Very much in keeping with the tradition of Japan's now monthly QE8 (September) and QE9 (October), last night's announcement of what is effectively QE10, left a bitter taste in the mouth of salivating habitual gamblers (f/k/a traders), after Shirakawa showed he would not bend over to Abe's political demands just yet, and left out any mention of inflation targeting, whether 2% or 3%, out of the QE10 announcement. What he did include was yet another JPY 10 billion increase in the total asset purchase fund to a total of JPY 76 trillion, increasing the size of eligible JGB and Bill purchases by JPY 5 billion each. However, since this approach has proven to be a total failure in recent months, the market immediately faded the move and the USDJPY tumbled to under 84.00 overnight. Of course, this an all other overnight news items are, of course, completely irrelevant, as the market now observes the Cliffhanger drama in what may be its last day. As we expected several days ago, if the GOP indeed proceeds to vote Plan B in the House today (and is subsequently voted down by the Senate), you can drop any hope of a compromise deal in 2012.
Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?
At a time in the year when the market should be at a standstill, and when all trading should be over, the tension in the S&P is unprecedented, driven by two main factors: the ongoing Fiscall Cliff confrontation, which now appears set to not be resolved by Christmas, and very likely to persist into the new year, and what happens with hotel AAPLfornia, as suddenly it has become a liability to show LPs any holdings of the fruit in the year end statement. The two events combined will likely see furious market volatility persist well through the year end, and since volumes will further die down, we may well see massive stock moves on odd lots. And while AAPL is trading under $500 for the first time since February following last night's Citi downgrade, the confusion over the Fiscal Cliff persists, with The Hill first reporting that Boehner is willing to cave on the debt ceiling extension, even as Boehner himself subsequently tweeted that "Any increase in the debt limit will require a greater amount in spending cuts and reforms." So back to square one, with a red herring proposal that Boehner can say we offered to the president and the president turned down. Japan continues to attract a lot of attention with the ADHD market desperate to hope that the coming of Abe 2.0 will be much better than that of 1.0, when in one year he achieved nothing and then resigned due to diarrhea. Judging by the action in the USDJPY, we may be a few short hours away from closing the gap that sent the pair to 84.30 first thing, and proceeding to unwind the near record JPY commitment of traders short position as the JPY realizes this time will not be different. Quiet calendar in the US, with the Empire State Manufacturing Index expected to print at -0.5 at 8:30 am Eastern, TIC data to show China's ongoing TSY boycott at 9 am, and a hawkish Jeff "Mutiny on the Eccles" Lacker speech at 1 pm.
In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.
Your comprehensive yet concise, one-stop summary of all the bullish and bearish events of the past week.
After its biggest miss in four years (following the pre-revision spike to the biggest beat in three years), UMich Consumer Confidence came at 74.5 relative to an 82.0 expectation (biggest miss on record). Hugely down from last month's final print of 82.7, this is the first negative print since July to the lowest since August. Expectations for the future crashed its second largest absolute print on record (-13 to 64.6) to the lowest since Dec 11. In the typical election year we see a rise in hope and confidence into the election and then a drop off after - it seems we are following that path...
The US dollar continues to trade heavily, with the euro and sterling edging to new multi-week highs and the yen consolidating its recent losses. The main consideration appears to be the looming fiscal cliff, weaker data and the prospects for additional QE to be announced next week by the Federal Reserve.
At the same time, tail risks emanating from euro area have diminished, even if the i's aren't dotted and the t's not crossed on Greece's new program, or if the negotiations over bank supervision in Europe at today's EU finance minister meeting, are more protracted.
Today's "trading", in a repeat of what has become a daily routine, can be summarized as follows: flashing red headline about Fiscal Cliff hope/optimism/constructiveness out of a member of Congress who bought SPY calls in advance of statement: market soars; flashing red headlines about the inverse of Fiscal Cliff hope/optimism/constructiveness out a member of Congress who bought SPY puts in advance of statement: market plunges. Everything else is noise, as is said hope/expectations/constructiveness too since it is increasingly likely nothing will happen until the debt ceiling hike deadline in March, but stop hunts must take place in a market which nobody even pretends is driven by fundamental newsflow. Such as the bevy of PMIs released last night, the key of which was the China HSBC PMI as reported previously, which beat expectations by the smallest of possible increments, at 50.5, but rising to expansion territory and the highest in 13 months, which sent the EURUSD spiking and has kept it in the 1.3030 range for the duration of the overnight session. Sadly, those on the ground in China hardly felt the number was a bullish as EURUSD trading algos around the world, sending the Shanghai Composite to a fresh post-2008 low, closing down over 1% at 1,960. But let's just ignore this inconvenient datapoint shall we?
This objective one-stop-shop report concisely summarizes the important macro events over the past week.
There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."
