Yet again, early exuberance in stocks - which was entirely unsupported by credit and bonds - plunged back to reality late in the day. Intraday volatility in Russell and Trannies was unbelievable with 3-4% swings (Trannies best day in 14 months before the tumble - but managed to close back above its 200DMA). Since Friday, Treasury yields are 6-9bps lower and the dollar rallied back to unchanged today. The big story was the total collapse in oil prices into their close (accompanied by weakness in CAD and EUR, stocks, and bond strength) as it appears someone large got a serious tap on the shoulder to liquidate (WTI under $82 -4.4%, biggest drop in 2 years). Copper gained as gold and silver slipped modestly on the day. HY credit pushed back above 400bps (widest in 13 months) as VIX broke above 24.5 briefly in the last hour (from below 21.5 at its lows) highest since June 2012.
The head of the San Francisco Federal Reserve Bank on Tuesday said he would be open to another of round asset purchases if inflation trends were to fall significantly short of the U.S. central bank's target. Although he said it would take a big shift in the U.S. economic outlook for the Fed to restart its bond buying, John Williams said the possibility of a new downturn in Europe and other global economic woes pose a risk to the United States. "If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider," Williams said in an interview with Reuters.
Equity markets live and die on several well-established conventions, according to ConvergEx's Nick Colas, noting that these are the rules that investors use as the bedrock of their fundamental analysis. The volatility of the last few weeks shows that some of these paradigms are now under attack. Chief among the question marks: “Do central banks always have the power to tip the balance between growth and recession?” Another rising concern: “Can stocks constantly shrug off recessionary signals from commodity and fixed income markets?” Lastly, “How many exogenous, if largely unpredictable, global events can equities ignore before their collective weight halts a bull market?” Bottom line: the debate on these topics isn’t over for October or the balance of the year.
While Greek leaders are proclaiming victory, intending to exit the bailout plan early and fund themselves in the public marketplace - just as they did in April (despite record poverty, unemployment, and suicides); it appears investors are a little less sanguine about the prospect. Greek bond yields have topped 7% for the first time since March and any gains from the 5Y bonds sold to hedge funds in April have now gone (and Greek stocks are at 13-month lows). The driver of recent weakness appears to be fears over whether Draghi's OMT will ever be real enough to monetize Greek debt and a re-rating based on more standalone risk if Greece were to exit the bailout program early.
Just when you think the selloff couldn’t get any scarier, it did. The last hour of trading took over 1% out of the S&P 500 in rapid fashion, reportedly on fears of an Ebola check at a major U.S. airport. Today we offer up a “Top 10” list of specific markets and indicators to watch for signs of a near term market bottom. They include the CBOE VIX Index (key levels at 26 and 32), the action in small cap stocks and crude oil, and the dollar. Less quantifiable issues – but important nonetheless – are headlines related to Ebola (probably getting worse before better), 10-year Treasury bond yields (2.0% and 1.5% possible here), and European policymakers addressing a host of difficult monetary and fiscal policy issues. Bottom line: this is unlikely to be a dramatic “V-bottom” low given the range of issues of concern to investors. Look for the majority of our “Top 10” to stop going down before calling a bottom.
So… we’ve got a weak and fragile market, losing two of its biggest drivers… at the same time that the Fed is ending QE. This is a recipe for a potential bloodbath. If we wipe out the “bubble” portion of the market move from 2009, we’re going to 1,250 on the S&P 500.
According to Wells Q3 Earnings Supplement, while Mortgage Applications declined from a transitory one year high of $72 billion in Q2 to $64 billion, this number is going far lower. The reason: Wells' Morgage Application Pipeline just tumbled back to $25 billion, matching the lowest number since Lehman, and putting an end to any debate about the state of the US housing market.
With this in mind we hope the Swiss people display their fierce independence and reject the advice of the "experts," many of whom got us into this mess, in favour of the policies that have kept them peaceful and prosperous for centuries ...
