There was a time three months ago, when "beating" German confidence served as an upward stock and EURUSD catalyst not once but twice in the same week. One would therefore assume a German confidence miss, such as with today's German ZEW, which barely budged from 36.3 to 36.4 on expectations of a rise to 40.0, with the current situtation dropping from 9.2 to 8.9, on expectations of a rise to 9.8, should be risk negative. Well, it wasn't: it is the new normal after all, and in fact the EURUSD jumped in a kneejerk reaction at 5 am, rising over 1.3000, albeit briefly, assisted by ZEW members saying that respondents do not see a further ECB rate cut - well, of course not - they are Germans, and Draghi isn't. Perhaps the news of a better than expected Eurozone Industrial Production print, which rose from 0.3% to 1.0%, on expectations of a more modest increase to 0.5%, is what catalyzed the subsequent drop in both the EUR, and US stock futures. The IP strength was driven by Germany, Spain and Netherlands offset be decline in France and Italy.
JGB Futures Narrowly Avoid Third Halt In Three Days (By A Tick); 5Y Yields Jump To Highest In 22 MonthsSubmitted by Tyler Durden on 05/14/2013 - 02:07
JGB Futures avoid a third halt in three days by 1 tick (drop 0.99 vs 1.00 handle limit) but two words spring to mind - not orderly. It seems the pendulum of 'inflation repricing channel through the JPY' has begun to swing back towards the JGB market - not what Abe and his cohorts would have hoped for given the deluge of monetization they are up to. As we originally discussed here, the inflation expectations can be spread across bonds or FX and just as we saw in 2007, 2008, and 2011, the initial burst takes place in one market and the normalizes as the other catches up. In this case it was a massive devaluation of the JPY that is now being 'caught up' to by the JGB yields rising. 5Y JGB yields just topped 40bps (from a 9.9bps low on March 5th!!) and their highest since July 2011. Of course, the problem with rising rates is the burden it puts on the government as cost-of-debt accelerates beyond tax revenues with negative trade balances; and if the JGB channel is now 'inflation security of choice' then JPY devaluation will take a back seat (and so will JPY carry trades driving risk-on around the world - as we noted here). And as if that wasn't all exciting enough, Japanese Machine Tool Orders re-accelerated to the downside -24.1% YoY (worst since January).
While most consider the Middle-East a hot-bed of geopolitical risk (prone to flare at any moment), it seems hot money flows and territorial disputes are rapidly turning the South China Sea into a powder-keg. As Japan vs China is off the front pages for a moment (and US and South Korea engage in joint naval exercises) it seems Taiwan and the Philippines are escalating rapidly following the death of a Taiwanese fisherman last week after Filipino military fired on his vessel in supposedly disputed territory between Taipei and Manila. The situation is evolving rapidly as the Philippines' un-apology (though they sent their condolences) may prompt Taiwan to send F-16 fighters, Kidd-class destroyers, and three or more warships, according to The Liberty Times. The threat of escalation is premised on a formal apology coming within 72 hours. As Stratfor notes, Taiwan's territorial 'claims' are "outrageously ambitious" but the various island nations all appear set on rattling sabres as mainland China stiffens its resolve against Japan over the Senkakus. Given the movements of the Navy (below), it would seem the US is well aware of where tensions are starting to rise...
China is in the midst of an urban revolution, with hundreds of millions of migrants moving into cities every year. Since 2011, for the first time in history, more than half of China’s 1.3 billion citizens (690 million people) are living in cities. Another 300-400 million are expected to be added to China's cities in the next 15-20 years. New Premier Li Keqiang recently proposed accelerating urbanization in China, and said urbanization is a “huge engine” of China’s future economic growth. Yet, China’s urban dream may be derailed by the lack of affordable housing in cities for the massive influx of urban residents.
ConvergEx's Nick Colas undertook a recent trip to Afghanistan. As he notes, the country has a long way to go to reestablish a viable economy and political stability, but he saw enough to be optimistic on both counts. Security around the capital is tight, and Afghan troops look professional and disciplined. There is ample food on display in countless local grocery stands. Girls go to school throughout the city, although women are a less common sight on the streets. Scarcity makes for odd economic outcomes – the only passenger car you’ll see is a Toyota Corolla, imported from different countries. No Afghan will be surprised that you are a tourist in their country – they are still very proud of its history and resilience. Westerners there will assume you are “On business.” Here are seven “Postcards from Kabul” with his last observations from this trip.
Inflation expectations (CPI this evening) have risen on expectations surrounding Prime Minister Abe’s policies and bold BOJ monetary easing under Kuroda. In developed economies, inflation expectations are often measured using the breakeven inflation rate (BEI) embodied in inflation-indexed government bonds. And sure enough much has been made of the rise in so-called JGBi's (despite their small notional outstanding and limited liquidity) as indicative that expectations are increasingly creating a virtuous cycle for Japan (encouraging domestic consumers to spend not save). However, while this all sounds jolly good in the headlines, as Goldman Sachs notes, in fact the JGBi market (when adjusted for a planned consumption tax hike in 2014) implies a considerably lower expectation of inflation (around 1%) to 2015 (the end of Abe's predicted 2Y plan). Oh well, must need moar money...
Just Say Non To The New "Sick Man Of Europe" - Support For EU Plunges In France And Most European CountriesSubmitted by Tyler Durden on 05/13/2013 - 20:32
In some surprising news, and quite contrary to what its record low bond yields would indicate (for a key reason for said artificial demand for French, see The Greater Fool) today the Pew Research center released results from a poll of 7646 EU citizens in March 2013, showing that the new sick man of Europe is Europe itself, or rather the great unification project itself: the European Union. Perhaps most surprisingly, nowehere is this more evident than in France itself - the country where the idea of a European Union germinated in the first place - and where the decline in support for the EU has been the greatest in the past year, with just 22% responding affirmatively to the question whether 'economic integration strenghtened the economy', down from 36% a year ago, and the biggest drop of all surveyed EU member states.
