Geopolitical Risks Research

· Deficit reduction talks ongoing between Congressional Republicans and the White House.  Under the plan being envisioned, the debt ceiling would be increased in exchange for a deal that includes strict spending reductions.  The details on the plan would be left for a later date (but the broad numbers, such as aggregate spending cuts or deficits as a % of GDP, would be agreed to now).  The “Big 3”, Medicare, Medicaid, and taxes, would be left until after the ’12 elections.  Republican Congressman Paul Ryan appeared to bless the broad points of this plan during remarks on Wed.  WSJ  http://on.wsj.com/jgkLIu

· Debt ceiling deal near says Politico – Politico has a lot of the same details as in the WSJ; says broad targets will be agreed to for deficit reduction but specifics will be deferred.  A vote on this deficit reduction plan, w/along w/a $2T hike in the debt ceiling, could come by the summer break – Politico

· California tax revs come in ~$2B ahead of expectations and analysts expect more good news - State officials are reporting an unexpected $2-billion surge in tax receipts that will help lawmakers close the remaining $15-billion budget deficit.  The windfall may actually harm Brown’s efforts to push through an extension of tax hikes.  LA Times. http://lat.ms/ktOrXi

· High speed traders move to the sidelines amid a reduction in volumes and volatility; volumes are tracking down 15% Y/Y so far as HFTs become less active; some say current levels of volume are more “natural” compared to the elevated trends seen during the financial crisis – WSJ   http://on.wsj.com/mQ1Gvt

· Silver – Carlos Slim’s silver firm ups bet against the metal – Slim’s mining company, Frisco, was short just under 95.759 million ounces of silver as of April 30 compared with a short position of 70.120 million ounces at the end of 2010 (Reuters  http://reut.rs/mNkAwM).  CNBC is reporting that Slim has been selling silver futures for “weeks” in an effort to actively hedge the production in his silver mine (http://bit.ly/isUhty).   

· Silver – CME hikes margins again - Chicago Mercantile Exchange notified traders today that it’ll raise margin requirements for a fourth time in a little more than a week.  Effective after the close Thurs, CME’s initial margin requirements will move from $16,200 up to $18,900.  http://bit.ly/mI0Y1v

· OPEC may raise oil output limits, restore credibility.....Reuters says OPEC is considering raising formal output limits when it meets in June.....some in OPEC see need for group to take action to bring prices back under $100 - Reuters

· Brazil – Siemens has warned Brazil over the level of the real, saying the country risks becoming “deindustrialized” unless it imposes more extreme capital controls and gets its currency under control.  Siemens says the real is “crushing” its export business in the country.  FT   http://on.ft.com/llyyST

· Europe divided over Greece – the WSJ says some German officials are increasingly open to the idea of a voluntary restructuring of Greek debt while others throughout Europeare fighting against such a move.  Germany thinks maturity extensions should be considered in order to avoid more draconian measures later on down the road (like principle haircuts). Greece officials say they are open to a rescheduling, but need political backing from the rest of Europe first.  WSJ    http://on.wsj.com/kIuXyO

· Investors gear up for a pretty important series of speakers/actions this Thurs morning (BOE 7amET; Fed’s Yellen 7:30amET; ECB decision 7:45amET; ECB’s Trichet press conf 8:30amET; Fed’s Dudley 10amET.

· Consumer - COST SSS strong w/Food inflation accelerating; BIG SSS miss; BIG calls out weakness in Lawn & Garden; for HD/LOW neg read-through - this follows SMG & SHLD (appliance); MW on the tape today and is raising its guidance for the Q.

· Giant asteroid heading close to Earth - A giant asteroid weighing 55 million tons will just miss the Earth later this year, Nasa experts have predicted; will miss the earth by just 201K miles; would be the largest object ever to approach the earth so close.  If it were to hit the earth, the asteroid, named YU55, would have an impact equivalent to 65,000 atom bombs and would leave a crater more than six miles wide and 2,000ft deep – London Telegraph.  http://bit.ly/mv4cjL

Macau GGR MOP20.5bn, Up 44.6% YoY. For the third consecutive month, Macau has broken its monthly gross gaming revenue record. The post-CNY slowdown that the market was anticipating never materialized, as Macau saw its GGR grow 44.6% YoY in April (vs. 48.0% in March and 47.7% in February).

One-third of our full-year 2011 GGR target achieved. The MOP79.0bn (+43.3% YoY) in GGR banked during the first four months of the year is roughly 1/3 of our FY11 estimate of MOP235.5bn (implying 25% growth for the full year). In order to achieve our full-year estimate, monthly GGR for the remainder of the year will need to average around MOP19.5bn, equating to ~17% growth YoY (vs. the 43.3% growth reported YTD through April).

Galaxy Macau Opening: The Litmus Test. The opening of Galaxy Macau will test how well Macau handles significant increases in both gaming tables and hotel rooms. If Galaxy Macau is able to significantly grow the market, we suspect the street (including ourselves) will need to raise their Macau market size estimates again.

