The perfectly expected if completely irrational overnight ramp in various Yen carry pairs tried, and failed, and both the USDJPY and EURJPY were tumbling to overnight lows as we go to print. This is happening despite a rout in India in which Narendra Modi's opposition block is poised for the biggest Indian election win in 30 years, with his BJP party currently leading in 332 of 543 seat - an outcome that is seen as very pro business (and seemingly pro asset bubbles: the INR soared and the Sensex was up as much as 6% in intraday trading before paring virtually all gains following what many say was RBI intervention). And while the Nikkei (down 200 points) did not help the mood this move was mostly in response to yesterday's US selling, which means as usual the culprit for lack of algo risk-taking overnight has been the Yen carry, which moments ago hit intraday lows, and is increasingly flirting with the 101 level (after which double digits, and Abe's second resignation, come very quickly).
Just last month we highlighted how the collapse in China's shadow-banking system, it's concomittant credit crunch, and vicious circle of commodity-financed credit creation could spread contagiously to the rest of the world - through refusal to pay. It seems we were prophetic as Reuters confirms that money owed to Chinese firms by their customers has reached a record high. As China's economy continues to cool, companies are waiting longer and finding it harder to get paid for goods and services they've already sold, leading to record amounts of receivables - and potential write-offs - on corporate balance sheets. As one Chinese business owner exclaimed: "If you don't pay me and I pay others, aren't I just a sucker? I'm not that stupid." Receivables on average (across 2300 firms) reached $160.49 million at the end of last year, more than double the $65.9 million average at the end of 2009 and median collection time for billings crawled up from 71.4 days to 90.42 days (the first time above 90 days). "It's a pretty loud warning bell," warns a Peking professor.
Our Fed-fueled lottery-ticket economy will unravel with a vengeance in the years ahead. Malinvestment - the systemic consequence of the Federal Reserve's policies of near-zero interest rates and abundant credit - doesn't just inflate destruction asset bubbles: it poisons productive assets and the entire economy.
In this brave new centrally-planned world, where bad is good, very bad is very good, and everything is weather adjusted, Japan's blistering GDP report last night, printing at 5.9% on expectations of 4.3% was "bad" because it means less possibility for a boost in QE pushing futures lower, while the liquidity addicts were giddy with the GDP miss in Europe where everyone except Germany missed (as for the German beat, Goldman's crack theam of economic climatologists, said it was due to the weather), and the Eurozone as a whole came at 0.2%, half the forecast 0.4%, which in turn allowed futures to regain some of the lost ground.
Overnight Europe got two mini lessons: i) that rumors spread by conflicted French banks about "imminent" ECB QE don't always, if ever, come true, after the ECB spent a decent portion of the overnight session explaining, via Reuters, that while the central bank would engage in "some stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing (QE) - money printing to buy assets. Such a QE plan is still some way off." Precisely as we warned. The other lesson is that when QE or even hopes of QE fade, bonds get bid due to rotation out of equities into "safe haven" assets. As a result, German Bund yields tumbled with stops taken out (and Goldman stopped out on their Bund short) through the 12 month lows of 1.4% with 10 Year yields following lower and dropping to 2.565% hours ago, or a level not seen since November 1.
If, in the New Normal, newsflow and facts mattered, facts such as the German Zew Investor Expectations index crashing from 43.2 to 33.1, smashing expectations of a 40.0 print to the downside and down to the lowest since January 2013 nearly half the 7 year half reported as recently as December confirming Germany can no longer be Europe's growth dynamo courtesy of a still nosebleed high EURUSD, or facts such as overnight Chinese data missed in every category with industrial output up 8.7% y/y in April vs an estimated 8.9%, retail sales up 11.9% below the estimated 12.2% rise and ; Jan.-April fixed-asset investment growing 17.3% vs est. 17.7%, then futures may just posted a downtick. However, since it is a Tuesday, with a ~$1 billion POMO, one can ignore the fundamentals and proceed straight to buying anything and everything with indiscriminate abandon. The only question is whether the NY Fed orders Citadel to slam the VIX under 11 to start off the morning S&P rampage which should push the broad market index above Goldman's 1900 price target for the end of the 2014.
The Russell 2000 had its best day in over 17 months today - up 2.5% (best since Jan 2nd 2013) and +4% from Friday's lows. All US equity markets exploded higher our of the gate thanks to a ridiculous spike lower in VIX (below 12) and USDJPY stop-run back through 102 which squeezed "most shorted" dramatically higher. The Dow, Trannies, and S&P all made new record high closes...and it's not even Tuesday yet! Away from stocks, silver jumped over 2% for almost its best day in 3 months. Gold rebounded over $25 from overnight smackdown lows. Oil broke back above $100. Treasury yields rose modestly (2-3bps) - majorly out of sync with equity exuberance. JPY was large and in charge of stocks but the USD ended the day unchanged. S&P futures volume was 30% below recent average.
A Commodities Trading Titan Staffed With Former Goldman And JPM Employees Is Quietly Growing In SwitzerlandSubmitted by Tyler Durden on 05/12/2014 10:26 -0400
If there was any confusion about what may be coming next, now that the bulk of the TBTFs are liquidating their commodities trading divisions having been caught manipulating virtually every physical asset under the sun (except for Goldman: the bank will first stage a mutiny at the Fed before it is forced to spin off its legendary J Aron commodity division which spawned such taxpayer generosity recipients as Gary Cohn and Lloyd Blankfein), the most recent events at Swiss commodities giant Mercuria should clarify "next steps." Because after Mercuria last month acquired JPMorgan's physical commodities trading business for $3.5 billion however without the scandal-plagued Blythe Masters, the Geneva commodities group needed someone to fill in the big enough shoes which may now belong to the world's largest, and very much still under the radar, physical commodities trader. It picked Magid Shenouda, who was co-head of commodities for Goldman until the end of last year.
