The ongoing fight between Elliott Capital (et al, i.e., "the holdouts") and Argentina may moved to the backburner recently as the topic of sovereign bond impairment is not as actual today as it was a year ago (it will be again soon once the European double bluff of OMT and Japan's carry trade finally fizzle and European political crises return) nor have any Argentinian ships been confiscated recently by the multi-billion hedge fund, but that does not mean it is any less relevant or has any less implications for the global sovereign debt market. But while global consensus had largely been largely against Argentina in its treatment of holdouts, that may soon change in a very dramatic manner with a new and very unexpected entrant, one supporting the Argentinian position, and for all the wrong reasons too: the US president.
Another day, another 3-sigma swing in one of the biggest and most important FX carry-trades. AUDJPY is collapsing this morning as the smell of leveraged trades being tapped on the shoulder is all too fresh. Critically, carry trades are predicated on leveraging low returns in a low-volatility world; the shocks from a few weeks ago saw carry unwinds en masse - but all it took was a handful of Fed officials and Draghi/Carney's chatter and they are backing up the truck of the carry-express once again - that is until yesterday when the Minutes and Bernanke stepped up the currency wars once again. This kind of incredible volatility - unless everyone in the world is now a non-MtM trader - means fewer carry trades (or perhaps just a shift to another leveragable position).
Just more meangingless drivel form a clueless, paid for rating agency (which recently disclosed it would plead "puffery" in its defense against the US lawsuit) now that the ECB is intent on actually lowering the EURUSD, because unlike last year, there is no (immediate) fear of redenomination risk as a result of a sliding EURUSD. Thank you Japanese carry trade.
It can't happen... It can't happen...It can't happen... It just happened.
On occasion of an address to economists at a conference in France, Bundesbank president Jens Weidmann reminded the audience that 'the ECB cannot solve the crisis', because it is due to structural reasons and therefore requires structural reform. Weidmann rightly fears that governments will begin to postpone or even stop their reform efforts now that the ECB has managed to calm markets down. In a Reuters article on the topic, a number of people are quoted remarking on ECB policy. What is so interesting about this is how far removed from reality general perceptions are when it comes to judging current central bank policies. In short, Weidmann wants to end the three card Monte, whereby commercial banks buy the bonds issued by governments because they don't have to put any capital aside for the purpose, which bonds they then can in turn pawn off to the central bank for refinancing purposes. Weidmann wants to see the connection between banks and sovereigns severed, a connection that has been fostered by governments over many centuries in order to enable them to spend more than they take in through tax revenues.
The first news overnight came from the RBA which kept the target cash rate at 2.75% and following a warning that the AUD remains at a high levels (despite falling 10%), saw various AUD pairs slide. Which meant that all those correlation desks which had linked their rising ES signals to the AUDJPY and AUDUSD, would have to promptly recalibrate and find something else to "carry" them higher. That something was the Yen, as the USDJPY once again rose to just shy of the 100 resistance area, in the process pushing the Penikkeistock higher by 1.8% and above 14k, to 14,099 to be precise. Supposedly the Yen carry trade is back and all good again, or until such time as the 10 year hits 1% and the entire farce is repeated once more. However, at least Abenomics has bought itself a few weeks reprieve for the time being.
Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.
Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.
Here's my take on the key events for investors in the week ahead, with an attempt to place them in a somewhat larger context.
There are a number of factors behind the widening canyon of economic inequality, but the primary driver is financialization. Financialization has given those with capital and access to financier expertise ways to skim great wealth from the system without creating any value whatsoever. The hidden toxin in financialization is the resulting concentration of wealth can buy concentrations of political power. Financialization is thus self-perpetuating: once the skimming operations generate billions of dollars in profit, it only takes a relatively small piece of these profits to buy/influence the political class. Once the politicos are in your pocket, the regulators and judiciary fall into line or are marginalized by new statutes or gutted budgets. Financialization is the disease eating away the heart of the economy and what's left of democracy.
