If the big hope propelling both ES and S&P cash over 2,000 was the Ukraine-Russian talks, leading to some de-escalation and a thawing of Russian-German conditions, then it was clearly a dud. As the WSJ reports, "face-to-face talks between the Russian and Ukrainian presidents failed to produce a breakthrough for ending the conflict over eastern Ukraine, as Kiev released videos of captured Russian soldiers and rebels pushed toward a government-held city. The one-on-one session, which Ukraine's President Petro Poroshenko described as "tough and complex," ended early Wednesday after a day of talks on the crisis in the Belarusian capital of Minsk. Mr. Poroshenko said afterward that he would prepare a "road map" toward a possible cease-fire with the pro-Russia separatists." In other words, absolutely no progress. There was however escalation, when overnight the September Bund future rose as much as 36 ticks to 151.18, after Poland PM Tusk said “regular” Russian troops are operating in eastern Ukraine. And so we are back to square one, with concerns over Russia pushing European bonds to new record highs, in turn leading to more US Treasury buying, while a brand new rumor of more easing from the ECB, this time by Deutsche Bank, has propped up European equities, which like US futures are trading water around the critical 2000 level.
For the last 2 weeks, the US Dollar has surged - hitting new 13-month highs today amid JPY and EUR weakness - and for the last 2 weeks, US stock and bond markets have rallied (leaving 30Y yields implying the S&P is 130 points rich or yields are 25bps too low). S&P tops 2,000, Nasdaq closed up for 10th day in a row, Russell outperformed on major short-squeeze, Trannies slid red for the week. Today saw modest Treasury weakness (30Y +2bps, 2Y -1bps) but still lower on the week; gold ($1285), silver ($19.50), and oil ($94) gained on the day - despite USD strength - as copper dropped 1%. Credit markets remain unimpressed by record-er highs in stocks. VIX decoupled from equity strength today as NASDAQ options feeds broke. Volume was an utter disaster... that is all.
It is unclear exactly why stock futures, bonds - with European peripheral yields hitting new record lows for the second day in a row - gold, oil and pretty much everything else is up this morning but it is safe to say the central banks are behind it, as is the "de-escalation" algo as a meeting between Russia and Ukraine begins today in Belarus' capital Minsk. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week. What he didn't say is that he would also send a cohort of Russian troops which supposedly were captured by overnight by the Ukraine army (more shortly).
As we noted early on, by the time the cash markets opened this morning, the narrative of compliant Kuroda and drug-peddling Draghi had been painted as worth more than a yellowing Yellen's hawkish comments. And so it was that stocks, despite weak macro data this morning in the US - bad news is great news - surged as cash markets opened and tagged S&P 2,000 for the first time ever. However, once Europe closed, that exuberance faded in stocks. Treasuries rallied (30Y closed -2bps) with the front-end weakening very modestly. USD strength (on notable EUR weakness) sent oil and precious metals modestly lower on the day but Copper had a good day (+0.6%). Today was the lowest S&P futures (non-holiday) trading of the year as the Nasdaq rose for the 9th day in a row.
Key highlights in the coming week: US Durable Goods, Michigan Conf., Services PMI, PCE, and CPI in Euro area and Japan. Broken down by day: Monday - US Services PMI, New Home Sales (Consensus 4.7%); Singapore CPI; Tuesday - US Durable Goods (consensus 7.5%) and Consumer Confidence; Wednesday - Germany GfK Consumer Confidence; Thursday - US GDP 2Q (2nd est., expect 3.70%, below consensus) and Personal Consumption; Euro area Confidence; CPI in Germany and Spain; Friday - US Michigan Conf. (consensus 80.1), PCE (consensus 0.10%), Chicago PMI; Core CPI in Euro area and Japan (consensus 2.30%). Additionally, with a long weekend in the US coming up, expect volumes into the close of the week to slump below even recent near-record lows observed recently as the CYNKing of the S&P 500 goes into overdrive.
It's been one of those days. First, the CME broke for 4 hours due to what some suggested were HFT connectivity issues, then Russia announced it would send a second humanitarian convoy into Ukraine (a big risk off move the first time it was announced, now not even an algo stirred), then Germany reported that the IFO Business Confidence/Climate dropped for the fourth consecutive month to 106.3 from 108.0, below the 107.0 expected, with the IFO chief economist stating that German GDP expectations are likely to be cut to 1.5% from 2.0% later in the year, and finally the French government collapsed due to disagreement over policy between finance minister Valls and economy minister Montebourg. All in all, a typical day in Europe's slow-motion implosion. So why are Spanish and Italian bank stocks soaring and European bond yields reaching new record highs? Simple: following Draghi's speech on Friday at Jackson Hole, which at initial read was hardly as dovish as many had expected, the FT and various other media outlets promptly changed the narrative and made it seem as if the ECB head was about to unleash QE.
Rising rates would hurt bonds and equities but would support gold. This was clearly seen in the 1970s when rising interest rates corresponded with rising gold prices. Gold becomes vulnerable towards the end of an interest rate tightening cycle when there are positive real interest rates and savers earn something on their deposits.
