Bad data, don't worry, the central bank's got your back; Good data, don't worry, the central bank promised to stay easier for longer and longer (no matter how good things appear from the data). That's the meme that has driven the short-end of the world's largest bond markets to record lows. And then, just as the world's bond traders think they have the central banks understood, the Bank of England drops a tape-bomb...
It's one of those days: despite the Iraq conflict spilling out of control and about to involve US drones and warplanes, despite China's naval conflict with Vietnam over an oil rig in disputed territory set to go "kinetic" at any moment, despite the Ukraine civil war having its deadliest day yet this weekend and adding insult to injury Russia halting gas supplies to Ukraine (letting Kiev and Berlin fight for the scraps), despite crude prices rising ever higher and about to unleash a "discretionary income" shockwave on America's summertime motorists, despite yet another massive tax inversion M&A deal in which the buyer has made abundantly clear its stock is overvalued and will be used as the purchasing currency, stocks are inexplicably not at all time highs this morning.
Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan's future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won't have to worry much about 2015 as he won't be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
With another day of little otherwise completely irrelevant macro news (because following last night's abysmal Australian jobs data one would think the AUD would be weaker; one would be wrong), market participants - all 3 of them - and algos (which have finally uncovered where Iraq is on google maps) are finally turning their attention to the latest conflict in Iraq (because they obviously no longer care about the martial law in Thailand or the civil war in Ukraine), where the Al Qaeda spin off ISIS overnight seized at least 310K B/D in refinery capacity in northern Iraq according to the Police, and what is more concerning, is now less than a 100 kilometers away from Baghdad. Will ISIS dare to venture further south? Keep an eye on crude for the answer.
A quick thumbnail sketch of the Scottish referendum on independence
A dispassionate look at what the ECB announced last week and the potential implications
With the VIX smashing last week to levels not seen since early 2007, the S&P rising to all time highs, and European core and peripheral bond yield this morning touching historic lows, it would appear that the "market" has priced in every possible negative outcome. Which, as Goldman showed over the weekend is clearly not the case at least as investors are concerned who continued to sell stocks across the board in May even as the market broke out to record levels making many wonder who is buying stocks (for more read here)? Expect more of the same, and with some luck we will get a single digit VIX in the coming days as newsflow slows down following payrolls week and ahead of the world cup start in Brazil.
Thumbnail sketch of an overview of next week.
If predicting yesterday's EURUSD (and market) reaction to the ECB announcement was easy enough, today's reaction to the latest "most important ever" nonfarm payrolls number (because remember: with the Fed getting out of market manipulation, if only for now, it is imperative that the economy show it can self-sustain growth on its own even without $85 billion in flow per month, which is why just like the ISM data earlier this week, the degree of "seasonal adjustments" are about to blow everyone away) should be just as obvious: since both bad news and good news remain "risk-on catalysts", and since courtesy of Draghi's latest green light to abuse any and every carry trade all risk assets will the bought the second there is a dip, the "BTFATH mentality" will be alive in well. It certainly was overnight, when the S&P500 rose to new all time highs despite another 0.5% drop in the Shcomp (now barely holding on above 2000), and a slight decline in the Nikkei (holding on just over 15,000).
Two weeks ago we asked, rhetorically, "Whose Housing Bubble Is Bigger?" and showed the April home price increases in the UK and China. Today, we have our answer. As the WSJ reports, "U.K. house prices rose at the fastest monthly pace in almost 12 years and to the highest level since before the global credit crisis in May, a survey showed Thursday, as demand for homes continues to outpace supply despite tougher new mortgage rules."
In today's abnormally quiet overnight session one could hear a pin, or the USDJPY, drop: with everyone focusing on the ECB announcement in one hour, not a single algo is willing to make any big moves, or even start some momentum ignition, ahead of Draghi's announcement, which absent launching full scale QE, which it won't, will be a disappointment which means the EUR will ultimatly move higher after a kneejerk lower as the market forces Super Mario to do even more next time. As Bloomberg adds, a cut in refi and deposit rates is fully priced in and latest price action suggests investors brace for disappointment if ECB stops short of signaling asset purchases or other liquidity measures to combat deflation.
This week's busy calendar starts off with today’s global PMIs and ISMs. On Tuesday, President Obama begins a four day European trip ahead of the G7 meeting which starts on Wednesday. This G7 meeting is replacing the G8 meeting that was originally scheduled in Sochi but was cancelled after Russia’s annexation of Crimea. Tuesday’s data docket is important with Euroarea data releases including inflation and unemployment expected to further cement the ECB’s resolve in easing policy come Thursday. Wednesday features the global services ISMs and PMIs. Other data releases scheduled for that day includes the ADP employment report, which will provide an important preview to Friday’s NFP, and US trade. The Fed releases its Beige Book on Wednesday too and the second estimates of Euroarea GDP will be published on Wednesday as well. Apart from the ECB on Thursday, we also have the BoE policy meeting.
It took a precisely 0.1 beat in the Chinese Manufacturing PMI over the weekend (50.8 vs Exp. 50.7) for the USDJPY and the Nikkei to forget all about last week's abysmal Japanese economic data and to send the Nikkei soaring by 2.1% to its highest print in 5 months. Subsequent overnight weakness from Europe, where the Eurozone Final May Manufacturing PMI dropped again from 52.5 to 52.2, below the 52.5 expected, served simply to push bunds higher back over 147.00, if not do much to US equities which as usual continue their low volume "the music is still playing" melt-up completely dislocated from all newsflow and fundamentals (because just like over the past 5 years, "there is hope").
Ahead of this Thursday's ECB meeting, speculation is rife about what Mario Draghi will announce, and as the following Nomura chart highlights most pundits are convinced that the most likely announcement is a cut in the refi and deposit rate with a probability of around 90%, an LTRO in distant third at 34%, and a full blown QE dead last with 10%. However, as SocGen predicts, which is rather aggressive in its assumptions expecting a negative deposit rate of -0.1%, a targeted LTRO to "boost lending to the private sector", and a "signal" of €300 billion in asset purchases, the bulk of this new-found liquidity will almost exclusively go to boost capital markets, and the wealth effect. As for the broader economy? "We do not expect the 5 June measures to deliver a significant impulse to the real economy."
Dispassionae look at the several events in the week ahead.