There is one chart that shows that underneath the placid surface of the S&P not all is well. The chart is the following, and demonstrates the substantial recent selloff in US bank stocks, which have been a near-flawless 'canary in the coalmine' ahead of major market inflection points, and which have successfully predicted most major crashes inthe past several decades.
Rates shock: market now pricing only one Fed hike over next 3 years. As bond yields in Europe and Japan hit new historical lows this week, the US 10y yield fell to a 4-year low, just 20bps above its 2012 historical lows. This followed a weak payrolls report, Brexit uncertainty, the beginning of the ECB’s corporate bond buying program and a very dovish June FOMC meeting which significantly cut rate forecasts in the out years.
The only thing that can halt the tsunami of bond buying, would be a Bond Shock, an event that is certain to take place, the only question is when. As BofA points out, the relentless chasing after government paper will change "if Quantitative Failure spreads from Europe & Japan to the US." Here's how to time it and what it would look like.
The worst case outcome for many Indian investors came true this morning when head of the RBI said he would return to academia when his term ends on Sept. 4. Rajan was generous in his parting words, saying government reforms, together with steps by regulators will lead to greater job growth, prosperity for our people. Rajan said that “I will, of course, always be available to serve my country when needed" and added that “I am confident my successor will take us to new heights with your help."
In the aftermath of the tragic murder of British Labour MP Jo Cox, the most poignant - and debated - question that has emerged is whether the shooter, 52-year-old white male Thomas Mair, was motivated by political ideology especially since as some eyewitness have claimed he shouted "Britain First" during his deadly attack and is now being probed for "far-right links", or if he was simply mentally ill.
The approximate hour Janet Yellen spent wandering in circles and spewing double talk during her presser yesterday was time well spent. When the painful ordeal of her semi-coherent babbling was finally over, she had essentially proved that the Fed is attempting an impossible task. And better still, that the FOMC should be abolished. The alternative is real simple. It’s called price discovery on the free market; it’s the essence of capitalism.
"Central banks have lost the “War against Deflation”. They have failed to stimulate animal spirits depressed by the 4D’s of excess Debt, financial Deleveraging, aging Demographics and technological Disruption. This changes if Quantitative Failure spreads from Europe & Japan to the US. A rise in US bank CDS and/or a dive in assets related to consumer & housing credit would be very negative for global asset prices in our view. Note the new whispers of a peak in the US consumer credit cycle which, if true, at a time of zero rates in an $18 trillion, consumer-led economy would be concerning."
While it may very well not last and all of yesterday's gains could evaporate instantly if the Brexit vote is set to take place as scheduled, all 10 industry groups in the MSCI All-Country World Index advanced, with the index rising 0.7% trimming the week’s drop 1.6%. The Stoxx Europe 600 Index rose 1.4%. Futures on the S&P 500 were little changed, after equities Thursday snapped their longest losing streak since February. . Oil rose, paring its biggest weekly decline in more than two months. Bond yields around the globe fell.
England’s upcoming vote on June 23rd may be the first of several votes that reveal the deep flaws embedded in the European Union. In particular, Europe’s undercapitalized and overleveraged banks are dangerously exposed to rising political unrest.
One of the oddest things in this increasingly odd world is the spread of negative interest rates everywhere but in the US. One answer is that the Bank of Japan and the European Central Bank are buying up all the high-quality (and increasing amounts of low-quality) debt in their territories, thus forcing down rates, while the US Fed has stopped its own bond buying program. The other answer is that this is just one of those periodic anomalies that persist for a while and then get arbitraged away. And Brexit might be the catalyst for that phase change.