US equity markets were led by the stodgy old low-beta Dow this week - not the high-flying muppetry of the Russell or Nasdaq - as stocks enjoyed the best week in 4 months amidst escalation of geopolitical time-bombs in Israel, Iraq, and Ukraine. Dow and Trannies gained 2% by the close as today's disappointment in Yellen and Draghi took the exuberant shine off an otherwise bottom-left-to-top-right Birinyi ruler-based market. The USDollar gained 1.1% on the week - its best week since November - closing at one-year highs. Gold was slapped almost 2% lower (worst week in almost 3 months) as did WTI (back at $1280 and $93.50 respectively). Copper surged 3.2% on the week (2nd best week in a year) on China restocking chatter. Treasuries were a mixed bag with dramatic flattening on the week (30Y +2bps, 5Y +12bps) to 2009 flat. Credit markets cratered on the day - ignoring equity's relative shrug.
Was it ever in doubt? Bad news is great news for China and Europe and good new is great news for US because no matter what Yellen will go full dovetard tomorrow - at least that appears to be the total consensus view as the S&P hit record highs and bond yields plunge. Volume went from dismal to well dismal-er (we've run out of adjectives) to the lowest non-holiday of the year as we note Trannies (-0.25%) and Nasdaq lagged today. Credit markets snapped higher (tighter) today but remain less exuberant than stocks on the week. Gold staggered lower (-2% on the week) back under $1280 even as The USD rolled over notably on the day led by EUR strength. Treasuries rallied (30Y -3bps and 10Y <2.40%) in the face of equity strength. VIX flash-smashed early on from 11.5 to over 13 (cracking stocks lower) but that was a great buying opportunity into J-Hole...
With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.
The last 2 days have seen the USD index rise at its fastest pace in almost 4 months, closing in on 1-year highs. Led by JPY and EUR weakness, the USD is up over 1% this week (which is set for the best week in 9 months). While stocks shrugged off the hawkish minutes initial kneejerk lower and surged towards new record highs, credit markets were not as exuberant about the great suck out of liquidity (and how they'll manage to roll the wall of debt forthcoming). VIX was slammed back to one-month lows (even as the Fed admitted greater uncertainty) slamming stocks higher. Treasury yields rose notably (with the short-end underperforming) as 2Y-5Y up 5-6bps, 10-30Y up 1-3bps. Gold and silver drifted modestly lower and oil jerked higher. Copper was up from earlier on China restocking rumors. Into the close, stocks faded quickly - rather disappointingly ruining mainstream media's "new record high" headlines. Janet, save us....
- Ferguson at Turning Point After Night of Relative Calm (BBG)
- Gaza war rages on, Hamas says Israel tried to kill its military chief (Reuters)
- Surge in Putin Patriotism Masks Pain of Sanctions (BBG)
- Bank of England splits over rate hike for first time in 3 years (Reuters)
- Putin Meeting Leaves Kiev With Tough Choices (WSJ)
- European Gas Reverses Biggest Drop Since 2009 on Ukraine (BBG)
- "Isolation" Mongolia Seeks Economic Lifeline With Pivot to China, Russia (BBG)
- Uber Picks David Plouffe to Wage Regulatory Fight (NYT)
- China Levies Record Antitrust Fine on Japanese Firms (BBG)
While everyone's (algorithmic) attention will be focused on today's minutes from the July 29-30 FOMC meeting for views on remaining slack in U.S. economy following recent changes in the labor market (especially a particularly solid JOLTS report which indicates that at least on the openings front, there is no more) and any signal of policy change by the Fed ahead of Fed Chair Janet Yellen’s speech in Jackson Hole on Aug. 22, a curious thing happened overnight when a few hours ago the BoE's own minutes show the first vote split since 2011, as Weale and McCafferty argue for a 0.75% bank rate. Then again, if the Russians are finally bailing on London real estate, the inflationary pressures at the top of UK housing may finally be easing. In any event, every FOMC "minute" will be overanalyzed for hints of what Yellen's speech on Friday morning will say, even if stocks just shy of all time highs know quite well she won't dare say anything to tip the boat despite her warnings of a biotech and social network bubble.
S&P futures traded the lowest volume of the year today (for a non-holiday trading day) and volume has slid consistently lower as this rally of the last 8 days. The S&P outperformed today (up over 0.5%) as yesterday's oil-is-falling-so-buy-Trannies meme reversed into oil-is-falling-so-sell-Trannies which ended the day almost unchanged. The Nasdaq made new 14-year highs, up 5 days in a row. Treasury yields dropped notably early on then surged higher as US stocks opened (30Y +8bps on the week). The USD index also surged today (up 0.55% on the week) to new 11-month highs as EUR and CHF weakened notably. Commodities in general were clubbed like baby seals with copper, silver, and WTI hammered (but not Brent) after the inflation/housing data leaving oil under $95 - its lowest in 7 months. Gold fell much more modestly (but ended below $1300). AAPL closes at all-time high. VIX and HY Credit diverge notably from stocks after Europe closed.
With global GDP expectations plumbing new depths (at 2.48% consensus for 2014), one could understand why it is that 30Y US Treasury yields are at 16-month lows, that Dr.Copper is tumbling, and crude oil prices slumping. But apart from the fundamentals of global macro strength, what - at almost record highs - does the US equity market know that every other asset class does not...