The market trades lower following a slightly worse ADP Employment report and a notably weaker ISM Non-Mfg report at 10am.  In today's selloff, financials trade essentially in-line with the broader tape.  We're now at the tag-end of earnings, the group is beginning to trade more and more with the market on macro factors.  The higher beta sub-sectors are showing more weakness today (KSX due to asset manager exposure, KRX  and life insurance).  While off marginally, REITs are slightly outperforming the tape as interest rates continue to fall. Volumes on the day are tracking in-line with yesterday's pace, which exceeded the 20-day MA by ~15%. Flows are active in today's trading, showing both HFs and vanillas active. Generally, derisking appears to be the main trade being done today, as we're 2:1 better for sale in the group.  In the banks, we're seeing long positions get cut in both the money center and super-regional names, mostly from the HF community. Little vanilla interest is being seen in any of the large banks today from the vanilla community, which seems to be focusing more and more on the smaller cap regionals. In credit cards, we're seeing HFs take money off the table, after vanillas have been better for sale in the group for about a week. In insurance, we're seeing some small covering in P&C, however we're better for sale overall there. Life names are better for sale, including shorts, in the the lower-quality names. Look for the group to start to trade more and more on macro fundamentals as company and industry-specific catalysts draw to a close with the earnings calendar coming to an end.

China - The Shanghai index fell >2% after a number of hawkish headlines crossed inc. a) the PBOC's quarterly monetary policy report said that stabilizing prices/inflation expectations are its top priority & that bank RRRs have no 'absolute ceiling', b) the China Securities Journal has a front page article discussing a rate hike in May, and c) the Shanghai Securities News has an article discussing expanded controls of the property market into additional cities. HK was off >1% in sympathy with China while Japan remains closed

· Europe - In Europe, Portugal reached a deal on a bailout (news hit late in NY trading on Tuesday) and Finland is reportedly moving closer towards backing the bailout. Despite the fact that certain details haven't yet been disclosed (such as the interest rate), sovereign CDS spreads are tighter for Portugal (dn 35bps), Ireland (dn 26bps) and Greece (dn 20bps).

· South Korea is considering investing part of its foreign exchange reserves in yuan-denominated Chinese securities – DJ

· Debt ceiling – Boehner said he favors dealing w/the debt ceiling “sooner rather than later”.  "Why wait?" he said, adding that he would rather address the matter "sooner rather than later.".  Reuters

Market Update – risk-unwind/profit-taking day as equities pullback across the board w/a lot of the big recent winners suffering the worst declines (the Portugal news late in the day helped us finish off the worst levels – see below for more).  The most notable development today wasn’t so much that stocks pulled back for a second consecutive session (the first time this happened for the S&P since 4/11-12) but rather the widening divergences among certain indices and assets w/higher-beta/higher-momentum stocks/sectors getting crushed while large-caps and out-of-favor areas caught a bid.  The Dow finished flat while the R2K dipped more than 120bp (and certain sub-groups were even weaker – the R2K Tech Index fell >2% and the R2K Energy index was down ~3.5%). 

The R2K has pulled back now 3% in just the last two sessions.  The action in some commodities has been even more dramatic – silver fell ~5% today (SILV on BBG) and has declined now ~20% from its recent intra-day highs.  Crude fell >2% today and is off ~3.5% from its recent intra-day highs.  Meanwhile, one of the sectors that has been shunned for the last few weeks and came for sale despite beating St ests throughout earnings season (i.e. the banks) actually saw a nice rally (the BKX rallied 80bp on the day).  There was a lot of news today, w/a bunch of earnings (some of the biggest movers were earnings-related w/PCS, AVP,AMT, MA on the upside and CSC, SHLD, CTSH, LM, ADM, EMR, PFG, and CLX on the downside) and economic data points (factor orders and auto sales both came in ahead of St expectations).  That said though, as has been the case for the last few weeks, equities (and risk assets) are heavily dependent on the direction of the dollar….

The biggest risk for this tape lately has been a reversal in the dollar.  So long as the dollar had been drifting lower, helped by the appearance of a widening monetary differential between the world's major CBs and the Fed along w/an implicit acceptance in Washington of the decline (http://on.wsj.com/iroJez), equities had a bid to them.  However, starting late Mon, we have seen the dollar find some support.  Late on Mon it was the Treasury announcement about extending the debt ceiling breach date into Aug and today it was a relatively hawkish article on CNBC (http://bit.ly/k40lLR). 

Both by themselves aren't all that notable but in an environment where the short dollar/long risk asset trade had been very stretched, any minor change at the margin would cause a reversal.  All that said, the overall environment for the dollar remains negative and any strength has been hard for it to sustain.

Treasury made an announcement late Mon that will buy it a few more weeks on the debt ceiling but at the expense of state and local governments; in addition to the actions unveiled, plus stronger tax revenues, Geithner now says can get to Aug 2 before breaching; the announcement appeared to give the dollar a boost late Mon and that strength is continuing Tues morning – TSY Sec Geithner sent a letter to Congress late Mon (you can see the full letter here LINK) and said that as of May 6 it would suspend the issuance of State and Local Government Series (SLGS) Treasury Securities.  The action, along w/some others and stronger tax revenues, will help forestall a breach of the ceiling until Aug 2 at the latest (previously Geithner said Jul 8 was the date on which it would start to breach).  However, the move will rob state and local government of a valuable tool to manage their outstanding debt expenses.  The news overall was mixed – while Geithner found a few more weeks, he acknowledged that Congress probably wouldn’t take action by May 16 (the date at which the Treasury will start to bump up against the ceiling) and his action will hurt local government spending.