It's one of those days. The world looks on as Bernanke speaks and the S&P 500 levitates 20 points in a straight line wealth-effect-confirming way. However, it appears the FX and Bond markets just can't get excited about all this... Of course, all that matters is the foot on the neck of spot VIX (which is now back below 15%) and Bernanke's confirmation that housing has bottomed (again).
Europe's dual problems of low growth and weak profit margins combined with this week's vote in Italy are likely to usher in another period of European underperformance, but as JPMorgan's Michael Cembalest notes, that is the least of it as Italy overtook Japan with the worst real GDP growth of all advanced economies since 1991. In fact, other than wartime, the last few years in Italy have been the worst for growth since Italian unification in 1861. But, before the rest of Europe gloats that 'they are not Italy, or Greece', he reminds us that the slowness of French GDP growth in recent years is the slowest in over 80 years. As he warns, all things considered, from an investment standpoint, caution continues to be warranted as problems appear to be taking their toll on EU profitability.
And yay verily there was much rejoicing that Italy managed to sell a few billion euros worth of its sovereign debt to its banking system (albeit at the highest accepted yield since October 2012). However, the rejoicing was hardly effusive as bonds and stocks gained only marginally, buoyed by catch-up from yesterday's US equity markets. Swiss 2Y rates remain at zero and EUR-USD basis swaps came back a little but overall this bounce is nothing to celebrate with Italian 10Y spreads still 47bps wider on the week and Spain 23bps wider. Italian stocks outperformed credit, now down 2.6% on the week as Europe's VIX followed US down but remains above Monday's close at 22%. EURUSD ran up to test the 1.3130 stops and faded back to its comfort zone around 1.3100. As a reminder, European bank spreads are holding at their widest in 3 months and point to notably weaker prices in European financial stocks (were of course they allowed to trade in a free non-short-sale-banned market).
There was much press coverage of the December jump in European bank deposits: a veritable litany of pundits said that it was an indication of the recovery in the European financial system, how faith in the banking system is coming back, and that European consumers are so wealthy they actually have excess cash they can deposit at their bank. Perhaps it is not very surprising, then, that we have yet to hear a peep about the fact that overnight the ECB reported that deposits at all key core and peripheral European countries declined. Wait, we know: "it's seasonal."
A week after the epic fail of Atlantic City's Revel casino, and in the middle of the gambling 'mecca's rebuilding, the mayor of this always-above-board city has voted himself a $16,000 per annum pay rise; why not, he is entitled, right? Well it seems Chris Christie has a few things to say about that:
*CHRISTIE BLASTS ATLANTIC CITY MAYOR FOR $16,000 PAY RAISE
*CHRISTIE SAYS A.C. GOVERNMENT `GOING DOWN THE CHUTE'
*CHRISTIE SAYS ATLANTIC CITY GOVERNMENT IS `GOD-AWFUL'
Volume remains 'average' but there is one corner of this market that has gone full retard today. Despite rising energy costs, the Dow Transports has surged 3% - thanks in large part to Kansas City Southern, JB Hunt, and Union Pacific which account for more than half the TRAN gains. Presented for your visual adoration, Trannies gone wild...
China has been busy reverse engineering military equipment again, this time of the maritime variety, as it launches its first stealth frigate. Supposedly this will make incidents such as this month's "radar lock" tension over the Senkaku islands a thing of the past, as by the time Chinese boats want to be seen, they will be visible with the naked eye. The only question is whose secret plans were hacked in the procurement of the design plans. From BBC: "China's navy has taken delivery of the first of a new kind of stealth frigate, as tension continues with neighbouring countries over maritime borders. The Type 056 stealth frigate has a sleek design that helps it evade radar detection, and needs just one-third of the crew used by its predecessor." Needless to say, the timing of the launch is "just right", and will serve to underscore China's position on the disputed gas field next to several barren islands in the East China Sea.
Last year was a record one for major new discoveries, and 2013 has so far demonstrated that the road to discovery still has plenty of mileage. The past two months alone have netted new finds in Egypt, a flurry of promising exploration results in East and West Africa, some important moves toward commercial viability in Kenya, more gas in the North Sea, an unexpected junior discovery in Brazil - and of course, more gains in Texas. Riding high on a year of brilliant discoveries, companies are drilling deeper and expanding exploration like never before. These are the top finds for January and February that should be on your radar and sure enough as we have been vociferously discussing, Africa is increasingly the focus of developed nations' resource hunting.
