Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place. We seem to be close to the endgame.
As we explained previously, the market appeared woefully under-priced for the potential risk of a Scottish "yes" vote. However, this weekend saw the margin between 'yes' and 'no' voters narrowed dramatically (53% "No" vs 47% "Yes" - a 6-point spread now versus a 14 point spread just 2 weeks ago). UK Gilt yields are higher, GBP is falling (its lowest since March) and implied volatility has spiked by the most since 2008 as hedgers pile in, now suddenly fearful.
This seems to be the biggest question in financial markets for me right now because the math just doesn`t add up any way you slice it.
Hot on the heels of Ukraine's claims of 'invasion' and retraction of said claim, NATO is once again stepping in with strong claims about Russian 'incursions':
- *NATO OFFICER: ESTIMATED 20,000 RUSSIAN TROOPS NEAR UKRAINE (not 17 or 45?)
- *NATO OFFICER: OVER 1,000 RUSSIAN TROOPS OPERATING IN UKRAINE
- *NATO OFFICER: 2ND FRONT RISKS CUTTING UKRAINE ARMY SUPPLY LINES
- *NATO OFFICER: NEW 2ND FRONT 'EXTREMELY WORRYING' FOR UKRAINE
While NATO statements in the past have caused dramatic weakness in stocks (or been entirely shurgged off), it appears this time markets are taking their concerns more seriously as the officer states Ukraine's forces are in a "dire situation."
A "Yes" vote for Scottish independence represents a "high risk" event according to Citi's Michael Saunders. With the so-called 'neverendum' now less than a month away, Citi continues to highlight three particular concerns if Scotland does vote for independence: Scotland’s relatively weak fiscal position, Scotland’s large banking system and uncertainties over the currency arrangements of an independent Scotland. The Scottish Government seems to be seeking a policy of "sterlingisation" - which even their economic advisors judge "is not likely to be a long-term solution." For now a "no" vote is most likely, however, even if the Scottish referendum does not pass, the UK political landscape is likely to remain in a state of flux.
Europe Says Would Consider Any "Unilateral Military Action By Russia A Blatant Violation Of International Law"Submitted by Tyler Durden on 08/15/2014 11:53 -0400
While we await to see any actual proof of either a Russian armed convoy entering Ukraine territory, or that this convoy was shelled by Ukraine artillery, because as a reminder this is first and foremost a war of relentless propaganda on all sides, here is the latest from Europe, which moments after stating it may roll back sanctions just announced it is now considering even more actions against Russia. From Reuters:
- EU FOREIGN MINISTERS SAY WOULD CONSIDER ANY UNILATERAL MILITARY ACTIONS BY RUSSIA IN UKRAINE AS BLATANT VIOLATION OF INTERNATIONAL LAW
So far the only official comment that is missing is that of Russia which has vehemently denied any entrance by an armed convoy into Ukraine and has yet to have any direct statement on the alleged destruction of its assets in Ukraine.
Here Comes The European Triple-Dip: Negative German GDP Sends Bunds Under 1% For The First Time EverSubmitted by Tyler Durden on 08/14/2014 07:11 -0400
The hammer finally hit for Europe when overnight both Germany and France reported Q2 GDP prints that missed expectations, the first actually contracting at a 0.2% rate with consensus looking for -0.1%, while France remained flat vs expectations for a tiny 0.1% rise. As a reminder, this GDP is the revised one, which already includes the estimated contribution of drugs and prostitution, suggesting the actual underlying economic growth is far worse than even reported. Then again, this is hardly surprising considering all the abysmal data out of Europe and the rest of the world in recent weeks, and with the Russian trade war sure to trim even more growth, look for all of Europe to join Italy in its first upcoming triple-dip recession in history.
If a trader knew nothing about the growth, the debt, the inflation, the exporters vs. importers, the serial defaulters, currency manipulators, hot-money or conversely deflation fighters; simply grouping the nations of the world on whether they were 'friend' or 'foe' to the US would provide an odd highly correlated value perspective on the interest rates paid on 1yr and 10yr sovereign debt... It appears your status with the central bank cabal was more important than your ability to repay the loaned money?
While the biggest geopolitical news of the past week was Obama's announcement he would become only the fourth president in a row to order military action in Iraq, explicitly targeting the ISIS jihadists, the far bigger question are the developments that spurred the administration to finally act. Here are, courtesy of Vice News, the first two parts of a series looking at life in the Islamic State caliphate. Vice News reporter Medyan Dairieh spent three weeks embedded with the Islamic State, gaining access to the group in Iraq and Syria as the first and only journalist to document its inner workings.
As long as people remain obsessed with false paradigms and faux enemies, the establishment's goal of complete centralized dominance will be predictably attainable. If we change our focus to the internationalists as the true danger instead of playing their game by their rules, then things will become far more interesting...
Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange. Global Financial Data has gone back and collected stock prices during the closure of the NYSE to recreate the Dow Jones Industrial Average while the NYSE was closed. We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices from August 24, 1914 to December 12, 1914. This enabled us to discover that the 1914 bottom for stocks actually occurred on November 2, 1914 when the DJIA hit 49.07, over a month before the NYSE reopened. Few people realize that stocks in the US had already bottomed out and were heading into a new bull market when the NYSE reopened on December 12, 1914. The DJIA did not revisit this level until the Great Depression in 1932.
An overview of the major events next week within the context of the capital markets, which could be at inflection points.
- EU Works to Punish Russia as MH17 Bodies Leave Rebel Area (BBG)
- Bodies From Malaysia Airlines Flight Begin Long Trip to Netherlands (WSJ)
- Israel pounds Gaza as Kerry arrives (Reuters)
- U.S. judge dismisses Republican lawsuit over Obamacare subsidy for Congress (Reuters)
- Israel Soldier Missing Amid Assault on Hamas in Gaza (WSJ)
- Detroit Retirees Vote in Favor of Pension Cuts (WSJ)
- Russia Axes 1st Bond Sale in 3 Months as Ukraine Drives Up Yield (BBG)
- Wall Street Cut From Guest List for Jackson Hole Fed Meeting (BBG)
- Credit Suisse to Exit Commodities, Posts Big Quarter Loss (BBG)
- Draghi Cedes Euro Control to Yellen on Fed Rate Wagers (BBG)
For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.
As is now well-known, following the news broken first by Zero Hedge in May, Belgium, or rather "Belgium" (because clearly someone is using Belgian-based Euroclear as a front to cover their insatiable appetite for US paper) has emerged as the biggest buyer of US Treasurys in 2014, close to surpassing even the Federal Reserve as the biggest monetizer of the US deficit. But what about other countries in the world, such as for example France: a country whose economy virtually everyone admits is in shambles and yet whose bond yields have followed the rest of the world to slide to near record lows of 1.70% most recently. Here is the answer.