Archive - Sep 2014 - Story

"Good news" it would appear in the exuberant ISM and construction data, has morphed into bad news now that Europe has closed and US equities are tumbling. Despite the best efforts of VIX and JPY, the S&P 500 cash index just broke below the crucial 2,000 level.

It has been a bad year for Malaysian Airlines: following the disappearance of MH-370 (which to our knowledge still hasn't been found), and the crash of MH-17 (which to our knowledge still hasn't had its Kiev ATC recordings released) the country's national carrier reported it would be delisted, and nationalized, with a follow up report last week that some 6,000 workers would be laid off to enjoy the recovery "confirmed" by the market's all time highs on their own. The year not only got worse, but outright bizarre, macabre and morbid following a marketing ploy revealed last week in which would-be passengers were given a chance to win a ticket if only they shared their... bucket list?

The weekend's headlines reeled from the collapse in global manufacturing PMIs and with them the last best hope for the world's economies to reach escape velocity all on their own. However, there was one nation that did not plunge... there was one country whose growth (based on the soft survey data) is at 10-month highs. Perhaps this is the chart that President 'we need moar sanctions and costs' Obama does not want Angela 'umm, wait a minute' Merkel to see...

The CDC's worst nightmare is coming true. Despite reassurances from the government that it was 'contained', the Ebola outbreak in Nigeria is accelerating fast. Health Minister Chukwu said that 17 had now been infected and 271 were under surveillance (including most horrifyingly, 72 in Lagos). In addition, Congo is seeing cases increase rapidly, with WHO reporting 53 cases of Ebola (31 dead) and warning, perhaps ominously, that there is no link with the West Africa strain. Liberian President Ellen Johnson Sirleaf said the situation in her country "remains grave," adding "People now don't see this as a Liberia or West Africa crisis. It could easily become a global crisis." Furthermore, Doctors-without-Borders warns, "the world is losing the battle to contain the Ebola epidemic."

The hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility. No shock is needed to bring down these fragile corporate structures: existing debt and the slightest tremor of global recession will be enough to topple the rickety facade.

It appears JPY weakness (or generalized USD strength) is mirroring the demise of precious metals (and oil) this morning. Gold's 1.7% drop is the biggest in 6 weeks and drops the yellow metal to near 3-month lows. Treasury yields are up 5-8bps at the long-end. Troublingly, for the carry bulls, equity futures are not playing along with the JPY weakness.

ISM Manufacturing has risen almost without hesitation for the seven months from the January collapse to new 3-year highs, printing at a dramatic 59.0, its biggest beat in over a year, just shy of the recovery cycle's highs in 2011. New orders grew for the 15th month in a row to the highest reading since 2004! Earlier, Markit's US PMI missed expectations and fell modestly from preliminary data to 57.9, but moved to its highest since April 2010. Construction spending also surged, rising 1.8% (smashing expectations) - its biggest MoM gain since May 2012.

According to Piers, this is breaking news. Which, incidentally, may explain not only his show's abysmal ratings, but why he is now unemployed.

BREAKING NEWS: I am no longer a @CNN employee.

— Piers Morgan (@piersmorgan) September 2, 2014

"Herein lies our dilemma with bonds. We've been a member of the lower yields for longer camp for a number of years now due to our near-term growth and inflation outlook and our belief that financial repression is rife. However we also think that debt restructuring or inflation will eventually be the only way of successfully reducing debt burdens for many countries with the latter route the most likely. As such whilst bonds are a near-term safe haven they are also likely to be very poor real investments longer term. Timing the big switch in view on this will be one of the defining investment moments of the next few years. Let's hope we're lucky."

"We the undersigned are longtime veterans of U.S. intelligence. We take the unusual step of writing this open letter to you to ensure that you have an opportunity to be briefed on our views prior to the NATO summit on September 4-5. You need to know, for example, that accusations of a major Russian "invasion" of Ukraine appear not to be supported by reliable intelligence. Rather, the "intelligence" seems to be of the same dubious, politically "fixed" kind used 12 years ago to "justify" the U.S.-led attack on Iraq. We saw no credible evidence of weapons of mass destruction in Iraq then; we see no credible evidence of a Russian invasion now. Twelve years ago, former Chancellor Gerhard Schroeder, mindful of the flimsiness of the evidence on Iraqi WMD, refused to join in the attack on Iraq. In our view, you should be appropriately suspicions of charges made by the US State Department and NATO officials alleging a Russian invasion of Ukraine."

While yesterday everyone was focusing on the ongoing escalation in Ukraine, or BBQing, the real story was the sudden and quite dramatic collapse, or as we called it, "bloodbath" in global manufacturing as tracked by various PMI indices. Here is the summary.

As we explained previously, the market appeared woefully under-priced for the potential risk of a Scottish "yes" vote. However, this weekend saw the margin between 'yes' and 'no' voters narrowed dramatically (53% "No" vs 47% "Yes" - a 6-point spread now versus a 14 point spread just 2 weeks ago). UK Gilt yields are higher, GBP is falling (its lowest since March) and implied volatility has spiked by the most since 2008 as hedgers pile in, now suddenly fearful.

Back in June, when the political career of Eric Cantor came to a sudden, stunning end at the hands of an unknown "tea-partier", we commented that the biggest losers from Cantor's ignoble fall from Congressional grace were his biggest donors. Less than three months later, their loss is Cantor's gain, who after a long auction process has finally, and very expectedly, sold himself off to the highest bidder which as the WSJ reported overnight was none other than boutique M&A advisory firm, Moelis & Co. Per the WSJ, "Mr. Cantor, 51 years old, will be a vice chairman and board member at the firm, effective this week, he and Moelis founder Ken Moelis said in a joint interview on Monday.

• Ukraine Shifts to Defense Against Russian Incursion (WSJ)
• U.S. forces carry out operation against al-Shabaab in Somalia (Reuters)
• Bond Markets Tilt Toward Frankfurt as Draghi Negates Fed (BBG)
• Another "unexpectedly" - Swiss Economy Unexpectedly Stalls as Euro Area Takes Toll (BBG)
• Japan's 'Abenomics' feared in trouble as challenges build (Reuters)
• Germany Imposes Nationwide Ban on Uber's Cab-Hailing Service (WSJ)
• Japan's 'forward guidance', the GPIF, has "already begun a highly anticipated portfolio reshuffle" (WSJ)
• Detroit Brings Bankruptcy Plan to Court With Billionaires (BBG)
• Burger King has maneuvered to cut U.S. tax bill for years (Reuters)

Just when we thought centrally-planned markets could no longer surprise us, here comes last night's superspike in the USDJPY which has moved nearly 100 pips higher in the past few trading days and moments ago crossed 105.000. The reason for the surprise is that while there was no economic news that would justify such a move: certainly not an improving Japanese economy, nor, for that matter, a new and improved collapse, what the move was attributed to was news that Yasuhisa Shiozaki, who has been advocating for the GPIF to reduce allocation to domestic bonds, may be appointed the Health Minister when Abe announces his new cabinet tomorrow: a reshuffle driven by the fact that the failure of Abenomics is starting to anger Japan's voters. In other words, the GPIF continues to be the "forward guidance" gift that keeps on giving, even if the vast majority of its capital reallocation into equities has already long since taken place. As a result of the USDJPY surge, driven by a rumor of a minister appointment, the Nikkei is up+1.2%, which in turned has pushed both Europe and Asia to overnight highs and US equity futures to fresh record highs, with the S&P500 cash now just 40 points away, or about 4-8 trading sessions away from Goldman's revised 2014 year end closing target.