Archive - May 8, 2014 - Story

While most mainstream media is focused on villainizing Putin and the ongoing 'diplomacy' in Ukraine, we warned Monday of the dramatically escalating tensions between Vietnam and China over oil-drilling in disputed waters. The initial verbal to and fro - Vietnam angry at the move and China shunning them - was followed by physical interactions (multiple rammings and water-cannon use) and the US then got involved (laying the blame firmly at China's foot calling the move "provocative"). The capital markets appear a little more concerned about where this 'tension' leads as the Vietnamese stock market crashed almost 6% - its largest drop in 13 years.

Reflecting proudly on how her words were received (surprise!) dovishly yesterday during her congressional hearing (and stocks closed green), we are sure Fed Chairmanwoman Janet Yellen will be brimming with "nothing can stop me now" confidence as she heads into the ring with the Senate Budget Committee. The big headline from yesterday's Q&A that "the recent flattening out in housing activity could prove more protracted than currently expected," will we are sure be caveated with excess hope and exuberance today as yet another set of politicians attempt to pin her back down to 6 months. The biggest thing to watch, we suspect, if she reiterates her "sell small caps" recommendation...

Yesterday we correctly predicted that while the world is distracted by this and that, the next real short-term catalyst is the east Ukraine referendum vote on Sunday, whose results would be available as soon as May 11, indicating that, almost with 100% certainty, the Ukraine region would vote to become independent.  This was promptly followed by a skillful diplomatic gambit by Putin who, knowing full well Donetsk would just say no, suggested the referendum be postponed thus giving himself cover when the western press attacked him for using Crimean tactics for the second time in two months. The irony is that as we also explained yesterday, the Crimea scenario is fully in play once more. Confirming precisely that was news from News of Donbass which reported moments ago that in the aftermath of the new certain May 11 referendum, a week later east Ukraine will formalize the Russia annexation process and on May 18 there will be a "sceond round of the referendum where you will be asked to support accession to the Donestk region of Russia."

Having voiced his "serious concern" about a strong foreign exchange rate and low inflation, Mario Draghi came over the top with yet another resounding promise of action...

• *DRAGHI SAYS ECB IS COMFORTABLE WITH ACTING IN JUNE IF NEEDED

This was enough to send the EUR tumbling down from near 1.40 levels (which it hit as traders saw no actual actions) and spark a renaissance in risk-on assets... always the promises... The question - of course - is how long the half-life of this jawbone lasts?

The total number of people claiming benefits in all programs for the week ending April 19 was 2,832,693, an increase of 10,353 from the previous week (on an unadjusted basis) but the headlines will gloat of the drop in initial claims after last week's rather disturbing spike (which temporarily destroyed the pent-up demand post-weather meme). Initial claims dropped 26k to 319k, beating expectations. New York and Massachusetts saw the largest increase in claims while Michigan and New Jersey the largest drop.

The looming threat of a non-inflationary scenario for a group of nations that now have more debt-to-GDP leverage than ever before, more unemployed people that ever before, and more delinquent loans than ever before is indeed a worry for the ex-Goldman Sachs banker, but - so far - Draghi has been "all mouth and no trousers" in the local vernacular. Will he re-promise QE? Negative rates? OMT? Jawbone the EUR down as yet another set of algos buying his bullshit? We'll see...

As The Fed tapers and shifts its decision-making process away from rules-based, model-backed strategies in favor of "we'll know when to tighten when we see it" qualitative hand-waving, it seems the need to maintain teams of PhDs - to mutually masturbate over the historical back-fitted effectiveness of their models - is lacking. As The Boston Globe reports, The Federal Reserve Bank of Boston will cut nearly 15% of its workforce - around 160 jobs - in the largest layoff in over a decade... “It’s obviously a tough decision for us and the folks who are here,” Lavelle said. “It’s really about cost and efficiency.” Austerity strikes... (as it turns out the job cuts are due to losing a key customer - The US Treasury!)

"At today’s meeting, which was held in Brussels, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.25%, 0.75% and 0.00% respectively."

• China’s Trade Unexpectedly Rises (BBG)
• 'We're already not in Ukraine' - rebel east readies secession vote (Reuters)
• Pro-Russian Separatists in Ukraine Reject Putin's Call to Delay Vote (WSJ)
• Vietnam’s Stocks Post Biggest Loss in Decade on China Tensions (BBG)
• Hedge Funds Extend Their Slide (WSJ)
• Carney Looks to Untested Tools as House Prices Boom (BBG)
• New Draghi Era Seen on Hold at ECB as Euro Area Recovers (BBG)
• Woman With Printer Shows the Digital Ease of Bogus Cash (BBG)
• Regulators See Growing Financial Risks Outside Traditional Banks (WSJ)

Despite Mario Draghi and Janet Yellen's (repeat) attempt to steal the show today, the first when the ECB reports its monetary decision (with zero real chance of announcing any change in policy considering all the furious, and failed, attempts to jawbone the Euro lower) as it faces the dilemma of deflationary pressure, record low bond yields and interest rates at record lows coupled with an export crushing Euro just shy of 1.40, and a practical impossibility to conduct QE even as the hawks jawbone a "potential" European QE to death, while Janet Yellen conducts the second part of the congressional testimony this time before the Senate Budget Committee where she will again, say nothing at all, it appears the world will be focused on Russia once again after the latest 24 hour "de-escalation" gambit is now once again dead and buried and on top of it is Putin waving a "come launch a nuclear attack at me, bro" flag.

Yesterday, when like clockwork the algos were fooled by the latest "de-escalation" fig leaf offered by Russia, in which Putin casually threw it out there that east Ukraine should postpone its referendum sending the stock market surging, we said "naturally, since there will be no delay as Kiev does not even bother to discuss the referendum while Donetsk will push on but certainly aware of Putin's distance-providing "reservation", Putin will "sadly" have to accept the referendum results." Less than 24 hours later we are proven right once more when moments ago the head of the elections commission of the so-called Donetsk People's Republic, Denis Pushilin, said the decision was unanimous to go ahead with Sunday's vote as planned. So much for that, and indeed, Putin will "sadly" have to accept the Donetsk decision to become independent, and most likely ask Russia to protect it, in less than a week.