The best summary of what has (not) been going on in the downward drifting equity markets comes from DB's Jim Reid, quoting: "Markets are in non-panicky limbo at the moment ahead of the upcoming US budget debate. US equities fell for the 5th day in row (S&P 500 -0.27%) and although this is the worst run since the Christmas/New Year’s Eve period of 2012 (due to the fiscal cliff debacle), the cumulative fall is only -1.9% over this decline. Meanwhile Treasuries hit a 7-week low in yield as they recorded their 12th decline in the last 14 days." As has been the case over the past week, stocks in Asia have generally traded lower with the exception of the Nikkei225 which day after day continues to do its insane penny stock thing, first dropping -1.5% only to close up 1.2% on absolutely no news, but some chatter the Abe administration would raise the sales tax on October 1, only to offset the fiscal benefit by lowering corporate tax. How this has any net impact is beyond us. Proceeding to Europe, stocks failed to sustain the initial higher open and moved into negative territory, with Italian asset classes underperforming, as market participants digested reports citing Italian MP Gasparri saying that PdL lawmakers are ready to quit if Berlusconi is ousted. This in turn saw a number of Italian banking stocks come under intense selling pressure, with the Italian/German yield spread widening in spite of supportive reinvestment flows that are due this week.
Early weakness in Asia driven by US-follow thru selling and ongoing concerns about the us fiscal showdowns as well as the debt ceiling, if not by actual news, resulted in a red close in both the Nikkei and SHCOMP, as well as other regional indices such as the Sensex. This then shifted to Europe, where however stocks reversed the initial move lower and are seen broadly flat, with Bunds remaining bid on the back of month-end, as well as coupon and redemption related flows. However the move higher in stocks was led by telecommunications and health care sectors, which indicates that further upside will require another positive catalyst. There was little in terms of fresh EU related macroeconomic commentary, but according to a report published by the European Banking Authority, the EU’s biggest 42 banks cut their aggregate capital shortfall with respect to the “fully loaded” 2019 Basel III requirements to €70.4bln as of December 2012. This is amusing since not one European bank has actually raised capital, but merely redefined what constitutes capital courtesy of a liberal expansion of RWA, Tier 1 and various other meaningless definition which works until such time as the perilous European balance kept together by the non-existent OMT, is tipped over.
A few years back Chairman Bernanke was asked by a financial reporter how confident he was that the Fed could easily start the process of withdrawing from the accommodation of “unorthodox” monetary policy. Some might argue (ourselves included) that the answer 'should' be something like “very confident” or “We feel we have the right tools and the right people to manage that process”. Instead the answer given was “100%”. At last week's press conference, Chairman Bernanke, in CitiFX Technicals' view, looked like the “cat that got the cheese", despite the more downbeat message he was giving? Why? Because he got his way. In their “conspiracy theory” interpretation it is likely that Janet Yellen’s nomination will indeed be announced in the near future and that tapering is now firmly back off the table despite the guidance given in recent months to the contrary. Bonds seem to agree (so far).
Following UMich confidence's biggest miss on record, the Conference Board misses expectations printing at its lowest since May 2013 as the last data was revsied higher. This is the largest MoM drop since March. Crucially, the headline index was saved by a surge in the "present situation" as expectations for the future plunged. As a reminder, Consumer Confidence has an awkward 4 year 4 month pattern of dysphoria to euphoria (though at progressively lower levels) and today's data merely confirms that the cycle of exuberance may have been broken.
Everything was proceeding according to central-plan with a gradual rise in risk and a decline in the USD until 4 am Eastern, when the German IFO Business Climate data was released and missed across the board (107.7 vs Exp. 108.0; Current assessment 111.4 vs Exp. 112.5; Expectations 104.2 Exp.104.0), reminding everyone now that Merkel is cemented for the near future, the immediate prerogative for Europe is to get the EUR lower, one way or another. A returning bid to the dollar also has pushed 10 Year yields under 2.70%, while once again sending various EM currencies sliding, and bringing back cross asset volatility to a world whose Sharpe ratio over the past several months has plummeted into negative territory. Increasing concerns about a government shutdown (misplaced) will likely prevent a solid bid from developing under markets.
Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.
The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
One week after we released the following damning evidence (below) of fraud in the "markets", CNBC has now claimed their scoop. Crucially, it seems, after reading Nanex's concise explanation of the proof of fraud, the Fed has now launched a probe into the release of its own FOMC statements. ... Our question then is, unless Nanex and ZeroHedge had pointed out this obvious cheat, would the fraudsters still be considered too big to care about special relativity, and if a fallen HFT tree collapses its wave function in the forest, and nobody reports, did an HFT tree just fall?
