Archive - Sep 2, 2014

The Central Bank policies of the last five years have damaged the capital markets to the point that the single most important item is no longer developments in the real world, but how Central banks will respond to said developments.

It appears JPY weakness (or generalized USD strength) is mirroring the demise of precious metals (and oil) this morning. Gold's 1.7% drop is the biggest in 6 weeks and drops the yellow metal to near 3-month lows. Treasury yields are up 5-8bps at the long-end. Troublingly, for the carry bulls, equity futures are not playing along with the JPY weakness.

ISM Manufacturing has risen almost without hesitation for the seven months from the January collapse to new 3-year highs, printing at a dramatic 59.0, its biggest beat in over a year, just shy of the recovery cycle's highs in 2011. New orders grew for the 15th month in a row to the highest reading since 2004! Earlier, Markit's US PMI missed expectations and fell modestly from preliminary data to 57.9, but moved to its highest since April 2010. Construction spending also surged, rising 1.8% (smashing expectations) - its biggest MoM gain since May 2012.

According to Piers, this is breaking news. Which, incidentally, may explain not only his show's abysmal ratings, but why he is now unemployed.

BREAKING NEWS: I am no longer a @CNN employee.

— Piers Morgan (@piersmorgan) September 2, 2014

"Herein lies our dilemma with bonds. We've been a member of the lower yields for longer camp for a number of years now due to our near-term growth and inflation outlook and our belief that financial repression is rife. However we also think that debt restructuring or inflation will eventually be the only way of successfully reducing debt burdens for many countries with the latter route the most likely. As such whilst bonds are a near-term safe haven they are also likely to be very poor real investments longer term. Timing the big switch in view on this will be one of the defining investment moments of the next few years. Let's hope we're lucky."

"We the undersigned are longtime veterans of U.S. intelligence. We take the unusual step of writing this open letter to you to ensure that you have an opportunity to be briefed on our views prior to the NATO summit on September 4-5. You need to know, for example, that accusations of a major Russian "invasion" of Ukraine appear not to be supported by reliable intelligence. Rather, the "intelligence" seems to be of the same dubious, politically "fixed" kind used 12 years ago to "justify" the U.S.-led attack on Iraq. We saw no credible evidence of weapons of mass destruction in Iraq then; we see no credible evidence of a Russian invasion now. Twelve years ago, former Chancellor Gerhard Schroeder, mindful of the flimsiness of the evidence on Iraqi WMD, refused to join in the attack on Iraq. In our view, you should be appropriately suspicions of charges made by the US State Department and NATO officials alleging a Russian invasion of Ukraine."

While yesterday everyone was focusing on the ongoing escalation in Ukraine, or BBQing, the real story was the sudden and quite dramatic collapse, or as we called it, "bloodbath" in global manufacturing as tracked by various PMI indices. Here is the summary.

As we explained previously, the market appeared woefully under-priced for the potential risk of a Scottish "yes" vote. However, this weekend saw the margin between 'yes' and 'no' voters narrowed dramatically (53% "No" vs 47% "Yes" - a 6-point spread now versus a 14 point spread just 2 weeks ago). UK Gilt yields are higher, GBP is falling (its lowest since March) and implied volatility has spiked by the most since 2008 as hedgers pile in, now suddenly fearful.

Back in June, when the political career of Eric Cantor came to a sudden, stunning end at the hands of an unknown "tea-partier", we commented that the biggest losers from Cantor's ignoble fall from Congressional grace were his biggest donors. Less than three months later, their loss is Cantor's gain, who after a long auction process has finally, and very expectedly, sold himself off to the highest bidder which as the WSJ reported overnight was none other than boutique M&A advisory firm, Moelis & Co. Per the WSJ, "Mr. Cantor, 51 years old, will be a vice chairman and board member at the firm, effective this week, he and Moelis founder Ken Moelis said in a joint interview on Monday.

• Ukraine Shifts to Defense Against Russian Incursion (WSJ)
• U.S. forces carry out operation against al-Shabaab in Somalia (Reuters)
• Bond Markets Tilt Toward Frankfurt as Draghi Negates Fed (BBG)
• Another "unexpectedly" - Swiss Economy Unexpectedly Stalls as Euro Area Takes Toll (BBG)
• Japan's 'Abenomics' feared in trouble as challenges build (Reuters)
• Germany Imposes Nationwide Ban on Uber's Cab-Hailing Service (WSJ)
• Japan's 'forward guidance', the GPIF, has "already begun a highly anticipated portfolio reshuffle" (WSJ)
• Detroit Brings Bankruptcy Plan to Court With Billionaires (BBG)
• Burger King has maneuvered to cut U.S. tax bill for years (Reuters)

Just when we thought centrally-planned markets could no longer surprise us, here comes last night's superspike in the USDJPY which has moved nearly 100 pips higher in the past few trading days and moments ago crossed 105.000. The reason for the surprise is that while there was no economic news that would justify such a move: certainly not an improving Japanese economy, nor, for that matter, a new and improved collapse, what the move was attributed to was news that Yasuhisa Shiozaki, who has been advocating for the GPIF to reduce allocation to domestic bonds, may be appointed the Health Minister when Abe announces his new cabinet tomorrow: a reshuffle driven by the fact that the failure of Abenomics is starting to anger Japan's voters. In other words, the GPIF continues to be the "forward guidance" gift that keeps on giving, even if the vast majority of its capital reallocation into equities has already long since taken place. As a result of the USDJPY surge, driven by a rumor of a minister appointment, the Nikkei is up+1.2%, which in turned has pushed both Europe and Asia to overnight highs and US equity futures to fresh record highs, with the S&P500 cash now just 40 points away, or about 4-8 trading sessions away from Goldman's revised 2014 year end closing target.