Archive - Sep 2013 - Story

There is a modest rebound from knee-jerk levels but in general everything is moving how one would expect since the Fed chickened out... The USD is collapsing, Gold and stocks soaring, and 10Y yields tumbling... VIX and Bond vol has also collapsed. Let's just wait for Ben to bugger it all up with his communications...

Post-FOMC Reaction: S&P +17pts, 10Y -10bps, MTG spread unch, USD -0.65%, WTI +0.5%, Gold +$37

It seems the Fed is so scared about something (despite every long-only asset manager telling us day after day that the economy is recovering and the US doesn't need crisis support... oh and can withstand higher rates) that they have gone against consensus and decided that Tapering now is premature:

*FED REFRAINS FROM QE TAPER, KEEPS MONTHLY BUYING AT $85 BLN
*FED: RISE IN MORTGAGE RATES, FISCAL POLICY RESTRAIN GROWTH
*FED: `TIGHTENING OF FINANCIAL CONDITIONS' COULD SLOW GROWTH
*MOST FED OFFICIALS SEE FIRST INTEREST-RATE RISE IN 2015

Pre-FOMC: S&P Futs 1696, VIX , 10Y 2.865%, MTG Spread 72.5bps, USD 81.00, WTI $107.00, Gold $1310

We await Cramer and Liesman to explain what to do next...

Judging by the market's reaction to the June FOMC statement and press-conference, Nanex shows the four things that US market participants can expect to happen over the next few hours:

1. The HFT Machines Will Take Over (fake quotes will soar)
2. Quote Spreads will Widen (but all that liquidity provision?)
3. Quote Spreads will Become Unstable
4. The Number of Stocks Locked (Bid=Ask) or crossed (Bid>Ask) Will Soar

But apart from that - do as you're told and BTFATH as every commission-taking muppet will tell you the Taper is priced in.

Whether or not it is an indication of potential legal troubles over Obama's horizon is unclear, but as Politico reports, the White House Counsel Kathryn Ruemmler, a Georgetown Law graduate who assumed office on June 30, 2011, "has told President Obama she plans to leave by the end of the year" and a search for her replacement has begun.

As we earlier noted, there are numerous reasons that a taper should not occur (despite the protestations of so many sell-side economists that the economy is recovering... or about to). The following chart perhaps sums up best just how bad the real situation is... In light of this - if Bernanke tapers, is it not clear that The Fed is admitting it is cornered (for the four reasons we explained previously).

This morning we heard from Russia's Lavrov claiming to be ready to send proof, that Assad was not responsible for the chemical weapons launch on Syrians, to the UN. It is, therefore, only appropriate that the opposition - in some way - respond. The Free Syrian Army's Al-Masry state by phone this morning that:

• *SYRIA SMUGGLED CHEMICAL WEAPONS OUT TO LEBANON: AL-MASRY
• *SYRIA SMUGGLED TWO SHIPMENTS OF CHEMICAL WEAPONS TO HEZBOLLAH
• *SYRIA OPPOSITION SAYS UN CHEMCIAL TEAM SHOULD VISIT LEBANON

So it would appear the 'Syrian deal' is all going well; the debt-ceiling debate is just starting to hot up; German elections are too close to call; and the Fed is about to step away from the punchbowl. BTFATH...

Despite the Fed's strongest efforts at improving its 'communication', the average American is relatvely unaware of just what it is that QE does (and is). Reuters reports that a sad 73% of respondents could not define what the crucial-to-the-market's-survival program is with 12% of respondents believing QE was a computer-assisted program that the Fed uses to manipulate the dollar...

With the FOMC set to announce the decision to taper or not taper, forward guide or not forward guide, cut thresholds or not cut thresholds, we thought a reminder of the seven reasons to delay the taper (following what BAML's Ethan Harris calls the recent "punch in the stomach for the economic recovery story") and the four crucial reasons why the Fed can't (or won't) delay the Taper.

In light of this morning's Obama-Boehner volleys, we thought a reflection on the facts was useful. The Congressional Budget Office (CBO) released its 2013 Long-Term Budget Outlook yesterday morning, and its government debt projections are dismal... But the CBO’s featured chart only tells a small part of the story. The baseline scenario happens to be bogus. Even as it shows our addiction to debt worsening, it doesn’t do justice to the severity of that addiction. (You may want to show the chart to your children. After all, they’ll be the ones who’ll have to deal with the debt we’re piling on today.)

