We have discussed the idea of a VaR shock (driven by Abe/Kuroda's loss of control) a number of times recently but as Saxo's Steen Jakobsen fears, reality is about to hit as the marginal cost of capital normalizes. The world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access. The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots. However, as Jakobsen notes below, things are rapidly changing; the recent increase in yields has happened despite no real improvement in the underlying data. The the next few days are potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalization process of rising risk premiums and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have "worked so far"... and increase volatility in their own right.
In the week ahead, we get the usual middle-of-the-month batch of early business surveys, including the New York Empire, Philly Fed and Eurozone Flash PMIs. The second key focus will be a number of important monetary policy meetings, including the FOMC, as well as the Swiss, Norwegian Turkish and Indian policy decisions. The latter two are particularly interesting in the light of the recent EM weakness. The main event this weak will be the FOMC meeting after the recent market focus on the timing of tapering of the QE3 program. Swings in bond markets related to the FOMC meeting could be the primary source of FX volatility this week.
Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis. But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash. Which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond. If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on.
"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."
"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."
"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"
In the brief but tempestuous fight between Abe and the "deflation monster", the latter is now victoriously romping through an irradiated Tokyo, if last night's epic (ongoing) collapse in the Nikkei is any indication: down 6.4%, crushing anyone who listened to Goldman's "buy Nikkei" recommendation which has now been stopped out at a major loss in three days, and now well in bear-market territory, it would appear that a neurotic Mrs. Watanabe is finally with done with daytrading the Pennikkeistock market, and demands Shirakawa's deflationary, triumphal return to finally clam the market. Only this time the Japan's selling tsunami is finally starting to spill, if not to the US just yet (it will) then certainly to Asia, where the Shanghai Composite which was down 2.7%, and is once again well down for the year, and virtually all other Asian stock markets. Except for Pakistan - the Karachi Stock Exchange is an island of stability in the Asian sea of red.
Wednesday may be the new Tuesday (which halted its relentless and statistically impossible streak of 20 out of 20 up DJIA days last week), if only in terms of the overnight no news stock futures ramp, which today is back with a vengeance. In a session that was devoid of any news, the e-Mini is up enough to practically erase all of yesterday's losses. Whether this is due to a relatively calm Nikkei trading session, to no further surge (or collapse) in the USDJPY, or to the 10 Year trading flat inside 2.20% is unclear. What is clear is that the bipolar market swings from extreme to extreme on speculation about the largely irrelevant topic of whether the Fed will taper (because if it does, it will be very promptly followed by an untapering once risk assets around the world implode.)
Emerging markets have tanked but some of the reasons for their underperformance will prove overblown, providing opportunities for long-term investors.
To get a sense of the momentous volatility in Japan, consider that the Nikkei225 is more or less in the same numeric ballpark as the Dow Jones, and that each and every day now it continues to have intraday swings of more than 500 points! Last night was no different following swing from 13100 on the high side to 12548 on the low, or nearly 600 points, with all this ridiculous vol culminating in a close that was just red however for a simple reason that the rumor of the Japanese Pension Fund reallocation taking place hit shortly before the close sending the USDJPY higher by 200 pips... only for the news to emerge as an epic disappointment when it was revealed that the GPIF would raise its target allocation to domestic equities from 11% to... 12%. So much for the "Great Japanese Rotation."
It's one thing for broke Argentina to nationalize assets of just as broke Spain. However when tiny west-African country Gabon decides to "seize" assets from three international oil companies including China's petrochemical giant Sinopec, things not only get interesting, but puts a brand new pawn on the global geopolitical chessboard. But why is Gabon seeking to antagonize some of the primary participants in its crude extraction supply chain? Simple: leverage, or its own perception thereof. As the FT reports, this surprising move comes as Gabon prepares to "launch a licensing round for the deep waters off its coast. Experts say reserves in the Gabon Basin could rival deep offshore discoveries in Brazil."
