Following the ongoing rioting in until-now-calm Sweden, we thought it interesting to revisit the increasing chance of more broad-based social unrest in Europe. With the summer rapidly approaching, austerity still heavy in the air (well fauxsterity at least), there is a massive and growing divide not only between core and peripheral nations' youth unemployment but also within a nation. For instance, while Greece tops the overall youth unemployment level in Europe, 4 of the Top 5 regions (some with youth unemployment levels of over 70%) are from Spain. As lip-service is paid to addressing this pressing issue by the French and Germans (who themselves are increasingly at loggerheads over policy), as Bloomberg's Niraj Shah notes, the chasm between the rich and poor in Europe continues to gap ever wider.
While it should be no surprise to anyone that buybacks have been a major support of the market for the last few years (as we explicitly showed here and here in terms of earnings manipulation and here in terms of ill-timing), the following chart may give some pause for thought as to whether that is now a good thing or not. Not only is the credit market 'atlas' starting to shrug at its own 'frothiness', as it is used-and-abused by every poor-performing company to borrow-and-lever give-backs to shareholders, but the amount of 'outperformance' of the Buyback 'achievers' index (A gauge of companies that repurchased at least 5% of their shares in the previous 12 months) over the market is eerily similar now to the size of the outperformance at the top in 2007...
Most people do not think that Europe engages in Quantitative Easing. They know that the United States engages in it, that Britain engages in it and now that Japan engages in it but they think that Europe has so far refused to be involved. They think this because this is what they have been told. Unfortunately this is inaccurate. The European Quantitative Easing takes place every day just not in the manner utilized by America and others. However, it takes place all the same and it is done in a manner to circumvent the rules of the European Union. This is also why the ECB has such a massive balance sheet. What Europe has done is gotten around their own regulations which forbid the ECB from lending money directly to nations.
One of the consequences of yesterday's endless Fed PR campaign was making it very clear that any good news going forward will be bad news for the market as it brings the T-word that shall not be named (wink wink Hilsenrath) that much closer. Which is why today's initial claims print, which just came in line with expectations at 340K, on consensus was looking for 345K, will hardly be a good thing for the market which now needs horrible economic data to assume that the taper will be delayed indefinitely. The last month's data was as always revised higher from 360K to 363K just so the media can claim an improvement of 23K for the week. Sure enough, futures not only did not ramp on the news, but are continuing to trade at the weak levels seen before the print. Continuing claims also came in better than the expected 3 million at 2.912 million, the first sub-3MM print since 2008. Hardly the bad enough news the market was looking for. And while the report in general was a big snooze, of note was the surge in California initial claims last week when the headline number soared, jumping to 15,060 due to "layoffs in the service industry." Will the weakness persist?
Was this it for the index that until last night was up a pennystockesque 85% in 6 months? According to the supposedly smartest money, hedge funds, who had already started offloading NKY225 exposure, the answer is yes.
Q. If Japan has a financial collapse, what will happen to its government bonds?
A. Please do not worry.
- Global shares sink, following 7.3 percent drop in Japan's Nikkei (Reuters)
- When all fails, pull a Kevin Bacon: Japan Economy Chief Warns Against Panic Over Stock Sell-Off (BBG)
- White House Feeds IRS Frenzy by Revising Accounts (BBG)
- In any scandal, lying to Congress is tough to prove (Reuters)
- Debt limit resets at higher level, budget impasse grinds on (Reuters)
- China factory data to test political calculations (FT)
- European Leaders Saying No to Austerity (BBG)
- And yet, nobody wants in anymore: Iceland’s new coalition government suspends EU accession talks (FT)
- Oil Manipulation Inquiry Shows EU’s Hammer After Libor (BBG)
- The Fed Squeezes the Shadow-Banking System (WSJ)
- Diamond Said to Weigh Backing Barclays Alumni in Venture (BBG)
- Spain’s Private Jets Disappearing as Tycoons Cut Flights (BBG)
Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.
