For Saudi Arabia, The Music Just Stopped: Scramble To Slash Spending Begins As Oil Math Reveals Dire PictureSubmitted by Tyler Durden on 08/25/2015 17:20 -0400
With declining crude revenues clashing head on with the cost of simultaneously financing the state while intervening militarily in Yemen, the Saudis are looking to tap the bond market (a move which could increase debt-to-GDP by a factor of 10 by the end of next year) and some are speculating that the riyal’s dollar peg could ultimately prove unsustainable. Now, as Bloomberg reports, "Saudi Arabia is seeking to cut billions of dollars from next year’s budget because of the slump in crude prices."
Hold onto your bootstraps. Markets are setting themselves up for a surprise as the Fed is still likely to hike rates in September. Today’s ‘risk-on’ move is a function of those expecting delay. Rising levels of market volatility are here to stay and will be magnified by this ‘surprise’. Those ignoring the warnings of a rate hike by Fed officials do so at their own peril.
"I have a gut feel the recent wild swings are a precursor of a more insidious trend... which is definitely not going to be our friend!"
Goldman's 3 key reasons for China's "surprise" rate cut: i) Activity growth weakened meaningfully after a brief rebound in 2Q; ii) Outflows re-emerged and drained liquidity; iii) Equity market has been falling very rapidly. The conclusion: "These cuts are positive moves which are much needed to support the economy and market. But they are unlikely to be sufficient by themselves."
The PBOC cut itself was not surprising, considering the PBOC now has to juggle and micromanage every aspect of the economy, from its sliding currency, to the bursting stock bubble, to record capital outflow, to soaring real interest rates, to the slowing economy. In fact, bulls around the globe will welcome the latest central bank bailout. Which also happens to be the worst aspect of today's intervention, because one can once again toss all the talk that China would finally stop intervening in asset pricing, with today's decision merely perpetuating the market's reliance on central banks. As a reference, this was the second time China cut both RRR and interest rates in 2 months: the last time it did so was during the depths of the financial crisis.
To make people eat their seed corn, we need to add the essential element: a perverse incentive. There’s only one way to make everyone play a perverse game: force. Let’s look at monetary policy in this light.
My advice to my generation if they would like to buy various assets is to just literally say to yourself, "Don't think about the price or what other people are paying. Just ask: 'What would I pay for 1 share of XYZ, knowing it has an artificial edifice around it?'" Then take a swing while flying blind and pray you hit it.
But until that is no longer the case, count me out. Me and my entire generation.
Translation: the Fed is not data dependent, but it is, as we have said all along, entirely market dependent.
- Deutsche Bank Says Rout ‘Very Serious’ as Growth Outlook Dims (BBG)
- Great fall of China sinks world stocks, dollar tumbles (Reuters)
- Global Stocks Fall Sharply Amid Concerns About the Chinese Economy (WSJ)
- Stock Rout Spreads Through Europe After China Plunge (BBG)
- China stocks give up year's gains as 'national team' stays on bench (Reuters)
- The Fed Is Looking at a Very Different Dollar Than Wall Street (BBG)
- French train gunman 'dumbfounded' by terrorist tag (Reuters)
We warned on Friday, after last week's China rout, that the market is getting ahead of itself with its expectation of a RRR-cut by China as large as 100 bps. "The risk is that there isn't one." We were spot on, because not only was there no RRR cut, but Chinese stocks plunged, with the composite tumbling as much a 9% at one point, the most since 1996 when it dropped 9.4% in a single session. The session, as profile overnight was brutal, with about 2000 stocks trading by the -10% limit down, and other markets not doing any better: CSI 300 -8.8%, ChiNext -8.1%, Shenzhen Composite -7.7%. This was the biggest Chinese rout since 2007.
Carnage Continues Across European Stocks; EURUSD Surges Above 1.1500 As WTI Crude Tumbles To $38 HandleSubmitted by Tyler Durden on 08/24/2015 05:02 -0400
Germany's DAX is now down 15% since the "China doesn't matter" devaluation began with most European borses down 3-5% from Friday's close as the day started off with a modest bounce only to test new lows. EURUSD is now up 500 pips in 4 days back to 7 month highs. European bond risk is surging with Portugal up 50bps since China's debacle began. And finally crude continues to get battered, now testing the $38 handle for the first time since Feb 09.
Anyone who listens to a mainstream media pundit, talking head, or spokes bimbo deserves the reaming they are going to receive.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises
On Friday, ahead of the closing stock rout, we forecast that the biggest risk for anyone staying long over the weekend was a disappointment out of China, where the sellside had gotten so excited that a 50-100bps RRR cut was imminent, that the lack of one would surely send futures sliding. Sure enough, as we noted earlier today, much to everyone's surprise and disappointment, the PBOC did nothing (for reasons we speculated upon earlier). Which bring us to this evening's S&P futures, which opened for trading minutes ago, and as expected, gapped by over 0.6% after the Chinese disappointment, down 13 points to 1958 and looking quite heavy.
A non-bombastic discussion of market forces and what to expect next