It has been a tempestuous week where good is bad, worse is better, but European news is to be sold. Here is your one stop summary of all the notable bullish and bearish events in the past seven days.
Time to panic? Or heading to the next whisky bar? Question is now what next? Somehow, we’ve been here before, but since then we had LTRO1, LTRO2, a (bank) bail-out, lots of European haggling and bickering… Hot Summer.
What's Ben gonna do?
Is it us? Today felt very nervous. The equal narrowest range in S&P 500 e-mini futures (ES) in over 3 months along with dismally low volume and even worse average trade size as we peaked over July 5th's swing high and fell back. Aside from the farcical trading in the big Dow supporting stocks that we just noted, most asset classes traded along with stocks - in a very narrow range. The big movers were oil - up over $92 - on Israel-Iran tensions (among other things) and the major financials - which in general have retraced all of their post-EU Summit euphoria now (with MS breaking down 6% today). EURUSD did its by no standard dip and rip through the US open to EU close and ended the day unchanged. Treasuries limped a little higher in yield (~1-2bps). VIX plummeted to 15.45% (zero premium to realized vol), down 0.75vols - its lowest close in over 3 months - but this was not enough to provide any more juice for stocks which meandered, ending fractionally higher. Gold and Silver slithered sideways - with a very modest upward bias as Copper was helplessly led a little higher by Oil's exuberance and a slight limp lower in the USD on the day as the AUD extends its gain to 2% on the week against the greenback. We can't help but reflect on this chart as we see a retest on low volume and low average trade size following the very same path as last year. For now, complacency rules.
Still the divergent world views between equity and rates as during the last days.
EGBs better supported. Equities, too…
Spain held so so today, did overshoot 7%, but closed back below. The level itself is just symbolic; we all know…Fact is, Spanish funding is a costly thing.
Credit feeling slightly heavier than equities.
Middle East situation not really in the prices, as the tension in Syria is growing to new heights.
IMF annual review of EZ policies pitches a lot of already pitched ideas (QE, etc etc). No news
Nothing crisp from Ben – outside comments that “Europe is not close to having a long term solution”… Thanks for the thumb up!
Equities managed to rally after slumping on heavy volume to the 1340 level (scene of crime for Greek election, Spanish bailout, and EU-Summit) pushing up to close at the mid-June swing high levels and post EU-Summit close levels around 1358 (back over its 50DMA). Total volume for the S&P 500 e-mini (ES) was just below average but the average trade size was dismal - around the lowest of the year. Whether due to VIX options expiration squeeze sending VXX and other derivatives tumbling (with VIX almost testing a 15 handle intraday); or a safety 'algo' running things up and over VWAP; or a reflexive reaction to bad is good and Bernanke has our backs no matter what happens, equities pushed 20 points off their lows but stagnated for much of the afternoon. The surge in stocks far outpaced risk-assets and what was more worrisome was the notable divergence in gold as the afternoon wore on - if this was QE-hope then the main QE-sensitive asset class of choice was not playing along at all into the close. Gold and Silver ended the day down modestly, Copper worse, but WTI ended the day up 2.3% on the week and back over $89. Treasuries pushed higher in yields (oh yes very QE-on?) - no higher in yield on the week with the long-end underperforming. FX markets were a little more aggressive - like Treasuries - and extended their rallies relative to USD with AUD now up almost 1% and the USD now down 0.36% on the week - which is interesting given Gold is also down around 0.5% on the week.
Same story again: Recurrent picture of Hard Core grinding slightly tighter, Soft Core doubling down on that . Italy eventually better today but still over the 6% mark and Spain stuck over 6.75%. Equities just a tick weaker after all. Gold non-QE victim. EUR slammed through 22, but rebounded off 1.219.
Eventually quite resilient markets, given all the expectations…
Gold inched up on Tuesday ahead of Federal Reserve Chairman Ben Bernanke's Congressional testimony today and Wednesday which should provide the market with information as to whether the US central bank will flood the market with more US paper.
Treasuries seemed to shrug off the QE-on trade from yesterday in the lead up to this morning's big disappointment from Bernanke. Gold lost it first and then as the statement came - with no mention of hyperinflation, helicopters, or new printers - so equities dumped - gapping down to converge with the rest of risk assets. The USD rallied as its cloests relative neighbor in disaster the EUR legged lower and the USD strength exaggerated commodity weakness further (Silver and Copper worst but all falling). ES is back to the post-ramp open on cliff on Friday at the magic 1340 level but momentum is not in its favor now and Treasury yields are reverting lower now also. Financials were the early laggards and have extended losses with GS back in the red and JPM down notably.
