Central Banks

For SocGen, as a result of a rather unfortunate credibility-losing accident, the Fed will not be one of the two major factor that will drive markets in the fourth quarter. So what will? According to the French bank, it is all up to China and Earnings now.

News That Matters

"Our model indicates the US equity market could potentially drop by 30% in the event of an ‘EM lost decade’ and by 60% in the event of a China hard landing (i.e. S&P 500 back to its lows)."

The US has now joined Canada, Cyprus, New Zealand, the UK, and Germany with plans to seize bank accounts during the next financial crisis. 

The recent scare that investors may be slowly (or not so slowly) waning in the primary market for US Treasurys is rapidly becoming a distant memory, and after yesterday's 3 Month bills pricing at 0.000% for the first time ever, today's strong 3 Year auction should end any debate, if only for the time being, about interest in US paper.

"Central bank credibility is priceless and they desperately need to reclaim the intellectual high ground. The continuous public back-and-forth through speeches and attempts at expectation management just aren’t working."

Overnight Barclays looked at the link between the current state of corporate profits, plunging by 60bps, and the broader economic cycle. It used data set stretching to the last seven business cycles, dating back to 1973, and found that on 5 out of 6 occasions, such a drop in margins resulted in a recession. In Barclays' own words: "the results are not encouraging for the economy or the market."

While Reverse QE, or QT, or whatever one wants to call it has become traditionally associated with Emerging Markets and petroleum exporters, nobody had linked it with one of the most advanced Developed Markets in the world which also happens to be an oil exporter, the market with the largest sovereign wealth fun in the world: Norway. That is about to change because as Bloomberg report, "the future may already be here", a future in which Norway's gargantuan $830 billion sovereign wealth fund, the product of two decades of capital accumulation courtesy of Norway's vast petroleum reserves and oil trade, is forced to begin liquidating its vast assets.

The best headline to summarize what happened in the early part of the overnight session was the following from Bloomberg: "Asian stocks extend global rally on stimulus bets." And following the abysmal data releases from the past three days confirming that the latest centrally-planned attempt to kickstart the global economy has failed, overnight we got even more bad data, first in the form of Australia's trade deficit, and then Germany's factory orders which bombed, and which as Goldman said "seems to reflect genuine weakness in China and emerging markets in general and this will weigh on the German manufacturing sector."

News That Matters

Stocks have taken out key support at a time when the Fed's hands are tied. 

If you don’t think financial markets have been utterly destroyed by central bank intrusion then how can you explain Friday’s 460 Dow point reversal higher after the post-NFP low? It was pure machine rage triggered by another implied “lower for longer” Fed policy signal. In short, we are now in an exceedingly dangerous phase of the central bank end game. They continue to pour gasoline on the first of financial speculation, yet smugly insist all is clear.

"There’s a lack of faith in monetary policy -- you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money -- and still inflation is lower. I think this is a dangerous situation if people perceive that it has the responsibility and it doesn’t have the tools."