The good news this morning is that the 2nd estimate of the third quarter (3Q) GDP was revised up from 2.0% initially to 2.7%. This is up sharply from the 2Q print of 1.3%. However, the combination of rising levels of unsold goods (inventory), slowing sales growth and declining incomes all point to weaker GDP growth in Q4 and into the early quarters of 2013. Look for GDP growth in the 4Q to decelerate to 1.5% to 1.7%. While there is currently not an official recession in the U.S. economy, as of yet, the details of the current economic growth are not ones of robust strength. If we are correct in my assumptions the economic underpinnings will continue to negatively impact fundamental valuations as profit margins continue to be compressed. While most of the media, and mainstream analysts, continue to focus on the state of the economy from one quarter to the next - the trend of the data clearly shows the need for concern. Of course, this also why Bernanke is already considering QE4. As we stated previously, while economic growth did pick up this quarter it is the makeup, and more importantly the sustainability, of that growth is what we need to continue to focus on.
We have again reached a point where attempting to explain away an utterly irrational market, in which sentiment and momentum shifts on a dime overriding any fundamental newsflow, and summarizing overnight catalysts has become a moot point. With stocks acting and reacting like petulant, schizophrenic children with ADHD, fundamentals are totally meaningless: yesterday and the overnight trading session have become perfect examples as prepared bulletins by two politicians, which said absolutely nothing of significance or constructive - have been enough to override 72 hours worth of actual fundamental deteriorating data, and also offset each other. Will Congress resolve the Fiscal cliff in its 10 remaining days in session without a major impetus to move such as a market plunge? Of course not, but once again the question has become one of who sells first, and the momentum piles on - and if there is no downside momentum, there are no volume ramps. In the meantime all the sellside firms have gone uber bullish on 2013, setting up the Fiscal Cliff as a perfect strawman. Of course the "Cliff" will be surmounted eventually, and after some near-term pain, but the reality is that the resulting rising taxes across the world in 2013 will be a major economic headwind, just the opposite of what the sellside crew is saying as one after another strategists push out optimistic outlooks on the next year to sucker in what little remaining retail interest in the farce formerly known as the market may be left.
A glimpse at stock prices, sovereign bond prices, and credit spreads and you could be forgiven for believing that (a la Juncker) Europe has turned the corner. The dismal reality is that one by one, market-based signals have been decoupled from reality by repression or plain old jawboning and squeezing. The picture of real fundamentals is considerably worse as these three charts from Bloomberg Briefs show. The Good (financial conditions index at multi-year highs) is merely a reflection of the ECB's transfer of risk and support (and is obviously hindered by the acknowledged failure of transmission mechanisms; which leads to the bad - both consumer and business confidence has decoupled (in a bad way) from markets. All this market-based hope is predicated on eventual joint-and-several-ness and an ECB backstop that seems more promise than premise; the ugly is that Germany (cash-money for the rest of the Euro-slaves) has seen six months in a row of manufacturing orders plunge and nine of the last eleven. Markets aside, fundamental realities suggest yet another hope-based rally due to be faded.
Harry Reid’s publicly displayed dismay at the lack of progress in the fiscal cliff negotiations finally injected a dose of realism into the process after investors threw caution to the wind and seized on the optimism offered by the Senate Majority Leader and Speaker Boehner on November 16. We view yesterday’s sound bite as more negative than the aforementioned statement on the White House Lawn, for we now sit 11 days closer to the New Year’s deadline. Despite this asymmetry, equities suffered only moderate losses giving up just a modicum of the gains from last week. The relative lack of a response to the comments seem puzzling given the price action from the prior several days; however with month end looming, enough buyers kept stocks from selling off violently. My November 13 “Missive” outlined a game theory exercise that suggests this rancor will continue until very late into December and/or the capital markets dislocate thereby ensuring either a falling over the cliff or a band aid solution to avoid the crisis temporarily. Both parties unfortunately may assume that by agreeing to postpone the tough decisions, they will have prevented a rout in equities; however, the August, 2011 precedent of raising the debt ceiling out of desperation hints otherwise.
It seems like it was only 24 hours ago that Europe bailed out Greece for the third time and everything was "fixed", with a resultant desperate attempt to validate this by pushing the EURUSD above 1.3000. Sadly, as always happens, Europe, and especially Greece, refuses to be fixed, because as we will not tire of saying: you can't fix debt with i) more debt, ii) hockeystick projections or iii) soothing words of platitude and an outright bankruptcy, just like that which Argentina is about to undergo, will be needed. If that means the end of the EUR and the delusion that the Eurozone is a viable monument to the egos of a few technocratic career politicians, so be it. As a result, this time around the halflife of the latest bailout was precisely zero, as was that of the latest Japanese QE episode, as the entire world is now habituated to the lies emanating from Europe, and demands details, which in turn are sorely lacking, especially as relates to the question of just where will Greece get the money desperately needed to fund the Greek bond buyback. But at least Kathimerini was kind enough to advise readers that said buyback must take place by December 7 in time for the euroarea finmins to approve the payment of the next Greek loan tranche at the December 13 meeting, something which will likely not happen, especially if Germany's SPD party delays the vote on the Greek bailout until the end of December as was reported yesterday. We can't wait to learn the details of the buyback package, which will come in the "next few days" per ANA, and especially where the buyback money will come from, especially with the FT reporting that various European countries will already lose money next year on the latest Greek bailout.