It was shaping up to be another bloodbathed session, with the futures down 10 points around the time Shanghai started crashing for the second night in a row, and threatening to take out key SPX support levels, when the previously noted rumor of an imminent PBOC liquidity injection appeared ex machina and sent the Shanghai composite soaring by 5% to barely unchanged, but more importantly for the all important US wealth effect, the Emini moved nearly 20 points higher from the overnight lows triggering momentum ignition algos that had no idea why they are buying only knowing others are buying. The rumor was promptly squashed when the PBOC did indeed take the mic, but contrary to expectations, announced that liquidity was quite "ample" and no new measures were forthcoming. However, by then the upward momentum was all that mattered and the fact that the underlying catalyst was a lie, was promptly forgotten. End result: futures now at the highs for absolutely no reason.
Lots of sellside squeals this morning following the epic bloodbath in China, where in addition to what we already covered hours ago, has seen at least five companies (China Development Bank, Shanghai ShenTong Metro, China Three Gorges Corp., Doosan Infracore China Co. and Chongqing Shipping Construction Development) delay or cancel bond offerings as the PBOC's admission of capital "misallocation" is slowly but surely freezing both bond and stock markets. And while the plunge was contained first to China, then to Asia, then to Europe (where the Spanish 10 Year once again surpassed 5% as expected following the carry trade unwind), with the arrival of bleary-eyed US traders the contagion is finally coming home. In a redux of last week, 10 Year yields are shooting up, hitting as high as 2.63% a few hours ago, while equity futures are now at the lows of the session. It could turn very ugly, very fast, especially if the Hamptons crowd were to actually read the stunning BIS annual report released on Sunday, which not even Hilsenrath explaining "what the BIS really meant" will do much to change the fact that the days of monetary Koolaid are ending.
It's as if we have two economies: the simulacrum one of stocks rising dramatically in a few months, and the real one of household earnings (down) and hours worked (down). It is difficult to justify the feeling that we are living in an extraordinary moment in time, for the fundamental reason that it's impossible to accurately assess the present in a historical context. Extraordinary moments are most easily marked by dramatic events such as declarations of war or election results; lacking such a visible demarcation, what sets this month of 2013 apart from any other month since the Lehman Brothers' collapse in 2008? It seems to me that the ordinariness of June 2013 is masking its true nature as a turning point. Humans soon habituate to whatever conditions they inhabit, and this adaptive trait robs us of the ability to discern just how extraordinary the situation has become.
With the confusion over Bernanke's comments - "have no fear as the economy is bad enough that the Taper will never come" confused with "the economy is picking-up and that's great so we don't need the Fed anymore" - one has to ask, as we have numerous times, is there another reason for the Fed to start the ball rolling on the Taper talk? In the last few weeks, the Treasury market's yields have risen notably but much more critically, the fails-to-deliver has surged. This critical indicator of both collateral shortages and technical carry trade unwinds is a little-discussed indicator of just how broken the market is thanks to the overwhelming ownership of the Fed. It's getting worse - as Barclays warns, the weakness in bonds is feeding on itself as more people want to short and so the need to borrow from the Fed (as dealer inventory is so low) increases and raises the cost (special-ness) of that short. Simply put, the main reason the Fed is tapering has nothing to do with the economy and everything to do with the TBAC presentation (rehypothecation and collateral shortages) and that the US is now running smaller deficits!!!
As reported yesterday, Greece has stormed right back to the top of the crisis charts, not only due to the previously reported news that the IMF may be withholding further payments until Greece finally gets its house in order (three years later one can forget this will happen), but because as a result of the fallout surrounding the national broadcaster ERT, the coalition government is now in tatters. Moments ago any hopes that some political stability may be preserved were crushed following news that the Democratic Left official Vassilis Economou, who spoke libe on Greek Skai TV which is still in operation, said the party decided to withdraw its ministers from the coalition govt of Prime Minister Antonis Samaras. And there goes the fake sense of calm that has permeated the south of Europe ever since last summer's nail-biting Greek elections, which concluded in the best possible way for Germany. This time around, however, the last thing Merkel needs two months ahead of her reelection is a resurgence in the peripheral crisis, timed perfectly to coincide with the end of the carry trade, which will mean only the ECB is left to pick up the pieces.