Both VIX and credit markets decoupled to the downside soon after Europe closed as equities clambered higher amid lower and lower volumes. As we headed into the last hour though both markets snapped higher to catch up to stocks and that mini-capitulation seemed enough for the equity rally to run out of steam. With the JPY strengthening all day, equities ignored the message of the carry traders until the close - when a big sell-side imbalance (and reality) smacked stocks lower to catch down to the all-important VWAP level once again. The USD saw its worst two-days since Oct 2011 giving up 3 weeks of gains. Gold and Silver are up nicely on the week (1.6 to 2%), outperforming today. Equities still managed gains on the day (despite the late-day tumble) and (oddly) Treasuries also ended very marginally in the green. The last few minutes of the day - normally kept open for some levitating algo to save the day - was a cliff-dive as news of FX margin controls on the all-important JPY carry driver smashed all risk-assets lower.
Moments ago the 101 USDJPY tractor beam was broken, sending the pair lower, as a red headline hit the tape saying that...
- JAPAN TO IMPOSE NEW RULES ON FOREX MARGIN TRADING, NIKKEI SAYS
Which incidentally was long overdue: with the BOJ scrambling to contain bond (and stock, if only to the downside) volatility, it was always the FX market that was the primary uber-levered culprit moving both asset classes. As such, it was very surprising that in a world in which all correlated asset classes (just look at the USDJPY-ES relationship) are driven by FX, that currency leverage and margin rules have remained largely untouched by regulators and central bankers whose credibility is suddenly slipping away, alongside the surge in global market volatility in the past week.
Think it's easy printing green? Believe you could do a better job than our illustrious bubble-blower-in-chief? The WSJ has created 'The Federator' in what we assume is a qualifying process for a Federal Reserve career. On an otherwise quiet day in equity and bond markets, the 'Defender-esque' game enables rates to be lowered (through the bearded-one's jetpack) or raised and a helicopter money-drop is added with the goals of maintaining the 2% inflation rate while keeping unemployment low... Fail and you will witness a WSJ headline exclaiming the error of your ways.
Cheap credit is a great boon to the wealthy and a path to debt-serfdom for everyone else. The ever-widening chasm between the wealthy and the "rest of us" has generated any number of explanations for this deeply troubling phenomenon. Credit has rendered even the upper-income middle class family debt-serfs, while credit has greatly increased the opportunities for the wealthy to buy rentier income streams. Credit used to purchase unproductive consumption creates debt-serfdom; credit used to buy rentier assets adds to wealth and income. Unfortunately the average household does not have access to the credit required to buy productive assets; only the wealthy possess that perquisite. And so the rich get richer and everyone else gets poorer.
In the old normal ("when we had an honest Fed," under Volcker), David Stockman explains to CNBC's Rick Santelli, "the market could judge what Congress and the White House was doing and decide where the risk/reward equation was and how to price the bond, the note, the bills," but in the new normal, "today, the market is entirely rigged." Stockman is no fan of deficits and as he notes "is no fan of money-printing," pointing out that "it's not honest," for the Fed to fund these chronically growing deficits and "created an unsustainably dangerous financial system." In thie brief interview, Stockman (of The Great Deformation fame) sums it up perfectly to a just-as-concerned Santelli, when he notes, "the error of central banking has become unversal." We're taxing the futures generations, he concludes, "they're going to thank you for the massive disaster that was handed to them." The honesty will never come...
The New York Times, The Associated Press, The Huffington Post, CNN and now, of course, Fox News: these are the media organizations, superficially from across the political spectrum, which have said they will boycott a meeting with the DOJ's embattled head, Eric Holder, on the topic of the DOJ's (not to mention the NSA's) Nixonian abuse of the first amendment and eavesdropping wherever and whenever it so chooses. The twist: the meeting is, paradoxically, supposed to be "off the record." One wonders: was this the DOJ's idea of being open and transparent - to hold a closed door meeting with the same media that it, allegedly, has been spying on, and thus put the media whose job is to report events - as in keeping the public informed - in a place where it can't do precisely that? It is as if the Marx Brothers are writing the tragicomic script for a sequence of events that inevitably ends with Holder's resignation and Obama's washing his hands of the whole affair.