East Ukraine may be independent in a result which the Kremlin said it "respects" and hopes for a "civilized implementation" of the referendum results, and which assures further military escalation in the proxy war of east versus west, but stocks are happy to ignore it all again. The reason: a positive close over in Asia (ex-Japan) after China’s State Council pledged to reform markets buoyed demand for risk, although it really is just a follow through to the furious VIX slam in the last hour of US Friday trading, which said otherwise, means buying of US equities was the reason to buy US equities. More importantly and adding to the early spoo euphoria were comments by ECB's Nowotny who said that interest rate cut alone would likely be too little to combat low inflation - suggesting a European QE is coming - also acted as a catalyst for the latest uptick in stocks: when trapped like the ECB and when "guiding" to future activity, if unable to actually execute it, may as well go all the way. End result, Spoos up nearly 0.5% because, well, others are buying spoos.
As Putin warned earlier in the week, they do not see the effectiveness of sanctions; but it seems he had something else in mind. By rolling back informal limits on Chinese investment, Putin has opened the door for significant capital inflows from his new best friend... and China has already agree to increase investment. While Putin is careful to note that the Chinese will not be allowed to invest in gold or diamond mining, or hi-tech projects, Russia hopes to lure cash from the world’s second-biggest economy into industries from housing and infrastructure construction to natural resources. Chinese President Xi Jinping and Russian President Vladimir Putin will meet in Shanghai May 20/21 and Chinese officials have already confirmed bilateral cooperation in the areas of investment and finance has made major progress as local currency settlement in two-way trade increases. Forget sanctions, just remove the US from the world trade equation...
It has been a very quiet session so far, and despite the slow-mo levitation in the USDJPY, its impact on US equity futures has been minimal if not negative. In fact, following yesterday's latest late day tumble, which Goldman summarized as follows, "Equities tried and failed again to break 1885, it continues to be the level that we can’t escape"... it would appear we are increasingly changing the trading regime, and as Guy Haselmann explained simply, markets are slowly but surely coming to the realization that the Fed's crutches are being taken away (that they may well return following a 20%, 30%, or more drop in the S&P is a different matter entirely) and that the economy will not grow fast enough to make up for this. Perhaps the most notable "event" is the sheer avalanche of banks pushing up their forecasts for an ECB rate cut (and or QE start) to June following Draghi's yesterday comments. And so the 1 month countdown begins until the end of forward guidance, or until the ECB "shatters" its credibility as expained yesteday.
US equity markets were off to the races when stocks opened and Yellen began to speak but the late-day ugliness was written on the wall by a total lack of support from either volume or any other risk-market. The S&P ramped up to last Friday's spike highs, Zero Hedge reminded traders that Biotech P/Es were double what they expected, and the 30Y auction tailed ugly was enough - with a dearth of news (aside from downplayed escalations in Ukraine) stocks dumped and played catch down with JPY (weakness) and Bond (strength). EUR weakness (from Draghi Jawboning) provided the impetus for USD strength but leaves the USD unch on the week. Considerable divergence in bonds today (30Y +3bps, 5Y -3bps) means the curve is steepening modestly. VIX was running stocks today and we slammed back under 13 briefly and closer higher on the day. Ugly day for high beta stocks with the Russell near 6mo lows (and the Dow is back in the red for 2014)
- China’s Trade Unexpectedly Rises (BBG)
- 'We're already not in Ukraine' - rebel east readies secession vote (Reuters)
- Pro-Russian Separatists in Ukraine Reject Putin's Call to Delay Vote (WSJ)
- Vietnam’s Stocks Post Biggest Loss in Decade on China Tensions (BBG)
- Hedge Funds Extend Their Slide (WSJ)
- Carney Looks to Untested Tools as House Prices Boom (BBG)
- New Draghi Era Seen on Hold at ECB as Euro Area Recovers (BBG)
- Woman With Printer Shows the Digital Ease of Bogus Cash (BBG)
- Regulators See Growing Financial Risks Outside Traditional Banks (WSJ)
Despite Mario Draghi and Janet Yellen's (repeat) attempt to steal the show today, the first when the ECB reports its monetary decision (with zero real chance of announcing any change in policy considering all the furious, and failed, attempts to jawbone the Euro lower) as it faces the dilemma of deflationary pressure, record low bond yields and interest rates at record lows coupled with an export crushing Euro just shy of 1.40, and a practical impossibility to conduct QE even as the hawks jawbone a "potential" European QE to death, while Janet Yellen conducts the second part of the congressional testimony this time before the Senate Budget Committee where she will again, say nothing at all, it appears the world will be focused on Russia once again after the latest 24 hour "de-escalation" gambit is now once again dead and buried and on top of it is Putin waving a "come launch a nuclear attack at me, bro" flag.
In a word... "mixed" Early ugliness gave way to another ramp job courtesy of USDJPY's 101.50 level holding - which managed to clamber the Dow to unchanged on the week and stabilize the S&P (after it bounced off its 50DMA). But... Nasdaq and Russell just could not get it together until the last few minutes thanks to a VIX slam, JPY ramp and 30Y dump. Yellen's testimony pushed some volatility through markets and perhaps provided the extra pressure on the small caps (after warning of valuations). The term structure steepened modestly with 30Y +1.5bps and the rest of the curve rallying 2-3bps (10Y unch). The USD rallied modestly off 19-month lows. Gold had its worst day in 3 weeks, breaking below 1300 and testing its 100DMA (tick for tick with silver on the day). Oil prices jumped back up to around $101 as Copper slipped back towards $3. And finally, we hesitate to mention it... today's market schizophrenia was enough to trigger a Hindenburg Omen.