. If uncertainty over Cyprus lingers as the final structure to the proposal has been withdrawn and is being renegotiated while the Cypriot banks remain closed, expect the Gold to Brent ratio to rise back towards 15 or even higher as demand for unencumbered physical metal will rise to offset clearing risk.
What I found most interesting on the day, however, was how the 30 year U.S. Treasury bond faded throughout European and New York trading all day. In a risk-off environment and the Euro under serious pressure the fact that the 30 year bond could not sustain a bid is indicative of even more stress in the system than anyone is letting on.
The latest TIC report clearly shows China ramping up its buying of U.S. Treasuries, buying $46 billion in January. This attack on Russian money movement through Cyprus is an indirect attack on China as well and raises the question of just what happens next if the Chinese stop buying and force the Fed to begin monetizing the entire long end of the yield curve at twice the stated QEIII/IV rate of $85 billion per month?
The Fed expanded its balance sheet last week along by $56 billion. Hmmm.