On the heels of growing contagion concerns regarding shadow banking collateral and the "rehypothecation evaporation" and this weekend's 'odd' Chinese trade data (big drop in imports, no doubt impacted by dramatic commodity invoicing swings), the PBOC has fixed the Chinese currency 0.36% in the last 2 days... the biggest strengthening in the currency since October 2012. It is unclear for now exactly what is going on but we suspect the panic button outflows as banks pull credit and unwind CCFDs are forcing China's hand to offset CNY selling pressure... and of course China does it in grand style.
As we noted in the pre-open, the "BTFATH mentality" will be alive in well' and sure enough Goldman Sachs' S&P 500 Target for June 2015 was 1950, we just reached it 11 months early (1949.25 highs to be exact). Their corresponding target for 10Y yields at that level of S&P is 3.50% (so we are 90bps lower) and earnings expectations to support that price was $120 per share (dramatically higher than the current level). Goldman's 2014 Target is 3% lower than the current level. Nothing to see here, move along...
If predicting yesterday's EURUSD (and market) reaction to the ECB announcement was easy enough, today's reaction to the latest "most important ever" nonfarm payrolls number (because remember: with the Fed getting out of market manipulation, if only for now, it is imperative that the economy show it can self-sustain growth on its own even without $85 billion in flow per month, which is why just like the ISM data earlier this week, the degree of "seasonal adjustments" are about to blow everyone away) should be just as obvious: since both bad news and good news remain "risk-on catalysts", and since courtesy of Draghi's latest green light to abuse any and every carry trade all risk assets will the bought the second there is a dip, the "BTFATH mentality" will be alive in well. It certainly was overnight, when the S&P500 rose to new all time highs despite another 0.5% drop in the Shcomp (now barely holding on above 2000), and a slight decline in the Nikkei (holding on just over 15,000).
Will volatility become a policy tool? The PBOC decided that enough was enough with the ever-strengthening Yuan and are trying to gently break the back of the world's largest carry trade by increasing uncertainty about the currency. As Citi's Stephen Englander notes, this somewhat odd dilemma (of increasing uncertainty to maintain stability) is exactly what the rest of the world's planners need to do - Central banks will need more FX and asset market volatility in order to provide low rates for an extended period... here's why.
It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates. After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.
Since so many people are still slightly confused about how all the pieces come together in this move lower in yields, we feel the need to add some follow-up commentary.
The complete implosion in volume and vol, not to mention bond yields continues, and appears to have spilled over into events newsflow where overnight virtually nothing happened, or at least such is the algos' complete disregard for any real time headlines that as bond yields dropped to fresh record lows in many countries and the US 10Y sliding to a 2.3% handle, confused US equity futures have recouped almost all their losses from yesterday despite a USDJPY carry trade which has once again dropped to the 101.5 level, and are set for new record highs. Perhaps they are just waiting for today's downward revision in Q1 GDP to a negative print before blasting off on their way to Jeremy Grantham's 2,200 bubble peak after which Bernanke's Frankenstein market will finally, mercifully die.
Our response to a question asked by CNBC-- “Why if everybody is talking about inflation is the bond market not moving?
S&P (futures over 1900 for first time), Dow, and Nasdaq futures markets are all pressing new higher-highs this morning on the heels of Europe's dismal election news overnight. Helped early on by JPY weakness, stocks now have a mind of their own and have disconnected from an unchanged Treasury futures market (cash is closed) and a fading EURJPY/USDJPY carry trade. European peripheral bonds are the must-have asset of the day with Portuguese bonds particularly loved. Italian stocks are the high-beta idiot-maker trade today (+2.8%).
The chaps at General Motors must be breathing a small sigh of relief this morning as they are not the biggest 'recaller' headline of the day. Office Depot has decided to take some pressure off them...
- *OFFICE DEPOT RECALLING ABOUT 1.4M CHAIRS ON FALL HAZARD
- *OFFICE DEPOT HAS RECEIVED 153 REPORTS OF SEAT PLATE BREAKING
- *OFFICE DEPOT RECEIVED 25 REPORTS CONTUSIONS, ABRASIONS, INJURY
- *OFFICE DEPOT SAYS INJURY REPORT INCLUDED FRACTURED BACK, HIP
The chairs were manufactured in China. The great news - for those not suffering broken backs, hips, or contusions - ODP will offer a merchandise credit of $55 (a 37.5% gain over the price of the $40 chair)... we smell a carry trade.
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.