Archive - Sep 16, 2014 - Story

Overnight weakness in Asia and Europe was shrugged off. The Dow hit all-time record highs (first since July) and the S&P broke back above 2,000 following headlines proclaiming a "stealth QE" from China (which actually hit the news during the Asia session) and chatter from WSJ's Hilsenrath that The Fed will leave the words "considerable period" in the statement tomorrow. Early weakness in stocks was ripped 25 points higher in the S&P on the back of a 97% correlation to AUDJPY (China-driven), the USD dumped to unch for the week (worst day since May), commodities all took off higher (led by Copper and Oil), and Treasuries flip-flopped to end steeper (5Y -5bps, 30Y +1bp on the week). "Most Shorted" stocks squeezed higher. HY credit compressed with stocks rally but decoupled later in the day. The Nasdaq and Russell (nearing death-cross) remain red on the week despite today's exuberance. VIX was smashed back under 13 (which makes perfect sense because there is no uncertainty this week at all). S&P closed below 2,000 and The Dow "off the highs".

As we discussed earlier, President Obama is sending 3,000 US combat troops into Ebola-fighting danger in West Africa (almost 10 times the number of non-combat troops being sent to Iraq and Syria to fight that other epidemic - ISIS). Speaking from the Centers for Disease Control & Prevention, we wonder if the President will stick to the line that the USA is "safe" (despite scientists predicting a 20% chance of infection here by year-end), that it is contained (despite scientists proclaiming this unprecedented and out of control), and why is the CDC telling US health-workers "now is the time to prepare."

Who could have seen this coming? In yet another example of untruthiness, it appears, according to Joint Chiefs of Staff Chairman Martin Dempsey, testifying before the Senate Armed Services Committee this morning, President Obama would back U.S. advisers accompanying Iraqi troops in battle to combat Islamic State militants if necessary. For now, Dempsey noted, Iraqi security forces are "doing fine," but as Republican, Sen. Jim Inhofe noted, "it is foolhardy for the Obama administration to tie its hands and so firmly rule out the possibility of special operators on the ground." Following Hagel's remarks that the fight will "not be an easy or a brief effort," Dempsey said if it doesn’t succeed, he would not rule out advising Obama to use U.S. ground forces.

The starting point in comprehending the dynamics of modern "markets' is to recognize that once they gain a head of steam, financial bubbles tend to envelope virtually every nook and cranny of the economy, creating terrible distortions and destructive excesses as they rumble forward. In this instance, Wolf Richter explains how Silicon Valley has once again (like 1999-2000) been transformed into a rollicking capital “burn rate” machine that has spawned a whole economy based on striving for bigger losses, not better profits. Even the leading venture capitalists now recognize that the insanity of the dotcom era has re-emerged. One of these days, even the monetary politburo may notice. But by then it will be too late. Again.

With the Ruble hitting record lows once again today against the USDollar, it appears concerns over USD liquidity are growing in Russia. The Russian central bank has unveiled an FX swap operation, allowing firms to borrow dollars in exchange for Rubles for a duration of 1 day (at a cost of 7%p.a.). Of course, this squeeze on USD funding - driven by Western sanctions - will, instead of isolating Russia, force Russian companies (finding USD transactions prohibitively expensive) into the CNY-axis, thus further strengthening the Yuanification of world trade and the ultimate demise of the USD as reserve currency.

While some are shocked by Calpers' decision to abandon hedge funds as an investment class (the first of many such "exits"), there really should be no surprise here. As we have said year after year after year (and so on), it was only a matter of time before limited partners said "enough" and stopped paying 2 and 20 to overpaid asset managers in a world in which central banks have "guaranteed" there is no longer any risk, just to underperform the market for a whopping 6 years in a row now. And to showcase where Calpers decision came from here are just two charts.

"Domestic media (Sina) reported that the PBOC conducted RMB 500bn of Standing Lending Facility operations with the big 5 commercial banks (ICBC, BOC, BoCOM, CCB, ABC). The reports note that the duration is 3 months and the RMB 500 bn is evenly split among the banks. This amount is roughly the same as a 50 bps cut to RRR for the whole banking system on a static basis. There is no official confirmation from the PBOC yet. Still, such an easing would be consistent with our expectation that (1) monetary policy will loosened amid the drastic slowdown in activity growth and falling inflation, and (2) full scale RRR and interest rate cuts are unlikely because they would be viewed as aggressive stimulus."

In a worrying sense of deja-vu all over again, today's rip higher reflects perfectly the US equity market's knee-jerk reaction to the last 'Stealth QE' from China on July 28th. That did not end well as hot money flowed out to the instantaneously "easiest" central bank in the world...

From copper to high-yield credit and from stocks to bonds and gold, markets are reacting violently to the headlines from China that they are unleashing another 500bn Yuan "stealth QE"... everything is rallying.. except the USD (biggest drop since May).

The last week has been dominated by sell-side strategists raising hawkish concerns about this week's FOMC with a focus on the drop of the "considerable time" language describing the period from the end of QE to the start of rate hikes. The Wall Street Journal's Fed-whisperer Jon Hilsenrath just dropped a rather large hint that that the "considerable period" language will remain... “Given the economic backdrop, they don’t want to send a signal right now that rate increases are imminent." Here's what the street thinks...

It has been a while since the PBOC engaged in some "targeted" QE. So clearly following the biggest drop in the Shanghai Composite in 6 months after some abysmal Chinese economic and flow data in the past several days, it's time for some more. From Bloomberg:

• CHINA’S PBOC STARTS 500B YUAN SLF TODAY, SINA.COM SAYS
• PBOC PROVIDES 500B YUAN LIQUIDITY TO CHINA’S TOP 5 BANKS: SINA
• PBOC PROVIDES 100B YUAN TO EACH BANK TODAY, TOMORROW WITH DURATION OF 3 MONTHS: SINA

Just as expected, the Chinese "derivative" currency, the AUD, goes vertical on the news, and the S&P 500 goes vertical alongside:. As for those confused what the SLF is, here is a reminder, from our February coverage of this "stealth QE" instrument.

Yesterday, in the aftermath of the popular anger aimed at Ukraine's president Porohsneko following his "Bohnering" on Ukraine's demands for a free trade agreement with Europe, we said the new president's days are likely numbered. Less than 24 hours later, this has started to play out, and as the live feeds below show, the Kiev parliament is being stormed by what appears to be discontent from the right wing "Right Sector" political group, despite today's ratification of the meaningless EU pact, whose purpose was to offset popular anger at the delay of the trade agreeement. Moments ago from Bloomberg: UKRAINE PROTESTERS ATTEMPT TO ENTER PARLIAMENT BUILDING: UNIAN  Below is a live feed of what may soon be the second political coup in Ukraine in under 1 year.

In our era of omnipotent central banks worshipped by the Status Quo, we have a goddess of financial transitions--Janus Yellen, the two-faced chair/deity of the Federal Reserve - to usher in the Great Transition from risk-on to risk-off.