Archive - Aug 2013

Behold a binary market in all its stop-hunting glory.

UPDATE: It appears all that mattered to the algos was to get the S&P green... (run those stops) S&P now +6pts, 10Y +5bps, USD unch, WTI unch Gold +$5... now watch USDJPY to see where stocks go next...

The initial reaction to the Fed minutes was to sell first and ask questions later - in everything. Of course, after plunging 10 points, the S&P bounced algorithmically up to its balance point at VWAP (and unch from FOMC) only to glance across at the carnage in the bond market (which didn't bounce) and sell back down. Bonds are trading at their post-FOMC minutes high yields (dominated by weakness in the 5Y/7Y belly), the USD is pushing higher, gold and silver oscillating slightly lower (and copper up). The USD strength is flopping over into JPY weakness and confusing algos that are once again pumping stocks up to VWAP... as we post, from pre-minutes: S&P 500 is unch, Gold is unch, USD is up small, but the 10Y Yield is up 5bps!

• FED STAFF A TAD MORE PESSIMISTIC ABOUT THE NEAR TERM ECONOMY, BUT STICKS TO ITS GUNS
• FED OFFICIALS ALSO SHOWED SOME ANGST ON THE ECONOMY
• FED OFFICIALS UNCONVINCED ABOUT LABOR MARKET IMPROVEMENTS
• MIXED VIEWS ON LOW INFLATION
• FED OFFICIALS THOUGHT THE MARKET HAD IT ABOUT RIGHT IN LATE JULY
• MIXED VIEWS ON THE DAMAGE OF RATE BACKUP
• NO CHANGE IN THE STANCE ON BOND BUYING
• OFFICIALS DECIDED THEY HAD ALREADY SAID ENOUGH
• CHANGES IN INTEREST RATE GUIDANCE ARE ON THE TABLE
• OFFICIALS CONSIDERED PATIENCE IN UNWINDING BOND PROGRAM

"Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels."

While some read the FOMC statement in July as more 'dovish' than expected - even though the market's performance since suggests otherwise -, it appears the actual conversations from the minutes point in a more 'Taper'-on direction (though clearly uncertainty remains high):

• *A FEW ON FOMC URGED PATIENCE, OTHERS FAVORED QE TAPERING SOON
• *FOMC MINUTES SHOW BROAD SUPPORT FOR BERNANKE TAPERING TIMELINE
• *FOMC PARTICPANTS SAID SEQUESTRATION 'CLOUDED THE OUTLOOK'
• *FOMC PARTICIPANTS PREDICTED GDP TO PICK UP IN 2ND HALF 2013
• *ALMOST ALL FOMC PARTICIPANTS BACKED 'CONTINGENT OUTLOOK' FOR QE
• *FOMC SAID JUNE PAYROLL REPORT SHOWED 'CONTINUED SOLID GAINS'

Pre-minutes: S&P (Fut) 1646, 10Y 2.8125%, USD 81.2, WTI $104.11, Gold $1371

Presented with little comment aside to ask - is this what 'consensus' would have expected?

S&P 500 -40 points, 10Y Yield +17bps, USD Index -0.75%, WTI Crude -0.9%, and Gold +$60

The July FOMC statement was a bit more dovish than expected, including (1) an explicit reference to the risks posed by higher mortgage rates, (2) more dovish language on below-target inflation, and (3) a statement that the Committee "reaffirmed its view" that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends. We will read the minutes from the July meeting with an eye toward any clues on the likelihood of near-term tapering and potential changes to the forward guidance.

It seems the world is growing increasingly uncomfortable (or downright angry) with the unintended (or intended) consequences of the Federal Reserve's actions (and not just EM nations...):

• FLAHERTY SAYS CANADA IS NOT A FAN OF QUANTITATIVE EASING
• FLAHERTY SAYS U.S. QE POLICY MAY BE TOPIC AT NEXT G-20 MEETING

So, given the implicit threat from the G-20 that this would appear to be, we should add one more reason (avoid USD reserve status questions) to the list of why the Fed will Taper sooner rather than later (deficits, technicals, sentiment).

That hedge funds as a whole have been underperforming the S&P500 not only in 2013 but in the past five years is well-known to most. This trend continued into the second half when, as Goldman calculates, the average hedge fund has returned only 4.1%, or an 80% underperformance compared to the S&P500's 20% through August 9. This is a marked deterioration compared to the 65% underperformance the last time we made this comparative observation in May. Some of the other more surprising observations: YTD, 25% of hedge funds have generated absolute losses and fewer than 5% of hedge funds has outperformed the S&P 500 or the average large-cap core mutual fund. 2 and 20 anyone?

On the occasion of August 21, 2013

What’s a clueless government trying to micromanage the affairs of over a billion people supposed to do when the wheels start coming off the wagon? If you’re India, you blame the country’s financial and societal woes on the buying of gold and attempt to prevent people from purchasing it. When that doesn’t work, and your currency continues to collapse, then what? Well, you decide to double down on a surveillance state. That’s precisely what the enlightened government bureaucrats at India’s Ministry of Home Affairs (MHA) have decided to do.

There is still no official public schedule for the Kansas City Fed's annual Jackson Hole Economic Symposium, anticipated to begin on Thursday. However, as we noted previously, the schedule will not include a keynote address from a high-ranking Federal Reserve official. Furthermore, as Goldman notes, in contrast to tradition, Chairman Bernanke will not be in attendance (Yellen will but Summer won't). However, Jackson Hole has historically been an event where the latest thinking on monetary policy has been debated by academics and central bankers, and this year will be no different. Perhaps, Goldman points out, most interestingly, some of the research to be presented finds that MBS purchases had a disproportionate effect on depressing MBS yields, while Treasury purchases did not seem to have a similar benefit - perhaps hinting at the form the 'taper' will take.

The Fed and other central banks have accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding.

The Dow has lost the all-important 15,000 level and is trading back towards the April 2013 'peak' (but remains 5% above 2007's previous all-time high). Almost a third of the Dow's 700-plus point plunge is thanks to IBM, XOM and CVX. The last 6 days have seen the blue-chip index drop 3.4%, its fastest since November as the BTFAiTH mentality seems lacking (for now).

Relatively slow day in Europe but the selling theme continued with the worst 5 days in 2 months in the broad equity markets and sovereign bond spreads continuing to push wider (+20bps on the week). Corporate and financial credit spreads widened significantly again - now 10% worse than a week ago. So it seems the rotation to European 'value' drew just enough greater fools in to mark a short-term top. Europe's VIX topped 20.5%, its highest in 6 weeks. And on a final 'bright' note, the Turkish stock index is down 32% in the last 3 months in USD terms (and Greek bonds continued to lose faith).