- National Security Advisor Tom Donilon resigning, to be replaced by Susan Rice - Obama announcement to follow
- Japan's Abe targets income gains in growth strategy (Reuters), Abe unveils ‘third arrow’ reforms (FT) - generates market laughter and stock crash
- Amazon set to sell $800m in ads (FT) - personal tracking cookie data is valuable
- 60 percent of Americans say the country is on the wrong track (BBG) and yet have rarely been more optimistic
- Jefferson County, Creditors Reach Deal to End Bankruptcy (BBG)
- Turks clash with police despite deputy PM's apology (Reuters)
- Rural US shrinks as young flee for the cities (FT)
- Australia holds steady on rate but may ease later (MW)
- The Wonk With the Ear of Chinese President Xi Jinping (WSJ)
- Syrian army captures strategic border town of Qusair (Reuters)
Following on from our annual update on the wealth (re)distribution of nations, we thought it important to look at the other side of the household balance sheet - that of 'debt' to see just how much 'progress' has been made in the world. In the aftermath of the credit crisis (and the ongoing crisis in Europe), government debt levels continue to rise but combining trends in household debt highlights countries that have sustainable (and unsustainable) overall debt levels - and thus the greatest sovereign debt problems. Whether the 'number' is from Reinhart & Rogoff or not, the reality is that moar debt is not better and the nations with the highest debt-per-capita may surprise many. Critically, despite the rise in 'wealth' from 2000-2008, the ratio of debt-to-net-worth rose on average by about 50% (and in many nations continues to rise). The bottom line - in almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor.
Technology, technology, and more technology—this is what has driven the American oil and gas boom starting in the Bakken and now being played out in the Gulf of Mexico revival, and new advances are coming online constantly. It’s enough to rival the Saudis, if the Kingdom allows it to happen. Along with this boom come both promise and fear and a fast-paced regulatory environment that still needs to find the proper balance. In an exclusive interview with Oilprice.com, Chris Faulkner, CEO of Breitling Energy Companies - a key player in Bakken with a penchant for leading the new technology charge—discusses: How Bakken has turned the US into an economic powerhouse; What the next milestone is for Three Forks; What Wall Street thinks of the key Bakken companies; Where the next Bakken could be; What to expect from the next Gulf of Mexico lease auction; What the intriguing new 4D seismic possibilities will unleash; What the linchpin new technology is for explorers; How the US can compete with Saudi Arabia; Why fossil fuel subsidies aren’t subsidies; How natural gas is the bridge to US energy independence; Why fossil fuels shouldn’t foot the bill for renewable energy; Why Keystone XL is important; Why the US WILL become a net natural gas exporter
Following April's surprising drop in crude imports which led to a multi-year low in the March trade balance (revised to -$37.1 billion), the just released April data showed an 8.5% jump in the deficit to $40.3 billion, if modestly better than the expected $41.1 billion. This was driven by a $2.2 billion increase in exports to $185.2 billion offset by a more than double sequential jump in imports by $5.4 billion, to $222.3 billion. More than all of the change was driven by a $3.2 billion increase in the goods deficit, offset by a $0.1 billion surplus in services.The Census Bureau also revised the entire historical data series, the result of which was a drop in the March deficit from $38.8 billion to $37.1 billion. In April 233,215K barrels of oil were imported, well above the 215,734K in March, and the highest since January. Furthermore, since the Q1 cumulative trade deficit has been revised from $126.9 billion to $123.7 billion, expect higher Q1 GDP revisions, offset by even more tapering of Q2 GDP tracking forecasts. And since the data is hardly as horrible as yesterday's ISM, we don't think it will be enough on its own to guarantee the 21 out of 21 Tuesday track record, so we eagerly look forward to today's POMO as the catalyst that seals the deal.
Back in 2010 we started an annual series looking at the (re)distribution in the wealth of nations and social classes. What we found then (and what the media keeps rediscovering year after year to its great surprise) is that as a result of global central bank policy, the rich got richer, and the poor kept on getting poorer, even though as we predicted the global political powers would, at least superficially, seek to enforce policies that aimed to reverse this wealth redistribution from the poor to the rich (a doomed policy as the world's legislative powers are largely in the lobby pocket of the world's wealthiest who needless to say are less then willing to enact laws that reduce their wealth and leverage). Now that the topic of wealth distribution (or rather concentration) is once again in vogue, below we present the latest such update looking at a global portrait of household wealth. The bottom line: 29 million, or 0.6% of those with any actual assets under their name, own $87.4 trillion, or 39.3% of all global assets.
Here are four things that seem to be dominating the weekend discussions.