We could focus on whatever events took place in the overnight session or the seasonally-adjusted economic data avalanche that will dominate US newsflow over the next two days (ADP, ISM New York, Factory Orders, Services ISM, Yellen Speaking, and of course Nonfarm payrolls tomorrow), or we could ignore all of that as it is absolutely meaningless and all very much bullish, and use a phrase from Standard Chartered which said that "the dollars Yellen is removing could be compensated for by cheap euros from the ECB; result may be enough cash sloshing around to underpin this year’s run-up in risk assets even if the Fed begins mulling higher interest rates too." In other words, the bubble will go on, as the Fed passes the baton to the ECB, if not so much the BOJ which is drowning in its own imported inflation. Case in point: two of the three HY deals priced yesterday were PIK, and the $1 billion in proceeds was quickly used to pay back equity sponsors. The credit bubble has never been bigger.
In American society, 'debt' and 'income' have become increasingly synonymous over the past 3 decades; but as Rick Santelli blasts (commonsensically), "they certainly shouldn't be." It appears the average joe has been led to this conclusion by the Central Banks. Rhetorically asking "where's the horsepower in the economy coming from?" Rick reflects on the auto-loan fears we discussed earlier, santelli notes that 55% of used cars (and 30% of new cars) are financed by subprime lenders... and rages, "if we continue as a country to fuel our consumerism with debt, there is no way the bond market's going to be wrong."
This shortened week is dominated by a veritable explosion of critical jobs market data on Thursday. As Citi's Steven Englander notes, there are five key US labor indicators - two of which will be initial asset market drivers: Citi expects disappointment; and three more that will give signals more relevant to the medium term evolution of asset markets and Citi think will give a more positive signal.
Day after day we are told that stocks are the place to be and that bonds are a disastrous bet as "rates must rise" but it appears that, increasingly, the world's developed (and debt-laden) economies are turning Japanese (with German 2Y rates at 2bps for example). But, for some context as to how low rates really are, Deutsche's Jim Reid unveils 500 years of Dutch (European) interest rates... and we have never been lower. Are bonds wrong? Or do they see a world where growth is permanently stifled by the drag of interest expense?
There has been a growing number of defaults since China first broke its non-payment cherry earlier this year. Names like Chaori Solar have "promised" to pay back the money they owe, only to falter on that promise mere months after a temporary reprieve. Wide-scale panic has for now been avoided by liquidity provision to banks (not shadow-banks) and mini-stimulus which many assumed was targeted at keeping the state-owned enterprises (SOEs) alive no matter what. That 'hope' all changed this weekend... As Bloomberg reports, Qilu Bank's annual report shows that Licheng district urban construction development company has not paid its loan interest..."To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan."
BTFATH! That was the motto overnight, when despite a plethora of mixed final manufacturing data across the globe (weaker Japan, Europe; stronger China, UK) the USDJPY carry-trade has been a one-way street up and to the right, and saw its first overnight buying scramble in weeks (as opposed to the US daytime trading session, when the JPY is sold off to push carry-driven stocks higher). Low volumes have only facilitated the now usual buying at the all time highs: The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing - yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13.
"If past is indeed sometimes prologue, this simple chart might be hinting that a rally similar in arithmetical range and time-span – if not in percentage gain – to the Tech bubble itself is becoming dangerously overripe and that, if so, the most propitious time to effect an exit is not when the fat lady interrupts her warbling of the anthem to shriek, 'Fire!' at the audience instead."
Gold is the best performing asset in H1 2014 (just beating crude oil). The USA is the worst-performing macro-economy in the world's majors in H1. The S&P 500 is up now 6 quarters in a row - its best run since 1998. The Russell 2000 had its best month since September but Trannies are leading the Dow by over 900bps year-to-date. "Most shorted" stocks had their 'best - biggest squeeze' month in 11 months. Gold and silver had great months. Today saw stocks rally then fade and bond yields rose then fell (down 1-2bps). The dollar slipped markedly on the day to 2-month lows as commodities surged (ex Oil) with Gold, silver, and copper all reaching multi-month highs (amid short-covering and CCFD unwinds). VIX closed the month higher.
Earlier today Reuters reported that the European Commission said on Monday it had approved a Bulgarian request to extend a credit line of 3.3 billion levs ($2.30 billion) in support of banks that have come under speculative attack. “The Commission concluded that the state aid implied by the provision of the credit line is proportionate and commensurate with the need to ensure sufficient liquidity in the banking system in the particular circumstances,” the EU executive said in a statement. The statement said Bulgaria’s banking system was “well capitalised and has high levels of liquidity compared to its peers in other member states. For precautionary reasons, Bulgaria has taken this measure to further increase the liquidity and safeguard its financial system”. The move follows runs by jittery depositors on two major Bulgarian commercial banks in the space of a week. And while this latest backstop of the Bulgarian bank system should provide a respite from bank insolvency fears (if only for the time being), one wonders about Europe's true intentions.
here is the punchline, and proof that anything the ECB can and will try to do, will be a complete disaster: Loans to households fell by €42.8bn (its largest decline on record), having risen by €5.1bn in April. This was mainly related to lending for house purchases (which do not count towards banks' allotment in the TLTRO) and took place almost entirely in France.
Today is the day that Paul Singer and his Elliot Capital Management team have been waiting for. Thanks to SCOTUS' decision, as Bloomberg reports, Argentina is poised to miss a bond payment today, putting the country on the brink of its second default in 13 years, after a U.S. court blocked the cash from being distributed until the government settles with creditors from the previous debt debacle. The decade-long battle between Argentina and holdout creditors from the country’s $95 billion default in 2001 is coming to a head as the judge’s decision “closes Argentina’s options to finally force it to negotiate," and "should now stop using these delay tactics and get serious." Argentina sees it a different way, the ruling "is merely a sophisticated way of of trying to bring us down to our knees before global usurpers,” according to the economy minister Axel Kicillof.
It is the last day of not only the month but also the quarter, not to mention the halfway point of 2014, which means that window dressing by hedge funds will be rampant, as they scramble to catch up some of the ground lost to the S&P 500 so far in 2014. Most likely this means that once again the most shorted names will ramp in everyone's face and the short side of the hedgie book will soar, further pushing hedged P&L into the red, because remember: in a market in which all the risk is borne by the Fed there is no need to hedge.
"... it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.... Never before have central banks tried to push so hard... Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms.... The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end."
One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later. In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath - a century of drift toward statism, militarism and fiat money - that was actually triggered by the events at Sarajevo.
Overview of the price action in the foreign exchange market and a short word on US 10-year Treasuries.