Carry Trade

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Dead Cat Bounce Deja Vu Ends 2nd-Worst Week Of The Year For Stocks





The 2nd worst week of the year (2nd only to Cyprus) for US equities was accompanied by Treasury buying as the JPY carry trade unwind continues in every risky-or-'yieldy' product. On an admittedly low volume day (typically good for a magical levitation in stocks), Treasury markets closed the day unchanged (and 30Y bonds ended the week unchanged). Stocks bounced after testing yesterday's intraday lows but intriguingly (Mrs. Watanabe?) it was Utilities that were the hardest hit sector on the day as stocks fell back rapidly after bonds closed finding balance at VWAP. The JPY strength weighed on the USD as it fell 0.7% on the week with gold and silver both up notably relative to other asset classes (+1.8% and 0.5% respectively). The last minute of the day saw a ridiculous instantaneous spike to take the S&P 500 to their day-session highs to desparately try to regain green on the day (SPX cash closed -0.87 points). Futures closed green with an 8 point run from 455ET (as we note no credit police were around to stop the idiocy).

 


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What If Stocks, Bonds and Housing All Go Down Together?





The problem with trying to solve all our structural problems by injecting "free money" liquidity into financial Elites is that all the money sloshing around seeks a high-yield home, and in doing so it inflates bubbles that inevitably pop with devastating consequences. As noted yesterday, the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion. In shorthand, those people with access to near-zero-cost central bank-issued credit can take advantage of the many asset bubbles financialization inflates. Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. It is widely accepted as self-evident that all these bubbles will not pop because the central banks won't let them pop. That's nice, but if this were the case, then why did stocks crater in 2000-2001 and 2008-2009, and why did the housing bubble implode in 2008-2011? Did they change their minds for some reason? No; they assured us right up to the moment of implosion that everything was fine, there was no bubble, etc. The only logical conclusion is that bubbles pop even though central banks resist the popping with all their might.

 


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Why Italian Bonds Have A Long Way Down To Go





As we hinted last night, and as the market is starting to realize, one of the bigger downstream casualties of the first rumblings that Abenomics is starting to crack, have been peripheral bond yields, with Spanish, Italian and Portuguese yields all wider by 10 bps and rising. However, that is only half the story. The other half is that, with its usual 6-8 week delay, the market is finally grasping the biggest danger in Europe - one which we have been pounding the table on week after week after week (most recently here): the soaring non-performing loans held by European banks. In fact, it took the FT to confirm what we have been warning about all along. And just so the market has a sense of how much downside may be imminent if indeed reality reasserts itself and frontrunning the Japanese carry trade both occur at the same time, here is a rather unpleasant chart courtesy of Diapason, of what expects all those who bought up Italian bonds in the recent dash-for-trash, oblivious of the collapsing fundamentals, and driven purely by FOMO. The downside could be big to quite big.

 


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Bizarro Time As Better Data Sends Stocks Lower





"The last 36 hours have perhaps been evidence as to what might happen if stimulus is withdrawn before the global recovery has been cemented and what might happen if Japan makes mistakes along the way to their attempted new dawn. With the Chinese data still ambiguous, Europe still in recession, Japan in the very  early stages of a growth experiment and with the US recovery still historically very weak one has to say that liquidity has been the main market fuel in recent months. So central banks have to tread carefully and the Fed tapering talk and the BoJ's seemingly benign neglect policy towards JGBs has had the market fretting." - Deutsche Bank

 


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Despite 'Promises', Japanese Market Chaos Continues





UPDATE 1: Japanese stocks turned negative (NKY -600pts from highs, -1.5% on day; and TOPIX down over 4% from highs); Japanese banks -11% from yesterday highs; S&P futures down 10 points from after-hours highs...

UPDATE 2: *KURODA WANTS TO AVOID INCREASING VOLATILITY IN BOND MARKET (yeah thanks... as useful as saying "we all want to avoid syphilis")

UPDATE 3: Nikkei 225 Drops below 14,000 - TOPIX down 11% from highs

For the second day in a row, and in spite of comments from Abe and Kuroda on communicating with the market (as Kuroda says BoJ Monetary easing sufficient), Japanese capital markets are out of control.

 


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The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?





In all the hoopla over Japan's stock market crash and China's PMI miss last night, the biggest news of the day was largely ignored: copper, and the fact that copper's ubiquitous arbitrage and rehypothecation role in China's economy through the use of Chinese Copper Financing Deals (CCFD) is coming to an end.

