UPDATE: China 7-day repo +374bps to 12%! China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011.
Following the hushed-up default by Everbright Bank last week, the liquidity situation in China has gone from bad to worse - with 1Y IRS now at all-time record highs. Many are now questioning whether the dramatic elevation in short-term financing rates is "here to stay," and with the Chinese yield curve now inverted in a similar fashion (and period) as the US Treasury market prior to the US recession in 2007, the clarion call for government stimulus is loud from the addicts. However, as HSBC notes today, since the government is now putting more emphasis on balanced growth and market reforms, it will tolerate GDP growth in the 7-7.5% range and will therefore take no strong measures to boost growth unless there is a risk of growth slowing to 7%. The red flags are piling up in the world's supposed growth engine...
The 20th century could be categorized as THE century when communications took off and we started living in each other’s pockets. Lives had been ruined by war, trouble and strife. Wealth had been redistributed beyond belief. There were no longer just a few that were making the profits, but there were growing classes of people that wanted recognition.
A conversation with a mining entrepreneur who succesfully built and sold a Mongolia Coal explorer.
For the sixth day in a row, the Dow managed a triple digit gain/loss - the first time since Sep/Oct 2011 - as markets appear to playing out a perfect echo of last year's June FOMC meeting with a ~3% 4-day gain in the run-up to the decision only to give it all back in the next few days. In the same way as last year, despite the rally in stocks, VIX (hedging) is rising, credit is diverging (hedging), and bonds are bid (though this appears more a Taper-off trade this time). Today's volume was among the lowest of the year (even accounting for holiday trading days) but that didn't stop the Dow ended up within a Hilsenrath headline of its all-time highs (though VIX near YTD highs, credit near YTD high spreads, and bonds close to YTD high yields). Silver, gold, and copper were hit hard today (-1.8% on the week) as WTI surged back up to $98.50; the USD retraced back to unchanged on the week (JPY -1%); Treasury yields are now up 4-5bps on the week (unch today); and while stocks looked good off the Friday surge, the last few minutes today saw them give back some of the exuberance back as hedgers turned to sellers (helped by a smash'n'grab in HYG) but all-in-all, equity investors seem very confident that Bernanke won't let them down.
As noted yesterday, and perhspa even more prescient now Anastasiades is back with the begging bowl, the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter for two reasons: 1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises. 2. The official Eurozone resolution of the crisis may provide a template for future resolutions of other banking/debt crises. It also matters for another reason: not only is the bail-in a direct theft of depositors' money, the entire bailout is essentially a wholesale theft of national assets. This is the inevitable result of political Elites swearing allegiance to the European Monetary Union.
The FX and precious metals markets are swinging wildly around this morning (amid no news) as US equities remain anchored to hope (and VWAP) ahead of the FOMC tomorrow. Copper is also sliding quickly but WTI is back above $98 as the USD gets back to unchanged on the week. Treasury yields spiked early but have reverted to unchanged now. Credit markets have done nothing but widen (worsen) from the open this morning - also ignoring equity's stability - but hedgers are active as VIX remains higher on the day.
In UBS' view, 1994 is critical for guiding investing today. The key point about 1994 was not that US bond yields rose during a global recovery. But that the leverage and positioning built up in previous years, on the assumption that yields would remain low, then got stressed. The central issue, they note, is that a long period of lacklustre growth, low rates and easy money induces individual investors, funds, non-financial corporates and banks to reach for yield. In many cases, they gear up to do it. And as Hyman Minsky warned; in this way, stability breeds leverage, and leverage breeds instability. It is much less likely that we see the US enter a ‘high plateau’ of growth as we saw from 1995-98, where the US saw a powerful productivity & credit fuelled boom while the emerging markets deflated. And it makes it more likely that the US stays on a lower trajectory, interspersed with periodic recessionary slowdowns in the years ahead. The point at which the market realises this would likely herald a significant risk-off event.
"Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left. Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?" - Stanley Druckenmiller
Wednesday may be the new Tuesday (which halted its relentless and statistically impossible streak of 20 out of 20 up DJIA days last week), if only in terms of the overnight no news stock futures ramp, which today is back with a vengeance. In a session that was devoid of any news, the e-Mini is up enough to practically erase all of yesterday's losses. Whether this is due to a relatively calm Nikkei trading session, to no further surge (or collapse) in the USDJPY, or to the 10 Year trading flat inside 2.20% is unclear. What is clear is that the bipolar market swings from extreme to extreme on speculation about the largely irrelevant topic of whether the Fed will taper (because if it does, it will be very promptly followed by an untapering once risk assets around the world implode.)
The cluster of Omens is starting to build - now 3 in the last 7 trading days. This cluster is now the most frequent since the 2007 highs - more 'clustery' than the 2010 signals. Volume today was dismal - among the lowest of the year in both futures and cash. Equity markets were bid out of the gate on the back of Japanese exuberance - and JPY carry - which oddly hadn't helped European risk markets. Credit markets, which decoupled from equity's reality around lunchtime Friday - were on a one-way street wider today - entirely ignoring equity's efforts at exuberance. The USD saw earlier (JPY weakness-driven) gains entirely unwound by the close and ended unchanged but gold (small gain) and silver (+1.1%) outperformed as WTI limped modestly lower. Treasuries added 3-4bps in yield (up around 16bps from Friday's low yields). VIX also didn't play along with equity's general lack of direction and rose 0.5 vols to 15.5%. Homebuilders are underperforming once again but financials remain the best performers off Friday's lows (for now). Nikkei futures did nothing all day - hovering at last week's dead-cat-bounce highs.
There's never enough information to be absolutely safe. I know you're going to help us protect America, because I already know you so well. Thank you for your cooperation.
Given that the Fed is openly citing the stock market as an indication that QE is working… and given that every other metric shows QE is a total failure…
Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in the towel to Bernanke's and Kuroda's liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People's Bank of China "decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government's ongoing commitment to its "prudent" monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC's rarely-used short-term liquidity operation (SLO) tool. But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available? Because when China finally does join what is already an historic liquidity tsunami then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world's most populous country.
China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place... Thanks to the G-0 central planners, the PBOC's hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the "China Liquidity Squeeze Risks Companies’ Debt Rollover" leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling.
This was one helluva week. Nevertheless current markets are still hooked on QE.