Carry Trade

The global risk on mood (which is really anything but, and is merely an unprecedented short covering squeeze as we will report momentarily) launched by an abysmal jobs report one week ago and "validated" yesterday by the surprisingly dovish FOMC minutes, which said nothing new but merely confirmed what most knew, namely that a rate hike is almost certain to not occur until mid-2016 if ever, and accelerated by a Fed-driven collapse in the dollar which overnight has led to a historic 3.4% move in the Indonesian Rupiah the most since 2008, has pushed global stocks even higher in their biggest weekly rally since 2012, despite the start of an earnings season where virtually every single company reporting so far has stumbled on earnings reports that were far worse than even gloomy consensus had expected.

The market is prone to temporary fits of shared enthusiasm – for emerging-market debt, for Internet stocks, for residential mortgage-backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize. IBGYBG, they say – I’ll be gone, you’ll be gone. There are numerous routes to bezzle and febezzle...  traders borrowed money from the future. And then the future came, as it always does, turning the bezzle into a bummer.

"... standard monetary policy rules might justify a continuation of the current zero-rate policy for much longer, well into 2016 or potentially even beyond. In this context, it is interesting that the reduced market-implied probability of liftoff in 2015 after Friday’s weak employment report mostly translated into a higher probability of liftoff not in 2016 but in 2017!"

The collapse is not over by any stretch...

BOJ IS SAID TO SEE LITTLE IMMEDIATE NEED FOR ADDING STIMULUS
BOJ OFFICIALS ARE SAID TO WANT CHANCE TO SEE MORE DATA

Courtesy of JPM we find something curious: it is no longer the Fed, nor its capital markets proxy, Citadel, nor even the banks or hedge funds that are the primary sellers of volatility. It is retail investors themselves!

Asian markets are bouncing modestly off a weak US session, buoyed by more unbelievable propaganda from Japan. Abe's proclamations that "deflationary mindset" has been shrugged off was met with calls for more stimulus, more debt monetization, and an admission by Etsuro Honda (Abe's closest adviser) that Japan "is not growing positively" and more QE is required despite trillions of Yen in money-printing having failed miserably, warning that raising taxes to pay for extra budget "would be suicidal." Japanese data was a disaster with factory output unexpectedly dropping 0.5% and retail trade missing. Markets are relatively stable at the open as China margin debt drop sto a 9-month low. PBOC strengthened the Yuan fix for the 3rd day in a row to its strongest in 3 weeks.

With liquidity in the markets drying up, it's important not only to understand the opportunity but also to understand how to execute on an opportunity!

The market, which clearly ignored the glaring contradictions in Yellen's speech which said that overseas events should not affect the Fed's policy path just a week after the Fed statement admitted it is "monitoring developments abroad", and also ignored Yellen explicit hint that NIRP is coming (only the size is unclear), and focused on the one thing it wanted to hear: a call to buy the all-critical USDJPY carry pair - because more dollar strength apparently is what the revenue and earnings recessioning S&P500 needs - which after trading around 120 in the past few days, had a 100 pip breakout overnight, hitting 121 just around 5am, in the process pushing US equity futures some 25 points higher at last check.

What can we expect to happen in our homeland when finally even the generally uninformed population also understands that governments they have elected for decades, and its Fed facilitator or controller, jointly have waged a century-long war on its citizens? The people of America cannot make a counter offensive similar to those of sovereign nations; however people are uniting in resistance to robber baron policies, as evidenced by the popularity of nonpoliticians currently in candidacy for the office of president. These troops will mass also, it just remains to be seen what form their eventual counter offensive will be. The established order will be challenged.

"In such a downside scenario there could be pressure on the central bank to provide about 10-12% of GDP in reserves to the market to offset outflows as well as hedging demand (which could be met by intervening in forward markets). This is roughly USD1.0-1.2trn – that would be about 30% of its current reserve portfolio."

After sliding early in Sunday pre-market trade, overnight US equity futures managed to rebound on the now traditional low-volume levitation from a low of 1938 to just over 1950 at last check, ignoring the biggest single-name blowup story this morning which is the 23% collapse in Volkswagen shares, and instead have piggybacked on what we said was the last Hail Mary for the market: the hope of more QE from either the ECB or the BOJ. Tonight, it was the latter and while Japan's market are closed until Thursday for public holidays, its currency which is the world's preferred carry trade and the primary driver alongside VIX manipulation of the S&P500, has jumped from a low of just over 119 on Friday morning to a high of 120.4, pushing the entire US stock market with it.

Below we show what the latest, September, response is to the question "what investors consider the biggest tail risk" as well as evolution of this answer in the three months preceding. Curiously both #1 and #2 risks, namely "China recession" and "EM Debt Crisis", are an indirect function of the recent and ongoing surge in the dollar, which will likely be exacerbated should the Fed indeed launch its first rate hike cycle in 9 years.