• Expectations for Fed to begin to taper asset purchases by USD 10-15bln
• Ranges for pace of Treasury purchases: high USD 45bln, low USD 25bln
• Ranges for pace of MBS purchases: high USD 45bln, low USD 30bln
• Some see FOMC lowering unemployment threshold from current 6.5%
• Summary of Economic Projections and Press Conference from Fed Chairman Bernanke follow the announcement

Residential real estate prices surged in China in August - up 18-19% in first-tier cities - as it appears the slowing of several tightening measures earlier in the year has sparked a full-fledged recovery in the bubble-growing in the Chinese property market. As The FT reports, some investors and analysts have started to express concern about whether China’s property market is veering into dangerous bubble territory, but the government has so far taken a much more dovish line. The fact that the government juxtaposed the soaring prices in the big cities with relative stability in smaller cities merely stoked the fires of hot-money inflows as one analyst noted, "continued effort to paint a picture of still-benign housing price conditions may imply that the central government wants to deal with other issues first before making a very clear stand on the overall housing policies." Restrictions on purchases remain but it seems clear that no new tightening has given developers and investors the green light to blow the bubble even bigger.

And now the response... We're recovering nicely - but no negotiations?

*OBAMA SAYS 'WE'VE COME A LONG WAY' ON ECONOMY
*OBAMA SAYS BUDGET DEBATE MAY BE MOST CRITICAL FOR ECONOMY
*OBAMA SAYS HOUSE ENGAGED IN IDEOLOGICAL FIGHT ON BUDGET
*OBAMA SAYS RAISING DEBT CEILING IS A BASIC FUNCTION OF CONGRESS

*OBAMA: UNPRECEDENTED TO USE DEBT CEILING TO `EXTORT' PRESIDENT

Wondering why bond yields are blowing wider? Seems the Republicans have decided that they won't stand for anything but a defunded Obamacare, smaller deficits (well that won't help the QE), and negotiations over the Debt Ceiling...

• U.S. HOUSE MAJORITY LEADERS CANTOR SAYS FIGHT OVER DELAYING 'OBAMACARE' HEALTH REFORMS WILL CONTINUE INTO THE DEBT CEILING DEBATE
• U.S. HOUSE SPEAKER SAYS THIS YEAR WILL BE "NO DIFFERENT" FROM 2011 ATTEMPT TO LINK DEBT CEILING HIKE TO BUDGET CUTS

Today, the Italian Senate will vote at 8:30 PM whether to formally expel the 76-year old former prime minister, Sylvio Berlusconi. Concurrently, the winner of three of the six Italian elections in the past 20 days will launch a delayed nationwide address on his political future. The contents of said address are unclear however, as Reuters reports, "political sources and local media said he would not use the address to torpedo the fragile left-right governing coalition of centre-left Prime Minister Enrico Letta - at least for now - despite weeks of threats to do so."  Furthermore, as WSJ adds, citing a column in daily newspaper Il Fatto Quotidiano, Marco Travaglio noted that Mr. Berlusconi came in third in the February vote but managed to pick the head of state, the prime minister and the government program. "Given all that, it would be crazy to trigger a crisis," observed Mr. Travaglio, a longtime critic of Mr. Berlusconi. That said, and as is well-known, the media magnate is highly unpredictable and in the past has made several versions of video announcements so he can choose one only at the last minute. However, no matter the content, what is most curious is that the vote, the Berlusconi expulsion vote and nationwide address, as well as the Bernanke press conference, which is also due at 2:30pm Eastern, will all coincide.

The yield on the benchmark 10-year U.S. Treasury bond has risen by more than 84 percent from May to early September, one of the most violent and rapid increases on record. This spike has caused severe convulsions in the bond market, leading many investors to wonder how long the torment can last. But as Guggenheim's Scott Minerd notes, if history is our guide, the answer is that it may be over soon. Investors would be wise to remember that “soon” is a period of time, not a matter of degree. Minerd makes this point to be clear that while long-term interest rates still have room to increase in this historic bear market - maybe even significantly - now may be the most opportune time to purchase longer duration fixed-income securities in the past two years.