Bank of England
With the 1% of the 1% due to engorge Davos with their high-thinking centrally-planned solutions to the world's oh-so-foreseeable problems, the FT takes a look back at a "world above it all" from 1914. Then too, Margaret McMillan notes, they would have been puzzling over how to cope with their fast-changing, troubled world. They would have worried – as they do today – about the future; concerned that the pattern of economic boom and bust was dangerously unstable; and warning that society might splinter as inequality grew and the middle classes were squeezed. One thing that would not have troubled Davos that January 100 years ago was the possibility of a major war. Europe had just come through two dangerous wars in the Balkans, which surely showed that the international order could cope with crises. And so they would have gone their separate ways confident that they would all meet again in 1915.
Markets have started the week on the back foot, despite a brief rally following a better-than-expected Q4 GDP print in China. Indeed, Asian equities recorded a small pop following the GDP report, but the gains were shortlived as the general negativity on China’s growth trajectory continues to weigh on Asian markets. In terms of the data itself, China’s Q4 GDP (7.7% YoY) was slightly ahead of expectations of 7.6% but it was slower than Q3’s 7.8%. DB’s China economist Jun Ma maintains his view that economic growth will likely accelerate in 2014 on stronger external demand and the benefits from deregulation. The slight slowdown was also evident in China’s December industrial production (9.7% YoY vs 10% previous), fixed asset investment (19.6% YoY vs 19.9% previous) and retail sales (13.6% vs 13.7% previous) data which were all released overnight. Gains in Chinese growth assets were quickly pared and as we type the Shanghai Composite (-0.8%), HSCEI (-1.1%) and AUDUSD (-0.1%) are all trading weaker on the day. On a more positive note, the stocks of mining companies BHP (+0.29%) and Rio Tinto (+0.26%) are trading flat to slightly firmer and LME copper is up 0.1%. Across the region, equities are generally trading lower paced by the Nikkei (-0.5%) and the Hang Seng (-0.7%). Staying in China, the 7 day repo rate is another 50bp higher to a three month high of 9.0% with many investors continuing to focus on the Chinese shadow banking system following the looming restructuring of a $500m trust product that was sold to ICBC’s customers.
On December 24, we posted an update on Germany's gold repatriation process: a year after the Bundesbank announced its stunning decision, driven by Zero Hedge revelations, to repatriate 674 tons of gold from the New York Fed and the French Central Bank, it had managed to transfer a paltry 37 tons. This amount represents just 5% of the stated target, and was well below the 84 tons that the Bundesbank would need to transport each year to collect the 674 tons ratably over the 8 year interval between 2013 and 2020. The release of these numbers promptly angered Germans, and led to the rise of numerous allegations that the reason why the transfer is taking so long is that the gold simply is not in the possession of the offshore custodians, having been leased, or worse, sold without any formal or informal announcement. However, what will certainly not help mute "conspiracy theorists" is today's update from today's edition of Die Welt, in which we learn that only a tiny 5 tons of gold were sent from the NY Fed. The rest came from Paris.
Weak results from Intel, American Express and Capital One, not to mention Goldman and Citi? No problem: there's is overnight USDJPY levitation for that, which has pushed S&P futures firmly into the green after early overnight weakness: because while the components of the market may have such trivial indicators as multiples and earnings, the USDJPY to which the Emini is tethered has unlimited upside. And now that the market is back into "good news is good, bad news is better" mode, today's avalanche of macro data which includes December housing starts and building permits, industrial production, UofMichigan consumer confidence and JOLTs job openings, not to mention the up to $3 billion POMO, should make sure the week closes off in style: after all can't have the tapped out consumer enter the weekend looking at a red number on their E-trade account: they might just not spend as much (money they don't have).
- Charter, Comcast in renewed talks on Time Warner Cable bid (Reuters)
- Bankers' Stock Awards Jet Higher (WSJ)
- Yahoo CEO Mayer Dismisses Operating Chief De Castro (BBG)
- Amazon Employees Vote to Reject Union (Reuters)
- Luxury in China loses luster as wealthy flee (Reuters)
- UnitedHealth Profit Up on Stronger Enrollments (WSJ)
- U.S. government failed to secure Obamacare site: experts (Reuters)
- Spain Sells Bonds at Record-Low Yield as Rajoy Touts Rebound (BBG)
- Newport Beach’s $100,000 Lifeguards Feel Pension Squeeze (BBG)
- Bailed-Out Euro Nations Expect Painful Challenges to Remain (BBG)
The positive momentum in equities slowed in Asian trading with losses seen on the Nikkei (-0.4%), and HSCEI , the SCHOMP unchanged and EM indices such as the Nifty (-
0.1%). In Australia, a disappointing December employment report saw a 23k fall in jobs for the month against consensus expectations of rise of 10k. The 10yr Australian government bond has rallied 5bp and the front end is outperforming as a number of investors expect the RBA to continue its easing bias over 2014. AUDUSD has sold off -1.1% to a three year low of 0.881. The ASX200 closed up 1.2% however, boosted by mining-giant Rio Tinto (+2%) who reported better than anticipated Q4 production. Amid recent fears of a Chinese growth deceleration, Rio Tinto reported record levels of production of iron-ore, coal and bauxite. In FX, USDJPY is finding further support in Asia, adding 0.1% to yesterday’s 0.38% gain to trade not too far from the 105 level. Which is also why the S&P futures are trading modestly lower: without a major breakout in the Yen carry, there can't be a sustained ramp in the US stock market which is driven entirely by the value of the Yen, which in turn is a reflection of the expectations of future BOJ easing.
