Being that markets are unrigged and all, at least according to every single proponent of HFT that is, futures have done their overnight levitation as they have every day for the past month driven by the one staple - the Yen carry trade - even if in recent days the broader market slump during the actual daytrading session mostly impacted biotechs yesterday. And since any news is good news, we don't expect today's main event, the ECB's rate announcement and Draghi press conference, both of which are expected to announce nothing new despite Europe's outright inflationary collapse which most recently dropped to 0.5%, the lowest since 2009.
For those used to smooth, undisturbed, Fed-assisted, no-risk-all-return, sailing, both the month of March and the entire first quarter were quite the wake up call.
One of the bigger stories overnight is Hilsenrath's latest communication from the Fed which once again simply paraphrases the status quo opinion, namely which is that the Fed will taper by another $10 billion on January 29, reducing the total monthly flow to $65 billion. "The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments." Of course, should the Fed not do that, as the Hilsenrath turned to Hilsen-wrath after all those Taper rumors in September ended up being one giant dud, one can once and for all completely ignore the WSJ reporter, who will have lost all his Fed sources and is now merely an echo chamber of consensus. What is notable is that the result of the latest mouthpiece effort, the USD is stronger, which means USDJPY is higher, which means US equity futures are flying.... on less QE to be announced. We eagerly await for this particular correlation pair to finally flip. The other big story, of course, is the already noted well-telegraphed in advance PBOC liquidity injection ahead of the Chinese Lunar New Year, and ahead of a potential January 31 Trust default which will certainly shake the foundations of the Chinese shadow banking system to the core. Not helping nerves was last night's announcement by Zhang Ming, a researcher and director of the international investment department at the Chinese Academy of Social Sciences, that "trusts and shadow banking will see defaults this year, and this is a good thing." Let's circle back in 6 months to see just how good it is.
The rest of the world may be stuck importing Japan's deflation (and Europe may be even contemplating launching a Fed type QE as BNP suggested first some time ago), but one country is doing all in its power, and more, to slow down hot money and the resulting inflation - Brazil. Moments ago the Central Bank of Brazil raised the Benchmark Selic interest rate by 50 bps points more than the 25 bps expected, to 10.50%.
While Eike Batista's collapse from grace may be the poster child for the country, this deep dive into the Latin American economy concludes Brazil’s flaws are clear. Commodity prices have been volatile; global growth has been weak and inconsistent. Brazil can no longer depend on these factors for growth. A closer look reveals that internal conditions are progressively becoming Brazil’s main economic foe. Ironically this is good news as the country is increasingly in a position to take control of its destiny. What is needed is decisive leadership and effective solutions to the long-term problems plaguing the country. Short-term stimulus measures and even supply-side measures such as reduced taxes have clearly not stimulated the economy. Brazil must invest in its own future.
No surprises here: Silver and Gold are the best, Banks and Greece - worst.
This week's brief 'outage' in US equity markets has been shrugged off by most, with some proclaiming that "we are getting used to it now." However, there is at least one group that are not ignoring this. Paddy Power has inaugurated bets on the next exchange in the world to suffer from a greater-than-2-hour outage, and the winner (for now) is... NASDARK. At 5/2 Odds, the pride of US capital markets is more than double as likely to suffer such an outage again by the end of 2014 than Tokyo and London and four times as likely as the emerging market Brazil's BOVESPA. USA is number 1 once again, well played...
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.
With a 180 point high to low plunge during the day, the Dow underperformed the rest of the major US equity indices which ended practically unchanged on the day. The market appears to be replaying the same opening POMO/EU pump to afternoon dump mode - with today's late-day ramp attempt to scramble back to VWAP. Treasury yields also oscillated but closed +/-1bps. But elsewhere, markets were turmoiling. The USD is up 0.5% on the week with 1.5% drop in JPY today which entirely disconnected from US equities after Europe closed. Credit markets were the voice of reason and equities (once again) ripped and dipped back to their sanity. WTI crude surged up near $100 (+3% on the week) as the USD weighed on gold and silver which are -0.6% and 1.6% on the week. Another day, another failure for the S&P's 50DMA.