Yesterday Bernanke testified before the Senate: today it is the turn of the House to grandstand. The prepared remarks are the same, but the Q&A will certainly be different, and will focus mostly on political talking points surrounding the sequester, with little to no talk of actual monetary policy. After all, the last thing anyone in Congress wants is the man who provides the deficit funding to pull the punch bowl.
Despite Abe's protestations, it would appear - from WSJ's index of Starbucks coffee prices around the world - that Japan's currency 'value' is similar to the US while it is Mr. Hollande (in France) that has more reason to hope for a currency devaluation in his country. With India and Mexico showing the lowest price for a grande latte (suggesting undervalued currencies), it appears Europeans (from Madrid to Paris to Athens) pay significantly more for a latte than even the New Yorkers. Forget the Big Mac Index, forget Purchasing Power Parity - the Scandinavians are suffering from over-priced currencies and significant divergence from Coffee Price Parity.
The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.
As expected, the January Durable Goods was a big miss to expectations, printing at -5.2% on an anticipated plunge in aircraft orders, worse than the expected -4.8%, and a plunge from the downward revised 4.3% in December. However, where there was a glimmer of hope, was the ex-transportation number, which rose modestly from 1.0% to 1.9%, on expectations of a 0.2% flat print. More curious, was the schizophrenic split in Capital Goods Nondefense ex aircraft, notably the Orders, which soared 6.3% on expectations of a 0.0% print, and up from a revised -0.3% in December, versus a drop in Shipments of -1.0%, down from 0.2% previously. As Bloomberg's Joe Brusueals called it, a "classic split decision" reflecting fiscal drag via reduced defense spending, modest gains in core economy. Bloomberg economist Rich Yamarone added that the decline in shipments of nondefense capital goods ex-aircraft was "not a promising start" for 1Q business investment. We agree, as uncertainty in the US economy is back on the table and adding to European uncertainty.
Today’s big event was Italy's 10% auction. Buyers can’t ignore yield, and we suspect many were “encouraged” to participate. But a decent Italy auction doesn't change the brutal facts. Electoral fall-out blankets the Euro battlefield, but it was decisions made years ago that have brought us to this blasted heath. Markets are caught in... Stalemate. On one side you have the disbelief on the Italy election (although why markets are surprised we cannot fathom) and all that entails about rising uncertainty on the Euro. On the other is the fact buyers need to invest. From there it becomes a debate about whether the Italy election was just another minor stumble that can be glossed over, or is it part of a more significant fundamental shift? We suspect market fears, uncertainty, and the global fundamentals will likely see the Euro crisis reveal itself again in four distinct ways in coming months.
There's a reason why Wall Street is so "beloved" by 99% of the people, and that reason is today best summarized by Jamie Dimon's 'witty' retort to Mike Mayo, perhaps the most hated banking analyst, who asked the JPM CEO a simple question - why affluent customers would not pick UBS over JPM due to a mismatch in capital ratios, to which Dimon's response is even simpler: "that's why I'm richer than you." No logic, no rationale: all about the bottom line, which to Jamie at least is all that matters. As for Mr. Dimon's pending application to purchase a Micronesian private island, we would surmise that the wealth mismatch is far more due to the too big fail banking system which means every time Mr. Dimon uses hundreds of billions in excess deposits to corner the IG9 market or to pursue any other uber-levered venture which blows up in his face even as the firm's highly accurate VaR.xls spreadsheet outputs the RAND() function, the government, also known as JPM's OpCo 1, will rapidly rush to bail him, and his riches, out.
- Italy sold EUR 6.5bln in 5y and 10y BTPs this morning, solid b/c and competitive yields, especially when considering the uncertain political situation in Italy.
- Moody's also said that Italian election is indirectly credit negative for other pressured EU sovereigns.
- Fears rise that ECB plan has a weakness as the strings in the Eurozone bond buying programme may be its frailty.