UBS said to increase investment bankers' salaries by average of 9%
— Bloomberg News (@BloombergNews) May 30, 2013
Tuesday's weak 2 Year bond auction is now a distant memory, and following yesterday's strong 5 Year it was not surprising to see a very strong pick up in demand for the just concluded 7 Year auction. On the surface, the auction was very strong with the high yield printing at 1.496%, stopping through the 1.515% When Issued if still the highest since March 2012. The internals were also very strong, with the Bid to Cover closing at 2.70, in line with last month's 2.71, and above the TTM average of 2.68. More importantly, Direct demands soared with 20.68% of the takedown going to Direct bidders, the second highest ever in this series, and lower only to December's 23.11%. Indirects were no slouch either, with a final allotment of 40.84%, leaving just 38.48% for Dealers, the lowest take down for 2013. So with very strong primary market demand along the belly, it is safe to say all rumors of a blow up in the US bond market are greatly exaggerated. Remember: TSYs still continue to be the primary source of repoable collateral and for the time being at least, everyone still wants them.
Anytime a free market guy rails against central planning and socialism, there is always someone who stands up and says “what about Sweden?” Ah, Sweden... a socialist’s paradise... a place where taxes are among the highest in the world, few people are wealthy, and the government is involved in people’s lives from cradle to grave. And in all of these government surveys on ‘happiness’, places like Sweden, Norway, and Denmark consistently rank among the happiest countries in the world. Well… the veneer is cracking. The riots we first noted here continue and these foru charts may offer some of in the incendiary material for why. As we noted recently, the benefits that have kept Europe relatively 'social-unrest-free' so far are starting to run dry. People in North America who are rapidly being dragged into a welfare state should pay very close attention... because this is the future that awaits.
Despite 'market-based' appearances (CAC near price highs and OATs near low spreads), the reality in France is dismal and growing more dismal. As we have explained in great detail (here and here most recently) France's economic fortunes are depression-like and today's Jobseeker data merely goes to confirm this. The total number of Gallic Jobseekers rose to 3.26 million, the highest ever on record and is accelerating at its fastest YoY rate in over three years. This month's gain of 39,800 was far above the 30,000 expectation but have no fear as Mr. Hollande promises to do whatever it takes. Interestingly, just as in the US, it is the young (under-25 +10,800) and middle-aged (25-49 +21,400) demographic that is suffering the most while the over-50 population saw only modest rises in joblessness. No green shoots here for the EU political elite to proclaim the crisis is behind us...
Those who recall about the implicit housing subsidy we discussed when we coined the term "foreclosure stuffing" which is merely the well-planned systemic bottleneck to clearing foreclosed properties already in the system, and thus artificially reduce housing supply will be happy to learn that according to RealtyTrac the average time for a foreclosed property to sell just hit a record at nearly 400 days across the entire nation.
With both the Real Estate and Banking equity indices in Japan already in bear markets (down over 20% from recent highs) and the broad indices down over 15%, just how much pain can the massive influx of foreign capital take before the exodus really takes hold. Today's 'news' of the GPIF's allocation shift won't be enough to stem the tide as 'foreigners' (who have flooded on an epic scale into Japanese stocks) step away to the next hot-money focus... this won't end well.
S&P 500 futures are up a healthy 9 points seemingly on the basis that bad-is-good and EUR or JPY are driving correlating-algos. But, it's not just the equity market that is 'Up' - VIX (the hedging vehicle) is 'Up'... Treasury bonds (the anti-risk vehicle) are 'Up'... and Swiss short-dated bonds (the EU safe-haven) are 'Up'... all makes perfect sense to someone we are sure.
"Since we're dealing with markets that are being manipulated by central bank policies, there is no such thing as economic analysis anymore. All you have is the imaginations of central bankers, and you don't know what they're going to do, so you have to be diversified."