UPDATE: Biggest down day in Faceplant since 5/29 (down 8%) to close at $28.25 on double recent volume.
This was the narrowest day's range in S&P 500 e-mini futures (ES) in over three months and volume was dismally slow as it clung to its 50DMA amid larger than normal average trade size. Elsewhere, markets were anything but dead. Commodities dipped and ripped with WTI breaking back over $88 on Saudi news and Silver/Gold/Copper all ending around unch on the day but leaking off their highs into the close (though well off lows). For a while 'bad was good' as the retail sales print prompted QE-on-esque trades with Gold up, USD down, and Treasury yields plunging to near-record-lows. FX and commodities appeared to catch up to stock's more sanguine view of things from Friday but once there, Treasury yields reversed and rose into the afternoon as EURUSD continued to rally back well into the green (repatriation?) dragging the USD down 0.25% from Friday's close. Credit notably underperformed equities on the day (with HYG stumbling into the close). It seems everyone is waiting with baited breath for Bernanke's speech tomorrow and VIX (which is back in line with realized vol for the first time in 5 months) limped higher by around 0.4 vols to 17.1%.
The sharp losses in the gold mining sector Friday and last week could presage further weakness today but the higher weekly closes for gold and silver were constructive from a technical perspective.
After initial gains in Asia, gold fell early in Asian trading prior to recovering and then weakening again bang on 0800 GMT as Europe opened (see chart below).
Gold is higher in euro and Swiss franc terms but slightly lower in dollars and pounds.
Europe slipping into (light) ROff (and then out). Recurrent picture of Hard Core grinding tighter, Soft Core doubling down on that . Peripherals drifting wider with Italy eventually further off the 6% mark and Spain at 6.77%. Equities about unchanged after all.
BKO eventually closing on a historic -0.060% low.
Slow dragging day, if it wasn’t for the EUR jogging back and forth all the time. Something gotta move, I guess.
By now, everyone is aware of the incredible increase in the price of corn thanks in large part to the almost unprecedented drought levels across the country. Up another 5% today at over $777, the 30-day run has seen prices up over 41%. However, while this is an unbelievable move to record high prices, on a trailing 12-month basis, this price move has merely mean-reverted to the average gain of the last 10 years. From 2002-2011, the average price rise from July-to-July was around $55 and the current July-to-July price rise is only around $75. While things do not look set to improve any time soon for the weather, some longer-term context for Corn may well be worth considering. Furthermore, as Goldman notes the lack of rainfall and extreme warmth has shifted corn yields to the second-largest yield-loss since 1950 (noting that the current 24% rise in the Ag complex is still well below the 35% rise in the 'drought' summer of 1988) and the implications for global inflation are gravely concerning as hopes of China stimulus are impaired.
The reason for the ramp in risk as attributed by various buyside desks as to what recently has become the trademark of more hope, prayer and magic from Jefferies' (yes, Jefferies is driving the market for once, who wouldathunk it) David "SPOOS" Zervos, whose latest note that the Fed will follow the ECB and cut its overnight excess reserves rate to -0.25% has picked up some traction, and is causing a modest rise in risk markets. Here is the problem: the Fed will NOT do this, and certainly will not do this for months and months as not only would it destroy the US money market, general colalteral, unsecured and virtually every other overnight market instantaneously (and not even Ben is that dumb to trade a few trillion in private sector overnight funding for 10% in the S&P), but even as Zervos says this is nothing short of a thought experiment in what may happen: "Whether it happens or not is not the point. The issue is that we are not priced for it AT ALL." Correct David: they are unprepared because it will not happen. The Fed will do much more LSAP, and even that other flow-based lunacy, NGDP targeting, before it decides to blow up overnight markets (not to mention destroy the entire Primary Dealer risk analytics system all of which is based on positive flow from Reserves). Because if the Fed telegraphs it is ending the inflows from reserves experiment started 3 years ago, we better be having 4% GDP growth. Reality check: we have 1.1% Q2 annualized GDP. Finally, that whole ECB experiment with negative Deposit Rates led to... absolutely nothing... correction: it led to yet another plunge in Spanish and Italian yields: something the Fed is quite aware of.