So, apparently, according to Jon Hilsenrath, "QE to Infinity" is actually "finite" after all. There is no doubt that the Federal Reserve will do everything in its power to try and "talk" the markets down and "signal" policy changes well in advance of actual action. However, that is unlikely to matter. The problem with the financial markets today is the speed at which things occur. High frequency trading, algorithmic programs, program trading combined with market participant's "herd mentality" is not influenced by actions but rather by perception. As stated above, with margin debt at historically high levels when the "herd" begins to turn it will not be a slow and methodical process but rather a stampede with little regard to valuation or fundamental measures. The reality is that the stock market is extremely vulnerable to a sharp correction. Currently, complacency is near record levels and no one sees a severe market retracement as a possibility. The common belief is that there is "no bubble" in assets and the Federal Reserve has everything under control. Of course, that is what we heard at the peak of the markets in 2000 and 2008 just before the "race for the door." This time will be no different.
We have recently explained (here and here) just how dismal the outlook for France is. The gaping divide between French and German perspectives on austerity, growth, and policy is widening by the day. And yet French credit spreads (and yields) have been collapsing ever tighter at the behest of a world gone mad on monetary munificence. We know who the greater fool is in Spain and Italy (the domestic banks and pension funds); and so now, thanks to SocGen, we know who the greater fool is in French debt (OATs). The BoP data also show that Japanese institutions have been sellers of USTs every month from January to March; and France has been by far the largest recipient of Japanese debt purchases. In March alone flows into OATs rose to JPY232bn, a 3-month high. Institutions have been buying OATs for 16 months in a row for a cumulative JPY5.7trn (E43.8bn) since December 2011. A marked 31bp decline in 10y OAT yields in April indicates that Japanese investors stepped up their purchases last month. This will not end well... and there is a limiting factor...
It seems that bubbles can pop? No matter how much a nation tries to destroy its economy, raise its inflation, and devalue its currency - equity market corrections occur... Argentina's MERVAL index (among the best performing equity markets of Q1) is now down 12% in the last 4 days (since we discussed this tongue-in-cheek comparison to Japan) - that is an annualized rate of loss of 100%... Of course, if you were to ask the Argentinian politicians, this drop is actually a rise - and we note that the official (and unofficial) exchange rate has not budged during the last few days.
... the Bank of Israel!
And so the final curtain falls on the myth of what was supposed to be, in its own words, the "most transparent administration" in history. As it turns out, the big Friday story of Bloomberg journalists snooping on clients was just amateur hour compared to what the AP was about to serve. In fact, the Watergate affair may soon appear like a walk in the park compared to the First Amendment shitstorm that is about to be unleashed following the just reported news that the US Department of Justice had "secretly obtained two months of telephone records of reporters and editors for The Associated Press in what the news cooperative's top executive called a "massive and unprecedented intrusion" into how news organizations gather the news." First amendment? Freedom of speech and press? Surely not when it comes to the Nobel-peace prize winning President and those who dare to expose his secret ways. And what's worst, is that the AP breach has all the makings of a spiteful hack driven by personal vengeance against one of America's premier news outlets.
It may come as a surprise to some that when distributed across all American adults, the average American spent just 3.57 hours out of every 24 on work and work-related activities in 2011, according to the BLS' American Time Survey. The number one time consuming activity? Sleep, at 8.71 hours (an all time high for the series), followed by Leisure and Sports with 5.21 hours in second place. The balance of the 6.51 hours remaining? 1.77 hours for Household Activities, 1.24 for Eating and Drinking, and so on, until we hit less than half an hour (0.47 hours) spent on education activities. At least the average time spent on telephone calls, mail and email is not more than the amount of time Americans spend edumacating themselves.
Treasuries underperformed but only modestly (ending the day 2-3bps higher in yield) but worth noting that the 10Y and 30Y and 29-30bps higher in yield post NFP. The S&P 500 made new all-time intraday highs (after ramping aggressively from the European close) but shorts seemed to know something and were heavy sellers from that point (with the 'most shorted' names actually closing down on the day). The Dow closed down 0.17% as there was no POMO to save us (despite a decent 330 ramp effort that dragged SPX into the green - just). It is elsewhere that cracks are appearing. VIX remains relatively bid to equity exuberance (as hedges remain) and the underperformance of credit is rather dramatic (typical underperformance has been reversed rapidly with in 2-3 days this year - not this time). A modestly stronger USD on the day (led by AUD weakness - not helping the carry traders) was not a factor for commodities where gold, silver, and oil (QE-sensitive) dropped 1% on the day. But then again, why worry, tomorrow is Turnaround Tuesday after all...
In a perfect follow-up to both President Obama's earlier comments and the news that a hearing is to be held ion May 17th, Rick Santelli has a few things to say. Clearly irritated at the incredible reality of big brother and government intervention, Santelli pushes his blood pressure to 11 on the dial as he comes to grip with the repercussions of the IRS actions. "Truth is power," he exclaims, "you can't assume someone is fair and honest," just because a politician says so. His bigger fears lie in the IRS administration of Obamacare where he is concerned that "No stent for you," will be heard when the powers that be know what groups you support, what thoughts you have, and what area you live in. Think he is exaggerating? Did you really believe the tin-foil hat wearers conspiracies that the IRS was doing this before it became mainstream news?