 


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Italy's New Government Approval Rating Plummets From 43% To 34% In Three Weeks, Protests Return





It was less than a month ago that the new Italian government of the pseudotechnocrat Letta, of Bilderberg 2012 and Aspen Institute fame, was voted in by a majority of the PD and the PDL parties (the latter agreeing so Berlusconi would get an extension of his much needed political immunity from assorted prison sentences). It may not last too long. As Reuters reports, it took just 20 days for Letta's approval rating to plunge by 25%, dropping from 43% at the start of the month to 34%, according to an SWG institute poll. It would appear the Italian people (unlike their Japanese peers who at least according to government-controlled media data could not be happier with PM Abe, supposedly because of the bubblelicious 50% rise in the Nikkei225 year to date, even though under 20% are actually invested in the stock market making one wonder just how credible polling, and all other data in Japan actually is) don't have Mrs. Watanabe's childish fascination wth soaring stock bubbles, sexy bonds, mini skirts and 2% inflation bras, and instead demand real economic results. Which also means the protests are back.

 


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Spot The Odd Continent Out: Total Bank Assets As % Of GDP





There is a reason why in Europe, no matter how much some want to deny it, the Cyprus deposit confiscation "resolution" has become the norm. Quite simply, as BofA summarizes, "Europe's economy struggles with too many banks, too much debt and too little growth. A long history of empire, trade, war and commerce means a long history of banking. The world’s first state-guaranteed bank was the Bank of Venice, founded in 1157, and the world’s oldest bank today is also Italian, Monte Paschi di Siena (founded 1472). In many European countries, bank assets dwarf the size of the local economy and are far in excess of other regions in the world. This is similarly reflected in the local stock exchanges: even now financials account for 42% of the Spanish stock market and 31% of the Italian stock market versus  ust 16% in the US."

 


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The Race For The Door





So, apparently, according to Jon Hilsenrath, "QE to Infinity" is actually "finite" after all. There is no doubt that the Federal Reserve will do everything in its power to try and "talk" the markets down and "signal" policy changes well in advance of actual action.  However, that is unlikely to matter.  The problem with the financial markets today is the speed at which things occur.   High frequency trading, algorithmic programs, program trading combined with market participant's "herd mentality" is not influenced by actions but rather by perception. As stated above, with margin debt at historically high levels when the "herd" begins to turn it will not be a slow and methodical process but rather a stampede with little regard to valuation or fundamental measures. The reality is that the stock market is extremely vulnerable to a sharp correction.   Currently, complacency is near record levels and no one sees a severe market retracement as a possibility.  The common belief is that there is "no bubble" in assets and the Federal Reserve has everything under control. Of course, that is what we heard at the peak of the markets in 2000 and 2008 just before the "race for the door." This time will be no different.

 


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Detroit May Run Out Of Cash Next Month





Another day, another US city on the brink of insolvency. This time it's Detroit, whose recently appointed emergency financial manager Kevyn Orr said may run out of cash next month and must cut costs such as long-term debt and retiree obligations. According to Bloomberg, "Orr’s report says the cost of $9.4 billion in bond, pension and other long-term liabilities is sapping the ability to provide such basic services as public safety and transportation. He listed cutting debt principal, retiree benefits and jobs among options he may take. “No one should underestimate the severity of the financial crisis,” He called his report "a sobering wake-up call about the dire financial straits the city of Detroit faces."

 


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Overnight Yen Tumble Sends Asia Scrambling To Retaliate





The main story overnight is without doubt the dramatic plunge in the Yen, which following the breach and trigger of USDJPY 100 stops has been a straight diagonal line to the upper right (or lower for the Yen across all currency crosses) and at last check was approaching 101.50, in turn sending the USD higher in virtually all jurisdictions. However it is not so much the Yen weakness that was surprising - a nation hell bent on doubling its monetary base in two years will do that - but the accelerating response in neighboring countries all of which are seeing Japan as the biggest economic threat suddenly and all are scrambling to respond. Sure enough, midway through the evening session, Sri Lanka cut its reverse repo and repurchase rate to 9% and 7% respectively, promptly followed by Vietnam cutting its own refinancing rate from 8% to 7%, then moving to Thailand where the finance chief Kittiratt called for a rate cut exceeding 25 bps, and more jawboning from South Korea suggesting even more rate cuts from the export-driven country are set to come as it loses trade competitiveness to Japan. Asian financial crisis 2.0 any minute now?

 


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Chinese Trade Data Manipulation: Innocent "Excel Glitch" Or Something Far More Sinister?





All Chinese economic data is manipulated: that much is known. So is its trade data. However, the manipulation has become so grossly evident, some wonder if there is a far bigger problem behind the scenes. Turns out there is: a $60 billion per month "hot capital" inflow problem, and an economy on the very of bursting at the inflationary seams.

 


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Surprising German Factory Orders Bounce Offset ECB Jawboning Euro Lower; Australia Cuts Rate To Record Low





The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.

 


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Of Spain's "Bad Bank" Foreclosed Properties, Only 6,000 Of 83,000 Units Have Tenants





Most of the SAREB's loans are linked to finished properties, for which it might be easier to find a buyer, but 4.3 percent are for unfinished developments and nearly 10 percent are for empty lots, for which there is little or no demand. Nearly all of the foreclosed properties in its portfolio are empty, including apartment blocks far outside big cities. Only 6,000 of nearly 83,000 housing units have tenants.

 


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