Archive - Feb 2014

With the Greeks facing up to their third (or 4th or 5th, who's counting anymoe anyway) bailout, proclaiming growth is just around the corner, that the crisis is behind them, and that slavery will solve European youth unemployment; we thought it both ironic and sad that, as Bloomberg's Niraj Shah notes, the European Commission today publishes its first anti-corruption report and finds Greece has the most corrupt public sector, according to Transparency International’s Corruption Perceptions Index.

"We've created a global debt monster that's now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber aggressive policy responses. It’s arguably too late to change course now without huge consequences. This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick starting the exponential rise in leverage across the globe. Since then we saw big corporates saved in the early 00s, financials towards the end of the decade and most recently Sovereigns bailed out. It’s been many, many years since free markets decided the fate of debt markets and bail-outs have generally had to get bigger and bigger."

Winter storm warnings and advisories stretched from Utah to Pennsylvania this morning. As Bloomberg reports, hundreds of flights across the US are being canceled as the threat of snow, ice, and sleet (and up to 8 inches of snow in New York City) "impact the morning commute." The storm will move across the central U.S., bringing showers and thunderstorms to the Central Gulf Coast tomorrow morning and expanding northward into the Tennessee Valley by Tuesday evening, the weather service said. In other words, we have our first good excuse for a crimped consumer not spending once again in February - the weather.

The key events this week are have non-farm payrolls (consensus 181K) and unemployment rate (consensus 6.7%). There is also going to be a number of speeches given by Fed policymakers.  Production surveys from the US (ISM) and other parts of the world are due Monday. We also get trade balance updates from the English-speaking economies - US, UK, Australia and Canada. Finally, keep track on inflation data from Italy and Turkey: the latter is important to track given current high correlation among 'fragile' EM currencies.

• Emerging-Market Rout Seen Enduring on Low Real Rates (BBG)
• After rocky January, markets eye data and central banks (Reuters)
• Europe will feel the pain of emerging markets  (FT)
• Lloyds delays dividend prospect after mis-selling charge (Reuters)
• Snow Set to Snarl New York Commute as U.S. Flights Halted (BBG)
• Rate Decision to Drive Yellen's Early Agenda  (Hilsenrath)
• Thai protesters move to downtown Bangkok in bid to topple PM (Reuters)
• China says Japan's 'hype' on air defence zone spreads tension (Reuters)
• Hedge funds seek 1.8 billion euros damages from members of Porsche's owning family (Reuters)

Alarms are going off in assorted plunge protecting offices, now that the USDJPY has breached the 102.000 "fundamental" support level, below which the Yen can comfortably soar to sub 100.000 in perfectly even 100 pip increments. The first trading day of February has brought another weaker session across Asia though some equity indices such as the KOSPI (-1.1%) are in catch-up mode given they were shut towards the back-end of last week. Over the weekend, the Chinese government published its latest official manufacturing PMI which showed a 0.5pt drop to 50.5, a six-month low, and consistent with consensus estimates. DB’s Jun Ma believes there was some element of seasonality affecting this month’s result including the fact that Chinese New Year started at the end of January (vs February last year), anti-pollution measures in the lead up to CNY and efforts to control government consumption around the holiday period. The official service PMI was released overnight (53.4) which printed at the lowest level since at least 2011. The uninspiring Chinese data has not helped market sentiment this morning, with the Nikkei plunging -2% and ASX200 once again under pressure. S&P500 futures have fluctuated around the unchanged line this morning although if support below the USDJPY fail solidly, then watch out below. Markets in Mainland China and Hong Kong remain closed for Lunar New Year.

The United States’ rapport with the Russian Federation is one of the world’s most important bilateral relationships.  Russia maintains a large nuclear arsenal and is a resurgent player in world affairs. Russia has considered Ukraine to be a vassal for the last five hundred years.  Russian President Putin has routinely referred to Ukraine as a Russian state rather than a free and independent country. How would the United States react if Moscow was able to exert influence over Mexico and install a pro-Russian government? America needs to take off her rose colored glasses and look at the world with a Machiavellian view.  We should decide to intervene in centuries old conflicts only when there are clear American security interests involved.  Unfortunately for the idealistic leaders of American foreign policy, Ukraine does not meet this test.  The Ukrainian people have shown an ability over the two decades to have a natural ability to take matters into their own hands and are quite capable of deciding this issue among themselves. 

Someone ought to explain to Gibson why this would be a runnaway hit...

USDJPY opened the evening under 102 with JPY holding its losses until aroun 1700ET when it broke back above the crucial level. S&P futures and USDJPY recoupled for a few hours but are now decoupling faster than the Seahawks and Broncos (S&P -1pt, USDJPY +30 pips). The catalyst for the disconnect (which Japan's Nikkei is also following) was weakness in Chinese data. Following Aussie PMI's lowest print in 5 months, China's Services PMI printed at its lowest on record and its biggest 3 month slide in 16 months. Japan's Nikkei 225 is now down 10% in 2014 and 7 of the last 8 days and 20Y JGB yields are testing 9-month lows.

Citi's Tobias Levkovich sums up the hope... "we have received a fair amount of questions from clients over the last couple of weeks about the effect of share buybacks supporting earnings in the coming year, almost as if they are stretching to find reasons not to cut their numbers." The following charts suggest we are stretched indeed... Quantitative easing has distorted not only financial markets, but financial memory. The awakening is not likely to be gentle.

In 1928, just as income inequality was surging, stocks were soaring and monetary distortions were rearing their ugly head, the now infamous words "a chicken in every pot and a car in every garage" were integral to Herbert Hoover's 1928 presidential run and a "vote for prosperity,' all before the market's epic collapse. Fast forward 86 years and income inequality is at those same heady levels, stocks are at recorderer highs, the President is promising to hike the minimum wage to a "living wage" capable of filling every house with McChicken sandwiches and now... to top it all off - Maserati unveils their (apparent) "everyone should own a Maserati" commercial. It would seem that chart analogs are not the only reminder of the pre-crash era exuberance and its recovery mirage and massive monetary distortions.

In 2008, a mysterious person or group using the apparent pseudonym Satoshi Nakamoto unveiled a new digital currency called Bitcoin that appeared to solve some of its predecessors’ problems. As Bitcoin rose in value the number of high-profile crimes and crashes rose apace. Throughout that boom and bust, Bitcoin retained a core user base that saw its possibilities and worked to overcome its flaws by developing point-of-sale hardware and online merchant services while lessening its dependence on a small number of exchanges. And then, just when the outside world had stopped paying attention, Bitcoin recovered. From under $20 at the beginning of 2013 it rose to $240, crashed to below $100, and then in one dramatic arc soared to more than $1,000. In early 2014 Bitcoin’s market value exceeded $10 billion and the number of merchants willing to accept it was soaring. The market appears to have spoken: Bitcoin is for real.

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