Capital Markets

It’s getting downright hazardous out there, and not just because the robo-machines were slamming the “sell” key today. The real danger comes from the loose assemblage of official institutions which claim to be running the world.

Persistently low oil prices have already inflicted economic pain on oil-producing countries. But with crude sticking near six-year lows, the risk of political turmoil is starting to rise. There are several countries in which the risks are the greatest – Algeria, Iraq, Libya, Nigeria, and Venezuela – and, as we noted previously, RBC Capital Markets has labeled them the “Fragile Five.”

Facing a growing public backlash and seeking to deflect charges that the government is complicit in a massive coverup of a completely avoidable disaster that ultimately caused the deaths of more than 100 people, Beijing has compelled the Party-affiliated majority shareholders of Tianjin International Ruihai Logistics to admit their role in circumventing restrictions on the storage and handling of hazardous chemicals.

With China's currency devaluation having shifted to the backburner if only for the time being, all attention was once again on the Chinese stock market roller coaster, which did not disappoint: starting off with yesterday's dramatic 6.2% plunge, the Shanghai Composite crashed in early trading, plunging as much as 5% in early trading and bringing the two-day drop to a correction-inducing 11%, and just 51.2 points away from the July 8 low (when China unleashed the biggest ad hoc market bailout in capital markets history) . And then the cavalry came in, and virtually the entire afternoon session was one big BTFD orgy, leading to a 1.2% gain in the Shanghai Composite closing price, while Shenzhen and ChiNext closed up 2.2% and 2.7%, respectively.

Between micromanaging the economy, equities, the yuan, and public opinion, there's no question that China has its hands full these days. But with everyone's attention now focused sqaurely on Beijing's plunge protection team and the PBoC's "controlled" yuan devaluation, the market may be ignoring the biggest risk of all...

Noble Group is Asia’s largest commodities trader. According to GMT research, Noble Group took what they have estimated as between $4 to $6 billions worth of fair value gains on asset valuation over the last 5 years. Since we are exactly one week after their Q2 results, in theory Standard and Poor’s had time to do their homework. We expect a big announcement of S&P on Noble Group later this week. UK insurers (who have also a foot in the cargo insurance market) have dumped Noble Group bonds overnight.

"Time is now rapidly running out," warns The Telegraph's John Ficenec as the British paper takes a deep dive into the dark realities behind the mainstream media headlines continued faith in central planning. Sounding very "Zero Hedge", Ficenec warns that from China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

Is Saudi Arabia on the verge of winning the war on US Shale firms? It appears the spigot of malinvestment-subsidizing liquidity that kept numerous zombie energy firms alive has been shut off almost entirely. As oil prices return to cycle lows, so credit risk has spiked to record highs and issuance of life-giving bonds has collapsed. As Reuters reports, this has opened up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as many oil companies need cash to replenish banks' slimmed-down lending facilities, service their bonds and finance drilling of new wells to keep pumping oil and sustain cash flow. But hope is fading as one private equity form CEO warns "I would say, this is a good time to be careful when it comes to investing in energy."

Just two days ago we warned of the dramatic disconnect between equity insurance and credit insurance markets - at levels last seen before Bear Stearns collapse. As the Yuan devaluation shuddered EURCNH carry traders and battered European assets, US equity markets stumbled onwards and upwards, impregnable in their fortitude with The Fed at their back no matter what. However, US corporate bond markets were a bloodbath...

Today many are talking about the economy, but that’s all they’re doing: talking. Doesn’t matter if its today’s politician, CEO’s from the largest corporations, some national or regional business association figure-head, right down to academia with its self-perpetuating gaggle of Ivory Tower economic aficionados. All they are doing is paying lip-service to the problems. And the reason? They can’t do anything about it because as of today, the U.S. economy is being controlled high-handedly by The Federal Reserve. The U.S. economy has never before been under the command and control of a single entity – until now. Today the Fed. entices nearly all businesses to focus on short-term games of financial engineering rather than on core business principles to grow. This is what a stance at the zero bound gives rise to.

Near-term dollar outlook, with some views on oil, Treasuries and S&P 500 thrown in for extra measure.  

When things that are supposed to happen once every 3 billion years (statistically speaking) start happening once every three months, or every three weeks, then something is definitively broken.

One of the most disturbing and recurring themes highlighted on this site over the past year has been the ever greater disconnect between the worlds of equity and fixed income, whether in terms of implied volatility, or actual underlying risk.  It turns out there is be an even more acute, and far more concering divergence, which was conveniently pointed out overnight by Bank of America and which suggests that a Bear Stearns type event may be just a few days ahead.

How did Tepper do in Q2? In a word: lousy. In another word: the man who recently was on CNBC pitching a 20x P/E multiple as the new normal, may have just called the market top.