Seemingly catalyzed by opaque black-box bank earnings (and aided by a run for 107 stops in USDJPY), the S&P has jerked 14 points higher in a few minutes as bond yields remain entirely unimpressed in an uncomfortable case of deja deja deja vu from last week. 10Y yields are below 2.20%, 30Y under 3.00%, and 5Y under 1.5%.
- No Happy Ending for Investors in Central Bank Fairy Tale (BBG)
- Ebola Response Strains Hospitals (WSJ)
- Obama, foreign military chiefs, to thrash out Islamic State plans (Reuters)
- Draghi’s ‘Whatever It Takes’ Plan on Trial at EU Court (BBG)
- Too-Big-to-Fail Banks Face Up to $870 Billion Capital Gap (BBG)
- Iran’s Message to World: You Need Us to Fight Islamists (BBG)
- Facing new oil glut, Saudis avoid 1980s mistakes to halt price slide (Reuters)
- Ukraine Grannies Outprice Banks on Hryvnia Black Market (BBG)
- HK police use sledgehammers, chainsaws to clear protest barriers, open road (Reuters)
- Gazprom Quarterly Net Rises 13%, Misses Estimate on Ukraine Debt (BBG)
Marc Faber warned last week that central-bank-funded deficits were creating bigger and bigger governments which implicitly reduce the dynamism of the economy and slow growth. Today, it was billionaire venture capitalist Peter Thiel's turn to make the anchors on business media squirm a little in his unleashed truthiness. Having predicted the current surge in volatility just weeks ago (due to the end of QE), Thiel believes "the thing that is most distorted is the bond market and fixed income, and perhaps less on the equity side," but, he warned, "we certainly are back on a government bubble of massive size," and as Faber notes, that means slower growth as Thiel notes, with regard Tech investing "investors always overrate growth."
“Hyperinflation and hyper-deflation are just two different forms of the same phenomenon: credit collapse. Arguing which of the two forms will dominate is futile: it blurs the focus of inquiry and frustrates efforts to avoid disaster.”
While today's market dump was certainly dramatic, it was a function of the scant liquidity in the market (as we warned would be the case first thing) and outsized moves following last week's mauling, not the result of any fundamental (or not so fundamental) news. That could change tomorrow, and change for the worse, because as Barclays reminds us, tomorrow is when the European Court of Justice (ECJ) is scheduled to hear testimony on the ECB’s non-existent Outright Monetary Transactions program (OMT). Recall that the OMT is the imaginary (again: non-existent) byproduct of Draghi's "whatever it takes" speech: a byproduct that was supposed to exist purely in the imaginary realm (as it was merely a verbal bluff, one which was never meant to be actually activated), and never actually take practical shape (hence, why the OMT's legal term sheet still does not exist, over two years later). Sadly for Draghi, and the entire Deus Ex theater that managed to send European peripheral bonds from record wides yields to record low, tomorrow it will attain some much dreaded shape.
Just as we warned, liquidity was incomprehensibly low today (below normal pre-market levels during the peak of the trading day) and the intraday whipsaws were meteoric as a closed cash bond market enabled the slightest twitch in USDJPY to send S&P algos into conniptions. Biotech crashed. Trannies were ripped ridiculously higher at the open - then collapsed into correction (-11% from highs); US Airlines have fallen for 6 straight days, crashing 17% (with today's 7% plunge - driven by chatter over airborne Ebola - its biggest in over years). Tresury futures implied a notable drop in yields across the curve (10Y -7bps at 2.21%, 30Y 2.97%, and 5Y 1.45%). The USdollar closed -0.33% led by EUR and JPY strength (but AUD surged 1% extending gains after China data). Gold ($1234), Silver, and copper all gained on the day as WTI fell once again (despite some intraday strength in the middle of the day). Stocks "flash-crashed" on very heavy volume in the last 30 mins with VIX breaking above 24 (highest in 16 months). All major equity indices are now below their 200DMA with the worst 3-day loss since late 2011.
"So bye bye to my piece of the pie... I poured my paycheck into the Russell, Now my cash account's dry... It's just one month from a new all-time high, And now we're right back where we were in July..."