Yesterday afternoon, following the rout in the US stock market, we made a spurious preview of the true main event: "So selloff in JGBs tonight?" We had no idea how right we would be because the second Japan opened, its bond futures market was halted on a circuit breaker as the 10 Year bond plunged to their lowest level since early 2012, hitting 1% and leading to massive Mark to Market losses for Japanese banks, as we also warned would happen. That was just the beginning, and suddenly the realization crept in that the plunging yen at this point is not only negative for banks, but for the entire stock market, leading to what until that point was a solid up session for the Nikkei to the first rumblings of a ris-off. Shortly thereafter we got the distraction of the Chinese Mfg PMI which dropped into contraction territory for the first time since late 2012, and which set the mood decidedly risk-offish, although the real catalyst may have been a report on copper from Goldman's Roger Yan (which we will cover in depth shortly) and whose implications may be stunning and devastating and may have just popped the Chinese credit bubble (oh, btw, short copper). And then all hell broke loose, with the Nikkei first rising solidly and then something snapping loud and clear, and sending the index crashing a massive 1,143 an intraday swing of 9% high to low, leading to an over 200 pips move lower in the USDJPY, and leading to a global risk off across the world.
UPDATE 1: They are panicking... BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.
UPDATE 2: Nikkei 225 is now down 1500 points from its highs and down 1150 (over 7%) from yesterday's close
UPDATE 3: The Final closing data is a disaster with JPY surging back to 101.50 (carry trades getting baumgartner'd everywhere), stocks down over 7%, and 10Y JGBs swinging from +11bps at the open to -6bps at the close for the second biggest range day in a decade...
All the time it is just the quadrillion JPY second-largest bond market in the world that is experiencing volatility on an unprecedented scale, the BoJ and her partners in crime are more than willing to 'officially' say "please do not worry." But when the equity market - that barometer of everything good and holy about Abenomics starts to crater, you can bet the excuses will come fast and furious. Today's drop of over 1500 points (over 9%) from the earlier highs is the largest drop for the Nikkei 225 since March 2011. The Nikkei 225 just lost the all-powerful 15,000 level and is suffering another VaR shock with a 6-sigma move today. In fact given the price levels this drop is on par with the post-Lehman moves in 2008. The question now (with US equity futures also fading fast -20 points and JPY crosses getting hammered) is how will the Japanese risk appetite for peripheral European crap hold up with this crimping in their plan as Japanese bonds and stocks dump?
Our country has entered a period of Crisis. We may or may not successfully navigate our way through the visible icebergs and more dangerous icebergs just below the surface. The similarities between the course of our country and the maiden voyage of the Titanic are eerily allegorical...
For the first time since October 2012, HSBC's China PMI (Flash) printed at a sub-50 level (49.6) missing expectations (50.4) quite notably. This is the worst two-month drop in 17 months. This is problematic for the PBoC who are being arbitraged left, right, and center and know that any stimulus will merely serve to exacerbate the problems they face (as we noted here that China simply cannot function with 'moderate' growth). Every one of the main index's 11 sub-indices is signaling 'problems' - from slower rates of output, slower new orders, employment dropping at a faster rate, stocks rising, and output prices falling. As HSBC notes, "The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds. A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery." Of course, none of this should come as any surprise to ZH readers - as we noted here, Chinese power consumption grew at its slowest rate since May 2009.
Well, they've finally done it.
As the following chart of the day from Bloomberg shows, as of this week, hedge funds have made "the biggest bet ever" against gold by taking Comex gold shorts to all time highs.
"Time in the digital era is no longer linear but disembodied and associative. The past is not something behind us on the timeline but dispersed through the sea of information." In effect, change no longer flows linearly like time anymore, it flows in all directions at once. History and meaningful context are both fatally disrupted by this non-linear flow of time and narrative. If the causal chains of history and narrative are disrupted, then how can anyone fashion a meaningful context for actions and narratives, and effectively frame problems and solutions? If everything is equally valid in a non-linear flood of data, then what roles can authenticity, experience and knowledge play in making sense of our world? "We're essentially the victims of a marketing and capitalist machine gone awry... we no longer are the active source of our own experience or our own choices. Instead, we succumb to the notion that life is a series of product purchases that have been laid out and whose qualities and parameters have been pre-established."