Is it all about expectations about tapering, again?
It has been commonplace to speak of central bank independence - as if it were both a reality and a necessity. Discussions of the Fed invariably refer to legislated independence and often to the famous 1951 Accord that apparently settled the matter.  While everyone recognizes the Congressionally-imposed dual mandate, the Fed has substantial discretion in its interpretation of the vague call for high employment and low inflation. It is, then, perhaps a good time to reexamine the thinking behind central bank independence. There are several related issues.
- First, can a central bank really be independent? In what sense? Political? Operational? Policy formation?
- Second, should a central bank be independent? In a democracy should monetary policy—purportedly as important as or even more important than fiscal policy—be unaccountable? Why?
- Finally, what are the potential problems faced if a central bank is not independent? Inflation? Insolvency?
Technical outlook for the several of the most actively traded currencies.
- From the guy who said the market is not overvalued: Q&A with Fed’s Williams on Upbeat 2014 Outlook and What Keeps Him up at Night (Hilsenrath)
- Obama Readies Revamp of NSA (WSJ)
- Indian envoy leaves U.S. in deal to calm diplomatic row (Reuters)
- China overtakes US as largest goods trader (FT)
- Wall Street Predicts $50 Billion Bill to Settle U.S. Mortgage Suits (NYT)
- Low-End Retailers Had a Rough Holiday: Family Dollar, Sears Struggle as Lower-Income Customers Remain Under Pressure (WSJ)
- ECB charts familiar course as Japan, US and UK begin to diverge (FT)
- Housing experts warn of hiccups as new U.S. mortgage rules go live (Reuters)
- It's a HFT eat HFT world: Infinium ex-employees sue over $4.1m loss (FT)
- Slowing China crude imports to challenge exporters (FT)
These men are masters of the capital markets. They are voting with their feet and pulling their capital out of them. Given that their personal compensation is closely linked to assets under management and profit sharing, this decision is akin to the choice to forego additional wealth that could be made quite easily (none of these individuals would have trouble raising several billion more in capital) rather than trying to find opportunities in a challenging market.
- Carney Guidance Threshold Strained as BOE Holds Policy (BBG)
- Does one laugh or cry: China Tells Banks to Improve Disclosures in Shadow-Lending Fight (BBG)
- Big Business Doubles Down on GOP Civil War With Tea Party (BBG)
- CIA sued for records on possible role in Nelson Mandela arrest (RT)
- Bridge Scandal Destroys Christie's 'Nice Jerk' Image (BBG)
- Borrowers Hit Social-Media Hurdles (WSJ)
- U.S. Leverage in Iraq Tested As Fears of Civil War Mount (WSJ)
- Austerity drive cuts into Chinese inflation (FT)
- Dish Pulling Its Bid for LightSquared (WSJ)
- BlackRock agrees to end analyst surveys (Reuters)
- Germany defends economic policies after US criticism (FT)
- Bank of Korea Holds Rate Even as Yen Clouds Export Outlook (BBG)
The overnight session began on a dour mood, with both the Shanghai Composite and Nikkei sliding (the former once again just barely above 2,000, latter once again dropping below 16,000), even though Chinese CPI came below expectations suggesting the PBOC has some more room to ease and not rush into liquidity extraction (which just happens to blow out repo rates like clockwork), while in Japan BOJ board member Shirai implied the Japanese QE can be extended and expanded as needed. Europe had a weak start although shortly after 3 am Eastern staged a dramatic turnaround supported by a bounce in the EUR (and ES driving EURJPY) leading to broadly higher stocks, supported by solid demand for Portuguese 5y bond syndication, as well as oversubscribed debt auctions by the Spanish Treasury which sold above the targeted amount and consequently saw SP/GE 10y spread fall to its tightest level since April 2011. At the same time, having been propped up by touted redemption flows ahead of Spanish and French bond auctions, absorption of supply shortly after 1000GMT resulted in an immediate selling pressure on Bunds. Helping lift spirits was a rumored $1 billion trade order in September S&P futures, as well as chatter by the Greek PM that the country was like Portugal and Ireland, prepared to get back into the bond markets.
Some better than expected economic news out of Europe, Greek 10 Year yields dropping to 7.65% or the lowest since May 2010, and futures are... red? Alas, such is life in a world in which the S&P500, aka the E-mini, is simply a derivative of the Yen funding currency pairs, where the USDJPY touched on 105 after a straight line diagonal move only to sell off in recent trading. Heading into the North American open, stocks in Europe are seen mixed, with peripheral stock indices outperforming, buoyed by the prospect of Portugal echoing yesterday’s Irish NTMA return to capital markets with its 10y bond syndication. As such, despite the cautious sentiment, financials led the move higher, with Italian banks gaining for 4th session as IT/GE 10y spread narrowed to its tightest level since early July 2011. Of note, FTSE-100 index underperformed its peers since the get-go, with retailers and tobacco names under pressure. In spite of opening higher by over 3%, Sainsbury's shares have since reversed and are seen lower by almost 2% after co. CFO said that he expects FY LFL sales to be just below 1% and expects Q4 to be similar to Q3. Elsewhere, tobacco names came under selling pressure following reports that China is planning a ban on smoking in public by year's end.