To compare Japanese and European bond yields in order to justify an argument for US bond yields staying historically low once the Federal Reserve is completely out of bond buying is a failed comparison.
St. Louis Fed James Bullard said on Friday that he expects the Fed to start raising rates sometime near the end of the first quarter of 2015.
Is there anything fundamental to explain why the equity indices of the "Fragile Five" countries, Brazil, South Africa, Indonesia, India and Turkey, have regained their recent highs? According to GaveKal the answer is a resounding no: "As investors, we like equity rallies to be propelled by fundamental factors, like earnings re-ratings or growth surprises. But there is little behind this rally to suggest any sustainable economic healing." So what is pushing this particular subset of risk higher? Why the global liquidity tsunami of course.
"Notwithstanding the view that we may see S&P get up to 1950 (+/- a little) over the next fortnight or so, over the rest of Q2 and Q3 we could see a decent correction of up to 20% in the risk-on trade. Low 1700s in the S&P attracts, and thereafter, depending on weekly closes, low 1600s/mid-1500s S&P could be in play. For now, however, the key level to the upside is 2000 as a weekly close on the S&P – if achieved then I would have to revisit my bearish bias for the belly of 2014. To the downside a weekly close below 1770 would, I feel, easily put a 1700 S&P within reach. Beyond that I would need to assess data and price action at the time before highlighting the next set of levels, but I would not be surprised to see policymakers again attempt to boost markets later this year - there should be no surprise if this happens because the reaction function of central bankers has become depressingly predictable."
The following outlines a solid statistical analysis of every aspect of the gold market, a thoroughly researched and well-presented account of the history of the modern monetary system and a highly original perspective of the growing bubble in debt and credit claims we have experienced since adopting today's system of credit-based money.
Some people are either born or nurtured into a time warp and never seem to escape. That’s Janet Yellen’s apparent problem with the “bathtub economics” of the 1960s neo-Keynesians. As has now been apparent for decades, the Great Inflation of the 1970s was a live fire drill that proved Keynesian activism doesn’t work. That particular historic trauma showed that “full employment” and “potential GDP” were imaginary figments from scribblers in Ivy League economics departments—not something that is targetable by the fiscal and monetary authorities or even measureable in a free market economy. Even more crucially, the double digit inflation, faltering growth and repetitive boom and bust macro-cycles of the 1970s and early 1980s proved in spades that interventionist manipulations designed to achieve so-called “full-employment” actually did the opposite—that is, they only amplified economic instability and underperformance as the decade wore on.
Confused by the market? You are not alone with irrational and "Fear of Missing Out" momentum trades and (not so great) sector re(un)rotation all that matters (as has been the case for years with fundamentals not relevant for about 24 months now), so here are some tips from Scotiabank's Guy Haselmann who believes "market noise can be simplified into the following: QE= risk on, End of QE=risk off. QE is now half way toward ending, so now is the time to adjust. The fact that…… EM central banks are hiking, China is attacking its credit bubble, and Japan hiked its VAT tax while the “third arrow” is M.I.A., are also reasons to de-risk. If sanctions on Russia expand to products or industries, then real problems to EU growth will arise. This is something to watch carefully."
The PBOC's willingness to a) enter the global currency war (beggar thy neighbor), and b) 'allow' the Yuan to weaken and thus crush carry traders and leveraged 'hedgers' is about to get serious. The total size of the carry trades and hedges is hard to estimate but Deutsche believes it is around $500bn and as Morgan Stanley notes the ongoing weakness means things can get ugly fast as USDCNY crosses the crucial 6.25 level where losses from hedge products begin to surge. This is a critical level as it pre-dates Fed QE3 and BoJ QQE levels and these are pure levered derivative MtM losses - not a "well they will just rotate to US equities" loss - which means major tightening on credit conditions...
There is a stark difference between the states of the markets for the monetary metals. The number of open futures contracts in gold is low, while in silver it’s high. What does it mean?
USDJPY has fallen over 250 pips in the last few days and today is its biggest daily drop in 8 months as stimulus-hope premia is removed from the FX carry trade juicer. USDJPY has retraced all its post-FOMC gains in the last 2 days as the euphoria-to-disaster crowd continues to flood in and out. This dive has driven Nikkei 225 futures down almost 1000 points from Friday's highs, pressuring the Japanese stock market to near its cheapest to the Dow in 15 months.
Being that markets are unrigged and all, at least according to every single proponent of HFT that is, futures have done their overnight levitation as they have every day for the past month driven by the one staple - the Yen carry trade - even if in recent days the broader market slump during the actual daytrading session mostly impacted biotechs yesterday. And since any news is good news, we don't expect today's main event, the ECB's rate announcement and Draghi press conference, both of which are expected to announce nothing new despite Europe's outright inflationary collapse which most recently dropped to 0.5%, the lowest since 2009.
Both the entire month of March, and its last full week, particularly for biotech investors and especially hedge funds, is a time that many would rather forget and continue pretending that the saying "as January goes, so goes the year" is no longer applicable. Luckily, for all those bulls who have forgotten that in a normal market there is both return and risk, at least in pre-New Normal times, there may be some good news. As Bank of America's chief technician MacNeil Curry reminds us, April is the least cruel month for stocks, posting the highest monthly average return since 1950, returning just over 2.0%.
Since the beginning of 2013, the market has been seen as invulnerable. Despite issues in the Eurozone, rising turmoil in the Mideast, riots and political clashes, rising oil prices and weak economic data - these issues bounced off the markets will little effect. The markets craved "bad news" as it provided insurance that the Federal Reserve would continue its "liquidity drip." It is important to note in the first chart above, that some of the biggest negative annual returns eventually followed 30% up years. The current levels of margin debt, bullish sentiment, and institutional activity are indicative of an extremely optimistic view of the market. Regardless, it is important to understand that it is always just a function of "when" a mean reverting event will occur. Unfortunately for many investors who fail to understand the "risk" they have undertaken within their portfolios, when that time comes it will matter "a lot."
Oh the dashed hopes... Just as we warned earlier... the dreams that yesterday was the dip to get back in and ride the waves of central bank largesse to another double in your favorite social media or Biotech stock are fading fast. Today is an almost perecect replay of yesterday's market action so far... pre-open Gold dump, JPY pump to sustain stocks at highs, spark retail bounce buyers back in and pros sell into strength as the "high growth" momentum stocks and Biotechs all reverse earlier gains in a hurry as all major stock indices are once again red post-Yellen.
With another session in which US futures levitate into the open, despite a modest drop in the Nikkei225 (to be expected after the president of Japan’s Government Pension Investment Fund, the world’s largest pension fund, said that a review of asset allocations into stocks is not aimed at supporting domestic share prices) and an unchanged Shanghai Composite while the currency pair du jour, the USDCNY, closes higher despite tumbling in early trade (which also was to be expected after a former adviser to the People’s Bank of China said China is headed for a “mini crisis” in its local- government debt market as economic reforms lead to the first defaults) everyone is asking: will it be deja vu all over again, and after a solid ramp into 9:30 am, facilitated without doubt by the traditional Yen carry trade, will stocks roll over as first biotech and then all other bubble stocks are whacked? We will find out in just over two hours.