Market Wrap: Chinese Stocks Crash As Financials Suffer Record Drop; Commodities Resume Decline; US ClosedSubmitted by Tyler Durden on 01/19/2015 07:12 -0500
Following last week's Swiss stock market massacre as a result of a central bank shocker, and last night's crack down by Chinese authorities, it almost appears as if the global powers are doing what they can to orchestrated a smooth, painless (as much as possible) bubble deflation. If so, what Draghi reveals in a few days may truly come as a surprise to all those- pretty much everyone - who anticipate a €500 billion QE announcement on Thursday.
"we doubt inflation expectations will spike sustainably higher on any announcement given the “failed” history lessons of US and Japan as well as doubts about QE making a difference quickly in the Euro zone." - Deutsche Bank
Quality stocks along with everything else are expensive. Increasing risk while valuations in the equity market are so elevated seems dangerous, so the obvious answer is to hide in cash. Given valuation dispersion is so tight, avoiding risk will be pivotal in 2015. To that end, avoiding or even shorting companies with a high degree of earnings manipulation seems sensible. This style was a particular strong performer in Europe and Japan last year. We expect to see similar effects emerging in US stocks this year. Simply put, the lack of quality income stocks to invest in is often a precursor to a market downturn.
My conclusion is that the SNB deliberately screwed the market, and in the process shot itself in the foot for 30-50 billion dollars. What were they thinking?
While a record amount of ink has been spilled praising the benefits of plunging crude price on the US consumer, so far this has manifested merely in soaring consumer confidence, if not in an actual boost to retail sales. Less has been written about the adverse side-effects of plunging oil, even though by now even the most “undisputed” permabulls have been forced to admit that the imminent collapse in capital spending is truly “unprecedented”, a phrase Goldman uses in the chart below. So what does plunging CapEx actually mean for the economy, aside from a major haircut to 2015 GDP, and what other areas of the economy will be affected by the Saudi Arabian scorched earth war on the US shale industry?
Since the European sovereign-debt crisis erupted in 2009, everyone has wondered what would happen if a country left the eurozone. The risks created by the SNB’s decision – as transmitted through the financial system – have a fat tail - and the consequences will not be limited to Switzerland. After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.
One day after the SNB stunner roiled markets, overnight global markets have seen - as expected - substanial downward pressure, with the Swiss market slide resuming post open, while European stocks have seen some pressure despite what is now an assured ECB QE announcement next week. However, the one trade that can not be mistaken is the global rush into the safety of government paper, with every single treasury yielding less today than yesterday (the Swiss 10Y was trading below 0% at last check), except for Greek 10Y which are wider on deposit run fears. That said, with capital market liquidity absolutely non-existent even the smallest trade has a disproportionate effect on futures, and expect to see much more rangebound trading until the damage report from the SNB action is fully digested, something which will take place over the weekend.
As a one-day upward move in a major currency its had few peers through history and is firmly in the top 10 of daily upward moves for any currency (vs the dollar) that we have data for which in many cases goes back into the nineteenth century. Most of the others in this top 10 are EM countries. So this is a rare event as when a peg gets abandoned and a big move ensues it’s usually a devaluation from a fixed rate system.What makes this move shocking is that just last month the SNB committed themselves to preventing their currency appreciating beyond 1.20 to the Euro and vowed they would enforce the policy with "the utmost determination". The risk for the global financial system is that if the SNB can make such a dramatic u-turn could other central banks follow at some point. We're not so concerned here as their situation is arguably a lot different to the ECB. The ECB might actually look at the wider market moves yesterday and be scared to disappoint.
As oil prices continue to fall, flirting with the US$40/bbl floor, there has been much talk of cheap oil’s winners and losers. The discussion has focused on big producer and consumer countries, but there may be another contender in the loser category – namely, the Islamic State (IS). In its gambit to become a state, it unwittingly became a hydrocarbon state, and as such has exposed itself to the same economic volatility that plagues other rentier states.
Market Wrap: "It's Turmoil" - Overnight Gains Wiped Out, Futures Trade Below 2000 On SNB "Shock And Awe"Submitted by Tyler Durden on 01/15/2015 06:56 -0500
To paraphrase a trader who walked into the biggest FX clusterfuck in years, "it's total, unprecedented market turmoil." So while the world gets a grip on what today's historic move by the SNB means, which judging by the record 13% collapse in the Swiss Stock Market shows clearly that the SNB market put is dead and the SNB may be the first central-banking hedge fund which just folded (we can't wait to see what the SNB P&L losses on its EURCHF holdings will be), here is what has happened so far for anyone unlucky enough to be walking into the carnage some 2 hours late.
The current premise is that global equities markets will rise regardless of economic fundamentals. Money must flow into equities [perceived as the only asset class capable of producing “acceptable” returns] because the alternatives offer virtually no return…with interest rates pinned near zero in most western economies. Just buy any equity [akin to dart throwing] and a “greater fool than you” will buy after your purchase, at a higher price, ad infinitum... thus ever increasing the asset’s value This is such an obviously flawed argument on so many levels... albeit, like almost any strategy, is surprisingly effective from time to time.
Looks like the Jefferies earnings harbinger were right, because with another quarter down, and here is another painful report by JPM, which just launched the Q4 earnings season for financials with a miss on both the top and bottom line, reporting $1.19 in EPS, well below the $1.32 consensus, and just barely above the lower estimate of $1.16. This was a decline from both the previous quarter (by 17 cents) and from a year ago (by 11 cents). Revenues missed as well, with JPM reporting $23.552 billion in top line, a decline of $560 million from a year ago ($1.6 billion lower than Q3), and below the $24.0 billion consensus. And while JPM's latest recurring, non-one time "one-time, non-recurring" charge came as a surprise to most (although how over $30 billion in legal charges can be considered one-time is beyond us), at the same time JPM once again resorted to the oldest trick in the book, taking the benefit of some $704 million in loan loss reserve releases, nearly offsetting the entire negative impact of the legal charge.
The possibility of the ECB announcing sovereign asset purchases on 22 January already led Switzerland’s SNB to move pre-emptively last month and introduce negative interest rates. As SocGen's FX Research group notes, as disinflationary pressures spill over from the eurozone to trading partners in the north and east of Europe, we parse over the central banks that stand ready to act should the ECB announce QE.
With Bill Gross still in cross-asset limbo, it appears the undisputed fixed income crown, for now, goes to DoubleLine's Jeffrey Gundlach who recently opined, "something is not right." Shortly, the monarch of money markets will be discussing the economy, the markets and his outlook 2015, in his latest webcast titled, rather ominously, "V". Given Gundlach's concerns about the "health of the economy and financial system," we suspect the V-for-Vendetta climax anology may well be more what he had in mind... Full presentation below