Borrowing Costs

The Bubble Machine Is Complete: Soaring Stocks Push Investors Into Bonds Whose Issuers Buy More Stocks

As JPM notes, soaring equity prices have had the effect of altering investors’ asset allocations, effectively tipping the balance towards equities even as money flows into bond funds. "The more equity prices increase, driven by either hedge funds or investors with low equity allocations, such as Japanese pension funds the higher the incentive by other investors who are already very overweight equities to buy bonds to prevent their bond allocation from falling too low."

Treasury Collateral Shortage Crosses The Atlantic, Makes European Landfall

We're just a little over two weeks into PSPP and signs are already beginning to show that the ECB is effectively breaking the market. "The soaring cost of borrowing government bonds in secured lending markets highlights the distortions caused by the ECB's asset-purchase scheme, which analysts say could clog up Europe's financial system," Reuters notes.

"Profound Shift In Liquidity Risk" May Imperil Market Function, New Report Says

"There's a liquidity conundrum in fixed income markets facing policy makers and investors: how it’s resolved will have long term investment implications across banks, asset managers and infrastructure players," a new report from Morgan Stanley and Oliver Wyman notes. The joint effort is an attempt to dig deep into the all important issue of credit market liquidity (or lack thereof) and determine the short term and long term implications.

Corporate Profit Margins And Investor Consequences

"...markets can turn from tranquil to turbulent in short order. It is worth noting that in 2006 volatility was low, and companies were generating record pro?t margins, until the business cycle came to an abrupt halt due to events that many people had not anticipated. Although investor appetite for equities may remain robust in the near term, because of positive equity fundamentals and low yields in other asset classes, history shows high valuations carry inherent risk... potential ?nancial stability risks arising from leverage, compressed pricing of risk, interconnectedness, and complexity deserve further attention and analysis."

Hilsenrath's FOMC Preview: "No More Promises, Fed Is Injecting Uncertainty Back Into The Market"

There have been countless previews of the FOMC statement at 2pm today, all of them largely worthless and regurgitating the same exact stuff. The only one that matters, as it is the only one with the explicit blessing of the Fed (see "On The New York Fed's Editorial Influence Over The WSJ") in its attempt to manage expectations: that "drafted" by Jon Hilsenrath. And if what the WSJ economist writes in "Fed to Markets: No More Promises" is accurate, then fasten your seat belts, ladies and gentlemen, because we are about to enter some turbulence. "The Federal Reserve is about to inject uncertainty back into financial markets after spending years trying to calm investors’ nerves with explicit assurances that interest rates would remain low."

Europe's Haves & Have-Nots: Greek Bulls "Throw In The Towel... They've Gone Plain Nuts"

Things are not going well for the Greeks. Bond yields are at post-default highs, implicitly shutting them out of the capital markets; stocks are cratering; and deposit outflows continue as the cash crunch looms. Even ex-Goldman silver-lining-finder Erik Nielsen stated this weekend that he is "throwing in the towel," on Greece, adding, as Bloomberg reports, that things have gone "plain nuts" in Athens. However, things are going great for the Germans - borrowing costs have never been lower, and the stock market is at record-er highs every day, as Draghi's money-printing fiasco has succeeded in one thing (and one thing only) dividing an already fragile 'union' into ever-greater 'haves' and ever-lesser 'have-nots'.

FX Volatility Spikes As More Countries Enter Currency Wars; Euro Surges On Furious Squeeze After Touching 1.04

The global currency wars are getting ever more violent, following yesterday's unexpected entry of Thailand and South Korea, whose central banks were #23 and #24 to ease monetary conditions in 2015, confirming the threat of a global USD margin call is clear and present (see "The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different"). But the one currency everyone continues to watch is the Euro, which the closer it gets to parity with the USD, the more volatile it becomes, and moments after touching a 1.04-handle coupled with the DXY rising above 100 for the first time in 12 years, the EURUSD saw a huge short squeeze which sent it nearly 150 pips higher to 1.0643, before the selling resumed.

The Fed Blew It

The Fed had multiple opportunities to let the air out of unsustainable asset bubbles by notching interest rates higher and tapering its asset purchases (QE). Instead, it waited until the next global recession is already starting to consider what should have been done long ago.

ECB Will Cut Rates To Minus 3%: JP Morgan

Should a tail event such a deflationary spiral or Grexit occur, limits on ECB asset purchases will put Mario Draghi at a disadvantage as other central banks race to the bottom. JP Morgan says this will force the ECB to cut interest rates for cash deposits to minus 3% while the dollar will appreciate by 20%, reaching parity with euro in 2015.