Archive - Sep 29, 2014

The key question now is “Can the U.S./global economy handle a meaningful downturn in financial asset prices?” The short answer is that it may not have a choice. The Federal Reserve has done what it can to juice the American economy and has the balance sheet to prove it. Central banks, for all their power, do not control long term capital allocation or corporate hiring practices.  Fed Funds have been below 2% for six years.  If the U.S. economy can’t continue to grow in 2015 as the Federal Reserve inches rates higher, there are clearly larger issues at play.  And those private sector problems will need private sector solutions. 

Ferguson was for amateurs. For those curious why the Hong Kong protests over the weekend have sent shivers across the world's capital markets, pushed the Hang Seng 2% lower, and impacted both European and US futures, not to mention leading to worries that China may get involved any second and result in another Tiananmen square event, the following clip from HK's Apple Daily, taken by a drone, shows just how massive the demonstrations, which according to some estimates involved just why of 100,000 people, taking place in Hong Kong are.

The Nasdaq, Russell 2000, and Dow Transports have been rescued in their high-beta manner all the way back to green by an initial USDJPY ramp to ignite some momentum "off the lows". Treasuries and credit refuse to  play along and even USDJPY has decoupled as stocks surged on a VIX-slamming (from over 17 to 15.50) ramp to unch. Safe-haven buying of camera-on-a-stick continues (+8% today).

Russia's RTS Index has dropped over 20% from its post-Sanctions 1.0 highs in June, officially entering a bear market. The Ruble continues to slide, breaking above 39.50 against the USD - record weakness. Whether it is US/EU sanctions "costs" and/or merely EM risk-off hot money outflows is unclear, but what is clear is that Russian stocks are extremely cheap...

One would think that the world's most important artificial waterway has working traffic lights and proper transit control. One would be wrong.  According to Egypt's Al-Ahram website, two container ships collided on Monday morning in Egypt's Suez Canal. The German Colombo Express was coming in from the Mediterranean Sea when it hit the Singaporean ship Maersk Tanjong half a kilometre from the Port Said port, Al-Ahram said.

Following last week's explosion higher in new home sales (despite surging record high prices), it is somewhat intriguing that pending home sales would tumble over 4.1% YoY, and drop 1.0% MoM (missing expectations of a 0.5% drop) and the 2nd biggest drop in 2014. The 'stunning' rationale for this miss, provided by NAR's chief economist, is... "fewer bargain-priced homes' (which is odd given record prices and record surge in new home sales), and a "rising rate environment" (except rates are collapsing)...

The dumb, speculative money is selling as smart money continues to accumulate physical ... Gokhran, the Russian precious metals and gems repository, said it has been buying gold bullion in 2014 and will likely to start buying palladium bullion in 2015, Interfax news agency reported this morning, citing the head of Gokhran, Andrey Yurin.

Having rallied exuberantly on the back of hopes a reform-hungry hot-money-flow-encouraging Silva would take the Presidency in Brazil, a new poll this morning shows encumbent Rousseff back in the lead... and Brazilian markets are rapidly unwinding their exuberance. The Ibovespa is down 5% - its biggest drop in over 3 years. Brazil swap rates have spiked over 50bps and bonds bleeding as USDBRL jumps over 3 handles (to weakest since 2008). It appears just 48 hours after a strong rally on Friday, as markets 'efficiently' knew everything was great, Rousseff has realised a few well-placed, well-executed poll results and everything changes.

It appears the post-PIMCO-effect is not wearing off. Having had a weekend to soak up the reality of what outflows will mean for Gross' old shop, credit markets are once again flashing bright red this morning as managers reach for protection ahead of expected redepemtions which would force selling into an illiquid market. High-yield spreads are 25bps wider at their highest since early Oct 2013. Equity futures are legging lower with the weakness...

With the biggest Hong Kong protest in recent history taking place over the weekend, and continuing indefinitely because one thing is certain: the local student demands for more democracy and the ouster of HK chief executive CY Leung will not be met, what everyone has focused on is what China's response, call it crackdown, to the breakout of violence will be. After all, while algos and the Fed's liquidity tsunami have priced in pretty much everything short of (or including, according to some) World War III, a repeat of Tiananmen square could well be large enough to where it registers as a slight downtick in the Fed's balance sheet, pardon the S&P 500.

Mission releverage accomplished. Personal Income rose 0.3% in August (very slightly below Bloomberg's median estimate), the 2nd slowest growth of the year. Personal spending however jumped 0.5%, beating the 0.4% expectations, and its equal best growth since March. What was spending focused on? Why autosales, which accounted for about half of the spending. And what funded this spending? Why subprime car loans of course; it sure wasn't the real disposable income per capita which was a paltry $37,684 in August.

10Y yields are back below 2.50% and the entire Treasury complex is flattening (erasing post-GDP losses) as fears over Catalan independence and Hong Kong protests spark safe-haven buying around the world. Gold is up, back over $1220 (pre-GDP levels) and Bunds are well bid yet the USD is fading modestly this morning driven by EUR and JPY strength. European periperhals bond risk is on the rise and stocks are mostly lower with Germany's DAX back below its crucial 50DMA. US equity futures are all red - retracing the entire Friday mini-melt-up in the afternoon (and catching back down to credit reality).

Powerful Crash pattern detected

A “poisonous combination” of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard-hitting report will warn on Monday. It warns of a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”. The total burden of world debt, private and public, has risen from 160 per cent of national income in 2001 to almost 200 per cent after the crisis struck in 2009 and 215 per cent in 2013. “Contrary to widely held beliefs, the world has not yet begun to delever and the global debt to GDP ratio is still growing, breaking new highs,” the report said. Luigi Buttiglione, one of the report’s authors and head of global strategy at hedge fund Brevan Howard, said: “Over my career I have seen many so-called miracle economies – Italy in the 1960s, Japan, the Asian tigers, Ireland, Spain and now perhaps China – and they all ended after a build-up of debt.”

There's always something new...