High-yield credit markets saw spreads widen 12bps on the week and high-yield bond prices fell notably as energy stocks faded after Monday's exuberant dead-cat-bounce. Trannies tumbled today off early exuberance gains, ending the week the biggest loser despite lower oil prices. Today's jobs data sparked initial "good news is bad news" weakness, was ramped to Europe's close then faded with Nasdaq and S&P red post-Payrolls. Treasury yields rose on the day (and week) with dramatic flattening as 2Y-7Y maturities up 17-20bps on the week and 30Y only 7bps higher. 2Y yields exploded 17bps for the worst week since Feb 2011 to Apr 2011 highs. The USDollar closed higher today (up 1.25% on the week) led by dramatic JPY weakness (and EUR fading). Despite USD strength, gold gained 2% on the week and silver +5.4% (best week in 6mo) even as oil lost 0.75% for its lowest close since July 2009. VIX tested down to an 11 handle but closed peeking back into a 12 handle, lower on the week. For the 3rd day of the last 4, internals created a Hindenburg Omen cluster.
In the great fiscal scheme of things, October 22, 1981 seems like only yesterday. That’s the day the US public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years). What prompts this reflection is that just a few days ago the national debt breached the $18 trillion mark; and the last trillion was added in hardly 365 days.
The world economy is slowing down and the authorities are fretting.
By now everyone has heard of the NY Fed's most famous employee (who did not work at Goldman Sachs previously): Kevin Henry, who according to his latest LinkedIn profile was recently promoted to Senior Associate at the Capital Markets desk at the NY Fed (and if they haven't, a refresh can be found here, here and here). Which is fine: Kevin deserves all the recognition and accolades that are due to anyone who manages to centrally-plan the world's biggest bond market. Because after all that's what the Fed does: it intervenes in the bond market. Nothing strange about that. And yet we have one question: why does Kevin seem to exhibit an absolute fascination when it comes to equity ETFs?
Consider: European stocks just closed at their highest since Jan 2008; Spanish bond yields hit a record low 1.803% and Spanish youth unemployment hovers near a record high 53.8%; Italian bond yields hit a record low 1.72% and Italian youth unemployment is at a record 43.3%. So once again we ask, why exactly does Europe need sovereign QE? WTF is it that lower rates will do?
THE bubble, the biggest bubble in financial history: an incredible $100 trillion monster that is now growing by trillions of dollars every few months.
The Bank of Russia this week made its heaviest currency intervention in more than a month, according to WSJ, to try to stem the escalating trend of Ruble collapse... but it's not working. Chatter of three significant interventions this week (which are quite apparent in the USDRUB chart) have had less and less positive impact on the currency and even with warnings of jail for FX speculators, the post-intervention selling continues. It appears, however, that the main pressure today is in the Russian bond market as 10Y RUB Bonds cracked 80bps higher to 12.04% yield... the pressure mounts on Putin.
Confused why in the lack of any horrible economic news (unless of course someone leaked a worse than expected November payrolls print which would put QE4 right back on the table) futures are higher, especially in the aftermath of yesterday's disappointing ECB conference? Then look no further than the Yen which has now lost pretty much all control and is in freeplunge mode, rising some 25 pips moments ago on no news, but merely as wave after wave of momentum ignition algos now make a joke of the Japanese currency, whose redline of 123 (as defined by SocGen)is now just 240 pips away. At this pace, Japan's economy, which as reported yesterday has just seen a record number of corporate bankruptcies due to the plummeting yen, may well be dead some time next week. Which, with Paul Krugman as its new and improved economic advisor, is precisely as expected. RIP Japan.
The oil and gas boom in the United States was made possible by the extensive credit afforded to drillers. Not only has financing come from company shareholders and traditional banks, but hundreds of billions of dollars have also come from junk-bond investors looking for high returns. Junk-bond debt in energy has reached $210 billion, which is about 16 percent of the $1.3 trillion junk-bond market. That is a dramatic rise from just 4 percent that energy debt represented 10 years ago. junk bonds pay high yields because they are high risk, and with oil prices dipping below $70 per barrel, companies that offered junk bonds may not have the revenue to pay back bond holders, potentially leading to steep losses in the coming weeks and months. The situation will compound itself if oil prices stay low.
Perhaps those sub-$50 Bakken prices tell us pretty much where global prices are ahead. And then we’ll take it from there. With 1.8 million barrels “that nobody needs” added to the shale industries growth intentions, where can prices go but down, unless someone starts a big war somewhere? Yesterday’s news that US new oil and gas well permits were off 40% last month may signal where the future of shale is really located. But oil is a field that knows a lot of inertia, long term contracts, future contracts, so changes come with a time lag. It’s also a field increasingly inhabited by desperate producers and government leaders, who wake up screaming in the middle of the night from dreaming about their heads impaled on stakes along desert roads.
Wondering why stocks suddenly found a soft patch in the last few minutes of trading? Here is the reason: according to a report in German Die Welt, the ECB's president and former Goldman Sachs employee, Mario Draghi, has just lost the majority on the ECB Executive Board.
In any economy, nothing works in isolation. For every dollar increase that occurs in one part of the economy, there is a dollars worth of reduction somewhere else. The real issue is what the fall in commodities in general, including oil, is telling us about the real state of the economy.
“Can a debt crisis be cured with more debt?” it is difficult to envision a return to normalcy within my lifetime (shorter than it is for most of you). I suspect future generations will be asking current policymakers the same thing that many of us now ask about public smoking, or discrimination against gays, or any other wrong turn in the process of being righted. How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.
US Treasury Warns Investors Underestimate "Potential For A Market Reversal", Take "Low Volatility For Granted"Submitted by Tyler Durden on 12/04/2014 13:26 -0500
"Investors may have taken low volatility for granted and underestimated the potential for a reversal. While quantitative easing policies are intended to encourage investors to buy risky assets, there is also a risk that the perceived reversal of such policies will lead investors to turn the other way, triggering market instability.... Similarly, investors may have become too sanguine about the availability of market liquidity — the ability to transact in size without having a significant impact on price — during both good times and bad. Accommodative global monetary policy, coupled with the Federal Reserve’s purchases of large amounts of low-risk assets and changes in risk sentiment, helped to compress volatility and risk premiums. "
But, but, but all the clever talking heads said he had to do it now...
*DRAGHI SAYS ECB TO REASSESS CURRENT STIMULUS NEXT QUARTER, MAY NOT DECIDE ON NEW MEASURES IN JANUARY
*DRAGHI: DECISION TO CHANGE BALANCE SHEET LANGUAGE NOT UNANIMOUS
This is not what the market wanted to hear - Draghi kicking the can with no indication they are any closer to getting Zee Germans on board with direct monetization of European fiscal irresponsibility.