Archive - May 29, 2014 - Story

in the past year it has became very clear that the asset class where the growth of HFT has been most pronounced is not in equities but in FX - perhaps linked to the tidal departure of all carbon-based FX traders all of whom it now appears were engaging in gross "chat room" mnaipulation - and to a lesser extent, options. But one place that seemed somewhat immune from the ravages of the constant millisecond back-and-forth churn and quote stuffing known as high frequency "trading" were bonds.

No longer.

It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates. After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.

Someone decided that 1436ET was the perfect time to buy $1bn worth of S&P 500 futures (10k contracts) in 1 second (and $1.8 billion in that minute)... this flush of volume is the largest minute of the day and lifted all equity indices and ETFs in one magical move. As a result of the order, bonds rallied even as and VIX is higher on the day.

Francois Hollande is not having a good week - disastrous elections over the weekend, followed by record high numbers of jobseekers (destroying his promise to deliver jobs), and now his banking system is under attack; as the WSJ reports:

US JUSTICE DEPT SEEKS >$10B BNP PENALTY FOR SANCTIONS EVASION: WSJ

A final resolution (and a guilty plea) of the yearslong investigation of the French bank is likely weeks away, WSJ notes but it does remain ironic that in flexing his enforcement muscles, DoJ's Eric Holder is about to crucify yet another non-US bank.

Presenting today's rhetorical pop quiz: spot the odd labor market out, dominated by the financial industry, also known as the place which has benefited by far the most from QE, which may have failed most of America, but certainly has unfailed America's financial industry, where things have never been better.

"Get ready to change your thinking on US Treasuries. The larger bear trend is set to emerge," is the ominous warning from BofAML's MacNeil Curry. As yields keep tumbling lower, he believes, US Treasury yields are either testing or fast approaching levels from which we should see a base and eventual resumption of the larger, long-term bear trend.

When American explorers first traveled through north Texas, Oklahoma and Kansas, they referred to it as "the Great American Desert" and they doubted that anyone would ever be able to farm it. But as history has shown, when that area gets plenty of precipitation the farming is actually quite good. Unfortunately, the region is now in the midst of a devastating multi-year drought which never seems to end. Right now, 56 percent of Texas, 64 percent of Oklahoma and 80 percent of Kansas are experiencing "severe drought", and the long range forecast for this upcoming summer is not good. In fact, some areas in the region are already drier than they were during the worst times of the 1930s.

Moments ago, the Treasury department concluded its auction activity for the week with the issuance of $29 billion in 7 Year Notes (Cusip WN6), which in keeping with the prior two - 2 and 5 Year - auctions earlier in the week, also had a modest tail: the bond priced at a 2.010% yield (73.9% allocation) compared to a When Issued of 2.009%. Then again, considering the big drop in yield from April, when the same auction priced at 2.32% this is perhaps not too surprising.  Notably, this was the first 7 Year auction tail since December, and is once again notable considering the overall strength of the secondary bond market.

According to RIA, quoting Slaviansk people's mayor Vyacheslav Ponomaryov, about 1,200 Ukrainian army soldiers have been killed during a special operation in Slaviansk, and eight helicopters and 15 armored vehicles were destroyed. Supposedly this includes the 1 helicopter whose crash was reported previously. "According to our information, the Ukrainian army has the following losses and damages: 1,200-1,300 people were killed, eight helicopters, 15 armored transport vehicles, and three [artillery] weapons destroyed. They are suffering huge losses. I’m speaking only about Slaviansk," Ponomaryov said in an interview with the Latvian radio station Baltkom.

There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book's popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people. 

It seems shorts keep covering and the Chinese keep buying (through Belgium of course - as they sell CNY, buy USD, and grab the extra yield on Treasuries). Despite stocks relative stability, 10Y yields have just hit 2.40% for the first time in over 11 months (as USDJPY broke down). It seems this morning's dismal GDP print was just enough to confirm the growth/inflation slowing meme (in bond investors' minds) and the yield curve is flattening even further...

Bottom line: someone is dead wrong on the economy, but we are glad that the weathermen formerly known as economists are putting all these timestamps out there in the public domain. Because we eagerly look forward to seeing just what the scapegoat will be when Q2 GDP mysteriously fails to soar to 4%. And judging by what the bond market is doing, the only place that may see 4% growth in Q2 is China (net of all the fabricated data of course).

"For lack of a better term, you’ve got an organized crime syndicate," a whistleblower who works in the Texas VA told The Daily Beast. "People up on top are suddenly afraid they may actually be prosecuted and they’re pressuring the little guys down below to cover it all up." What’s worse, the documents show the wrongdoing going unpunished for years...

But it's the weather... nope... NAR blames excess inventory as giving people too much choice and slowing their purchasing decisions for the notable miss on both MoM and YoY sales. This is the 7th month in a row of declining YoY sales. The 0.4% rise MoM missed expectations of 1.0% as the pent-up demand from a cold winter appears to be missing in action. Of Course NAR is optimistic (but even they are cautious), "an uptrend in closed sales is expected, although some months will encounter a modest setback."

Despite record highs in stock markets and talking-heads explaining that a terrible Q1 GDP print is nothing to worry about, Bloomberg's Consumer Comfort index collapsed to its lowest level in 6 months as 'Buying Climate' collapsed and economic expectations plunged from 48 to 42.5 (7-month lows). Those earning over $100k are happy and comfort soared but the comfort of those earning under $40k plunged to new cycle lows. The Fed won't be happy... need S&P 2,200 for animal spirits to come back again...