Think gold and silver were the worst performing financial asset in June? Think again: that dubious distinction falls to the Bovespa, the Shanghai Composite and the Greek stock market index, all of which tumbled more than the precious metal complex did in the past month. Yet what an odd month for hard assets - on one hand WTI, Corn and Brent were the best performing assets, while gold, silver, copper and wheat tumbled.
Following yesterday's most recent Europe-led rout, the market is attempting a modest rebound, driven by the usual carry funding currency pair (EURUSD and USDJPY) levitation, although so far succeeding only modestly with not nearly enough overnight ramp to offset the bulk of yesterday's losses. In a centrally-planned, currency war-waging world, it is sad that only two key FX pairs matter in setting risk levels. But it is beyond hypocritical and highly ironic that according to a draft, the G-20 will affirm a commitment to "avoid weakening their currencies to gain an advantage for their exports." So the G-20 issues a statement saying nobody is doing it, when everyone is, thus making it ok to cheapen your exports into "competitiveness"? In other words, if everyone lies, nobody lies. Of course, also when everyone eases, nobody eases, and the world is back to square one. But that will only become clear eventually.
- Hilsenrath: Heat Rises on Central Banks (WSJ)
- Some at Fed Are Urging Pre-Emptive Stimulus (NYT)
- Obama Warns of Headwinds in Europe; Urges European Leaders to Take Decisive Action on Euro (WSJ) - also needs reelection
- ECB thinks the unthinkable, action likely weeks away (Reuters)
- Games Turn London Into ‘Ghost Town.’ (FT)
- Greek Leaders Seek to Defer Austerity Cuts (FT)
- Hong Kong Builders Unload Properties to Raise Cash for Land Rush (Bloomberg)
- North India Crippled by Power Cuts (FT)
- Euro-Area Unemployment Rate Reaches Record 11.2% on Crisis (Bloomberg)
- Italy's Monti sees hope of end to euro crisis (Reuters)
Every day the Fed's control of all capital markets becomes greater and greater, and every day ordinary investors, and even habitual gamblers, realize they have had enough with participating in a rigged casino, in which the now completely meaningless and irrelevant level of the S&P or the DAX or Nikkei or the 10 Year bond is nothing but a policy tool in the global devaluation race to the inflationary bottom. And while we have shown the week after week of relenltess equity outflows as aging baby boomers call it quits and instead opt for return of capital (than on), the full impact of this boycott on Bernanke's usurpation of capital markets, in which a simple WSJ scribe can move the market more than the deteriorating fundamentals of the world's biggest company-cum-gizmo maker is best seen in trading volumes. Which as Securities Technology shows, are now down 19% in the first half of 2012. Of course, if one were to exclude the robotic presence in stock trading, which is anywhere between 50 and 70%, it would be a miracle to find any human beings still trading with each other.
Banks and ratings companies are sounding their loudest warnings yet that the euro area risks unraveling unless its guardians intensify efforts to beat the two-year-old sovereign debt crisis.
Following my thoughts on the fireworks going off everywhere in emerging markets, if you are not short emerging yet (EEM is a great proxy. Look at Bovespa in Brazil or TUR the Turkish ETF, it is all looking horrible and about to get completely decimated), you can still buy silver and sell Spanish equities. A few weeks ago when silver had broken the 50-dma I had pointed that it should retrace towards 25.80/26.50. We came right around those levels and caught a huge bid today. Confirmation by breaking out of the bearish downtrend channel since the recent highs would point towards new highs. Meanwhile the IBEX has completed a consolidation wedge and held resistance at 11,000. As a long as we stay below the afore-mentioned resistance the next stop on the way down is 9,600.