Archive - Sep 3, 2014 - Story

The chance of EURCHF breaking the peg at 1.2000 have increased from 10% to 25-30% based on European Central Bank monetary policy, geopolitical risk and a lack of policy choices for the Swiss National Bank. This means that being long EURCHF no longer is a safe bet and although the 70% chance of the floor being both defended and protected is still high, the tail-risk involved is becoming too concerning.

Sustainable? Thanks to various massive airplane orders (as Ex-Im is threatened with extinction), US Factory Orders rose 10.5% MoM in July - the biggest MoM rise ever. However, this was a miss against expectations of an 11.2% rise and perhaps most critically, Factory Orders Ex-Transports dropped 0.8%, also missing expectations with its worst print since March 2013.

Just three months ago, everyone was a believer: bonds traded well above par, Europe's recovery was on track, and Portugal's banking system was a shining example of how Europe's bailout program worked (and Goldman was pitching SPVs full of this crap to any and all greater fools). Today - the ugly truth is exposed as Bloomberg reports, Espirito Santo International debt attracted potential buyers at just 2% of face value. Of course, the words "contained" are trotted out to explain how this is a one-off and not at all representative of the rest of the European banking system. But... Howard Marks' Oaktree Capital seems to disagree - "We continue to think Europe will provide a substantial quantum of attractive investment opportunities for all of our strategies and in particular distressed debt," as a record amount of bad loans are being offloaded by European banks ahead of the stress tests.

Russia did this... "These are facts, provable," President Obama declared... we let him continue...

This month's Bill Gross letter, notably shorter than usual, is as close to the bond manager discussing an Austrian economics worldview as we will likely ever see him: in brief, it's all about the credit/money creation, with an emphasis on the use of proceeds of said creation under ZIRP, i.e., malinvestment , or as Gross puts it: "credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring."

• Confusion as Ukraine and Russia announce progress towards peace (Reuters)... but not for stock buying algos, they know everything
• Obama Expresses Skepticism About Possible Ukraine Cease-Fire (WSJ)
• Fighters Unwind in Russia Where Beer Doesn’t Spell Death (BBG)
• Despite dangers, U.S. journalist Sotloff was determined to record Arab Spring's human toll (Reuters)
• New Beheading Video Spurs Calls for Global Response (BBG)
• Christie’s Spending on Outside Lawyers Passes $50 Million (BBG)
• IEX to Apply for Exchange Status (WSJ)
• UK says not ruling out airstrikes against Islamic State, says hostage video genuine (Reuters)

Heading into the North American open, the bulk of the morning’s price action has been provided by news that Ukrainian President Poroshenko said that he reached an agreement with Russia's Putin on a "permanent cease fire" in Eastern Ukraine's Donbass region. This saw an immediate spike higher in European equities with the DAX future rallying and breaking above its 100DMA seen at 9644.50, thus extending earlier gains that stemmed from the strong performance in Asia-Pacific equities, while the e-mini S&P once again printed a fresh record high. However, these moves staged a partial reversal amid comments from Russia’s Putin that he denied that such an agreement had been reached as Russia is not a party to the Ukraine conflict. In stock specific news, Russian exposed Raiffeisen Bank outperforms Europe (+7%) in reaction to the geopolitical developments, while Hugo Boss have underperformed throughout the session following a share placement which came in at the lower end (-5.3%).

The comedic value of developments out of Ukraine, especially when it comes to "de-escalation", truly has no equal. Case in point, events from the past three hours, when we learned that there is a new Ukraine ceasefire, there is no Ukraine ceasefire, Putin is looking for a ceasefire but can't be part to a agreement as he is not "firing", NATO is pushing again, Ukraine demands special treatment, the Ukraine rebels were never even consulted on the latest ceasefure, and so on. End result: futures just hit new all time highs.