Archive - Aug 5, 2014

As we warned previously, it appears Russia is stepping up its sanctions-retaliation confirming its threat that "US will feel tangible losses."

• *PUTIN ORDERS GOVT TO PREPARE RETALIATORY SANCTIONS: RIA
• *PUTIN ORDERS GOVT TO READY STEPS IN RESPONSE TO SANCTIONS: IFX
• *PUTIN: RETALIATORY MEASURES SHOULDN'T HURT RUSSIA CONSUMERS:IFX

Russian stocks and currency are sliding this morning, not helped by this announcement. Of course, Putin has already put pressure on major US companies such as MSFT, IBM, MCD, INTC, AMD, and car manufacturers. And as far as "isolation" - the signing of a 5-year trade agreement with Iran would suggest there are still plenty of nations willing to work with Putin.

"We tried not to equivocate too materially yesterday but we hoped we had made it clear that it was our intent to move off of the centre point of neutrality to something a bit more bullishly inclined.... We’ll err bullishly then, albeit not aggressively so. Rather, as we’ve been in the past, we are “pleasantly” bullish and look to add to our positions..." - Dennis Gartman

BANZAI7 FOOD AND BEVERAGE WARNING

A two-star US General has been killed in Afghanistan, according to ABC News, which appears to be the highest-ranked US officer KIA since The Vietnam War. The attack took place in the relative safety of the officers academy at Camp Qargha, Kabul, when a gunman wearing an Afghan army uniform apparently turned his weapon against Americans and other Afghans. In addition to the US general's death, a German brigadier general was injured along with 15 other ISAF personnel. Afghan President Karzai said the attack was "an act by the enemies who don’t want to see Afghanistan have strong institutions."

With rates seemingly flip-flopped today (yields higher as stocks drop), we thought it worth skimming what the smart money in the bond market is thinking. As RBS Strategist Bill O'Donnell warns, "Janet must act like a diving instructor, hoping to bring levels to the surface without giving the economy the bends. What makes it really risky for Janet is that financial sector regulation has created a ‘one-way valve’ in secondary market liquidity. Nobody really knows how the system will hold up under duress." This is confirmed by Scotiabank's Guy Haselmann who fears, "the Fed will have difficulties controlling market gyrations and its potential loss of credibility from troubles that are likely to arise from its exit strategy."

US Services PMI fell from June's 61.0 level to 60.8 (slightly below the flash print of 61.0 suggesting modest weakness in the latter end of the month) ending a two-month streak of post-weather exuberance as new orders and jobs data slowed, and Markit warns "growth may have peaked." Factory Orders rose 1.1% for the biggest beat in 9 months. ISM Services smashed expectations and surged to Nov 2005 highs (from 4-year lows just 4 months ago - volatile?) with most sub-indices improving except new export orders fell to 4-month lows.

Sadly for the central planners, while they succeeded in the first part of their plan, namely getting investors to flee from money market funds, they failed in getting the money to flow into the desired asset class: stocks. Instead, money market funds are rushing at an unprecedented pace into that other most hated by the Fed, after precious metals of course, asset: Treasurys. Most hated because declining yields disprove all the propaganda about an improving economy as they do, or at least did, imply deflation down the road: hardly the stuff robust 3%+ recoveries are made of.... But before we declare victory over central planning, don't forget that the "regulators", the Fed and the SEC, are already contemplating the next step: recall that as we reported in June, "the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is."

Greek 10Y yields, up 6 days in a row, have surged in the last few days to 2-month highs (bond price lows). The significant shift in sentiment appears related to two main factors. First, The Independent reports that Europe is considering pulling Troika (its economic oversight committee) - which has been likened to German Nazi occupation - out of Greece, forcing local politicians to come up with their own reforms by the start of 2015 (which clearly the market is not believing). Perhaps even more concerning is Goldman Sachs shift to neutral on European peripheral bonds, warning that "at current spread levels we think there is not enough of a buffer for investors to take credit risk in intermediate and long-dated peripheral sovereign bonds." Time for some more 'whatever it takes' we think.

While in the US there has been nothing but political propaganda and a constant Obama defense of John Kerry over his disastrous, to date, handling of the deteriorating situation in the middle east, in the UK the internal discord has finally moved beyond merely posturing and has claimed the first political career, when overnight a minister in the Foreign Office, Baroness Warsi, announced she has resigned from the government, saying its policy on the crisis in Gaza is "morally indefensible", is not in Britain's national interest and will have a "long term effect on our reputation internationally and domestically".

Russia has been quiet, too quiet, since the EU and US unleashed their latest set of sanctions. However, as military drills and troop build-ups occur on Ukraine's borders, Reuters reports that Russian Prime Minister Medvedev is considering a significant retaliation, "any unfriendly measures by the EU, including those in the area of air transportation, we’ll be studied and won’t remain without a response." Russian business daily Vedomosti quoted unnamed sources as saying the foreign and transport ministries were discussing possible action which might force EU airlines into long and costly detours and put them at a disadvantage to Asian rivals by restricting or banning European airlines from flying over Siberia on busy Asian routes. Costs? Over $1.3bn for every months for Lufthansa, BA, and Air France...

All the latest news on the worst Ebola epidemic in history sourced over the past 24 hours.

• Second Ebola patient to arrive in U.S. on Tuesday (Reuters)
• Ebola Drug Made From Tobacco Plant Saves U.S. Aid Workers (BBG)
• Egypt plans to dig new Suez Canal costing $4 billion (Reuters)
• Apple Buybacks Pay Most Ever as CEOs Spend $211 Billion (BBG)
• DeMark Says Sell China Stocks Now After World’s Best Gain (BBG)
• Investors Stung by Losses After Exiting Struggling Property Fund in China (WSJ)
• B.A. in BTFD: MIT May Consider Granting Degrees in Less Than Four Years (BBG)
• Too late, money's already been spent: GPIF Needs Overhaul Before Asset Changes, Shiozaki Says (BBG)
• Oh look, another "truce": Israel withdraws troops, 72-hour Gaza truce begins (Reuters)

It is unclear how much of this morning's momentum-busting weakness in futures is the result of China's horrendous Service PMI, which as we reported last night dropped to the lowest print on record at the contraction borderline, but whatever low volume levitation was launched by the market after Europe's close yesterday may have fizzled out if only until Europe close (there is no POMO today). Still, futures may have been helped by yet another batch of worse than expected European data, namely the final Eurozone PMI prints, which in turn sent the EURUSD to day lows and the offsetting carry favorite USDJPY to highs, helping offset futures weakness. Because in the New Normal there is nothing like a little bad macro data to goose the BTFATH algos...