One of Einstein's great contributions to mankind was the theory of relativity, which is based on the fact that there is a real limit on the speed of light. Too bad that the bad guys on Wall Street who pulled off The Great Fed Robbery didn't pay attention in science class. Because, as Nanex shows below, hard evidence, along with the speed of light, proves that someone got the Fed announcement news before everyone else. There is simply no way for Wall Street to squirm its way out of this one...
The July statement from the FOMC presented the following snapshot of the economy, "Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months..." but as Stone McCarthy notes, tomorrow's FOMC post-meeting statement could well be less upbeat in tone, with hints of a slowing in the pace of improvements in the labor market, housing, consumer and business spending, and inflation remaining well below the 2% goal. A look at the housing and spending data certainly raises eyebrows but it is clear that the Fed remains cornered by deficits, sentiment, technicals, and international ire.
Perhaps confirming the collapse in consumer confidence we saw last week - that the market shrugged off on the back of Summers - ShopperTrak, which measures store traffic in 60,000 locations world-wide expects retail sales in November and December to rise by only 2.4%. As the WSJ reports, this will be the worst holiday season since 2009 (which last Friday's dismal +0.1% ex-Autos rise in retail sales for August supports). Retailers are clearly anxious with Kmart already airing its first holiday ad - 105 days before Christmas. As ShopperTrak notes, consumers are worried about a host of issues including rising interest rates that has "got people feeling more tenuous about the holiday season."
The most important event of the "coming" week was unexpected, and did not even take place during the week, but the weekend. So with Summers unexpectedly, and uncharacteristically out, here is what else is in store.
While the only market moving event of note had nothing to do with the economy (as usual), and everything to do with the Fed's potential propensity to print even more dollars and inject even more reserves into the stock market (now that Summers the wrongly perceived "hawk" is out) some other notable events did take place in the Monday trading session. Of note: while India's August inflation soared far higher than the expected 5.7%, rising to 6.1% from 5.79% (making life for the RBI even more miserable, as it is fighting inflation on one hand, and a lack of liquidity on the other), in Europe inflation decelerated to 1.3% from 1.6% in July driven by a drop in energy prices, while core inflation was a tiny 1.1%. In a continent with record negative loan growth this is to be expected. Additionally, as also reported, Merkel appears to be positioned stronger ahead of this weekend's Federal election following stronger results for her CDU/CSU, if weaker for her broader coalition. In Libya, oil protesters said they would continue stoppages at oil terminals until their demands are met in yet another startling outcome for US foreign intervention. Finally, some headline on Syria noted a Kerry statement "will not tolerate avoidance of a Syria deal", while Lavrov observed that it may be time to "force Syria opposition to peace talks." And one quote of the day so far: "Don't want market to become excessively exuberant" from the ECB's Mersch- just modestly so?
Following this morning's miss on retail sales and plunge in consumer confidence, Bloomberg's Rich Yamarone points out that retailers remain anxious about the outlook as they see consumers cautious and expect a spending slowdown. The following quotes from some of the largest and most belwether names may help shed some light on the reality of the hope that is priced into markets about consumption relative to actual business expectations... perhaps best summed by Sealed Air's CEO, "we are in the fourth year of the recovery and it doesn’t feel like a recovery. Because it’s the first time ever that things, four years within a recovery, are feeling so iffy."
This is the first consecutive monthly drop in 14 months and the largest miss vs expectations on record. Printing at 76.8 (against an expectation of 82.0), this is the lowest in 5 months and points to the picture we have been painting of a consumer increasingly affected by rising rates and soaring gas prices amid stagnant incomes. As Citi notes below, this is the exact same pattern we have seen play out in the last 2 cycles and suggest significant downside risk to US equities. The economic outlook sub-index collapsed to its lowest since January.
Overnight asset classes got a jolt following a report by Nikkei that Obama was moving toward naming Summers the next Fed chairman, citing “several close US sources,” pushing stocks modestly lower in Europe, with bond yields higher. According to the report, Obama is to name Summers as next Fed chairman as early as late next week, after the Federal Open Market Committee meeting. Otherwise, risk is still digesting the news of the confidential Twitter IPO, as it is becoming quite clear that some of the largest names (Hilton also announced yesterday) are seeking to cash out in the public markets. Is this the top?