Bond

 The analogy is as if you notice an ember smoldering in a combustible forest you might be only somewhat cautious, perhaps even rationalizing it away.  But if you then notice a second ember smoking up...

Government interference by both central banks and regulators (the latter are desperately fighting the “last crisis”, bolting the barn door long after the horse has escaped, thereby putting into place the preconditions for the next crisis) has created an ever more fragile situation in both the global economy and the financial markets. As the below charts and data show, price distortions and dislocations have been moving from one market segment to the next and they keep growing, which indicates to us that there is considerable danger that a really big dislocation will eventually happen.

• Gloomy mood prevails despite calmer commodities (Reuters)
• A Strong Dollar Hurts China More Than the U.S. (BBG)
• China Sets Yuan at Four-Year Low in ‘Stress Test’ (WSJ)
• Dow Chemical and DuPont Are in Advanced Talks to Merge (WSJ)
• Yahoo scraps plan to spin off Alibaba stake (Reuters)

Overnight market action has largely been a continuation of Tuesday's key themes with European stocks falling as a selloff in mining companies extended to a 7th day, even as metals prices rose and crude oil rallied modestly from a six-year low after yesterday's API crude inventory draw. U.S. equity futures have rebounded from modest declines, as emerging-market shares extended their losing streak to a 6th day while Asian stocks dropped to 2 month lows.

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Wake up world, the EU hasn’t experienced 2% inflation since BEFORE the Crisis erupted in earnest in 2012. Three NIRP cuts and over €1 trillion in QE later, the EU is on the verge of deflation again.

Considering the plethora of specials on the curve, which included both the 2Y, 3Y and the 10Y, it is hardly surprising that many took opportunity to cover the structural short headed into today's auction by purchasing paper in the primary market.

Man Group, which runs $76.8 billion in assets, said on its website that its $4.4 billion AHL Diversified fund lost 5.1% on Thursday. Among other funds to have been running bets, to a greater or lesser extent, against the euro were Brevan Howard Asset Management, which oversees about $25 billion in assets; Tudor Investment Corp.; Moore Capital Management; and Caxton Associates, said investors. "Pretty much everyone was short the euro. The view was very clear for everyone."

While it will hardly come as a surprise to its employees (who were warned a week ago that 25% of all fixed income workers would lose their jobs in the immediate future) most had hoped that the bailed out bank would at least have the ethics to wait with the layoffs until after the new year, now just three weeks away. It did not.

Sales of American Eagle gold coins at the U.S. Mint surged in November, with gold demand nearly tripling month-over-month. China's gold reserves rose by another 21 tonnes in November, the biggest bout of gold buying since China began disclosing monthly data on it's gold reserves in June

Despite these very high levels of demand, gold prices fell sharply in November - from $1,141/oz to $1,070/oz or 6.6%.

Last week we asked (rhetorically) if "something just blew up in junk?" We have the answer today, as triple-hooks (CCC-rated debt) in the junk bond market have crashed through the worst levels of 2011 and are now at the highest yields since July 2009. Amid this complacency still reigns in the equity market (just as it did when the last credit cycle turned).

Over the weekend, in its latest quarterly presentation, the Bank of International Settlements made what may have been a very premature assessment that China is now contained. Judging by events in the past 24 hours, the reality is anything but.

The public-to-private sector "revolving door" has crossed into the macabre twilight zone.