Quad-witching only added to an extremely volatile week as the entire bond, stock, FX complex pumped and dumped on the basis of whether a "considerable period" was really six months and whether "quite some time" was more or less than six months. The S&P hit record highs early on this morning thanks to a ramp in AUDJPY (but once again bonds didn't blink). All that ended when Europe closed and the Biotech sector's weakness spread, leaving the Nasdaq -1.4% post-FOMC (and all other indices in the red post-FOMC). The range of moves in bonds, FX, commodities, and vol this week were impressive as we noted below... 4 words sum up stocks - "not off the lows"
Treasuries ended the day practically unchanged. Gold, despite some early weakness, ended the day unchanged. The USD ended higher on the day - extending post-Yellen gains but was essentially flatlining aside from concerted buying pressure from 3ET to 7ET. Copper kept falling (as did silver) and oil prices slipped lower. VIX pressed lower as stocks rallied out of the gate but VIX diverged notably after Europe's close to 15% with a few minutes to go. So, given all of that, where do you think stocks closed? Thanks to a pre-CCAR ramp in US financial stocks (which notably diverged from financial credit spreads), and an idiotic 0.5 vol smackdown in VIX, US equities managed to clamber their way back up to pre-FOMC levels before giving some back inthe late-day (with a mini-melt-up into the close). AUDJPY ruled the 'fundamental'-driven US equity markets from open to close.
Following the default of 2 more corporations last night, Hang Seng's index of China Enterprises plunged to 8-month lows and officially entered bear market territory. Overnight angst in the Chinese currency markets (which saw the Yuan trade back to 1-year lows) has sparked broad commodity weakness (as CCFD unwinds en masse) with copper giving back most of yesterday's major short squeeze gains back. Chinese corporate bond prices also tumbled to one-month lows.
US and European stocks are spiking higher this morning supposedly on the back of better-than-expected data (Philly Fed) and self-referencing bias that surely Janet Yellen didn't mean what she said. Stocks (oddly) melted up on the last Philly Fed release (which was a massive miss). Anyway, fun-durr-mentals aside, this move is all about AUDJPY all the time as Financials lead the way (and are the only sector green post Yellen). European stocks are merelty tagging along for the exuberant melt-up ride. Beware of financials as CDS are widening even as stocks soar - a pattern we have seen before into the run-up to CCAR (stress-tests) and doesn't end well for bank stocks.
In the aftermath of yesterday's key market event, the FOMC's $10 billion tapering and elimination of QE with "QualG", not to mention the "dots" and the "6 month" comment, the USD has been on fire against all key pairs, with the EURUSD sliding below 1.38, a 150 pip move in one day which should at least give Mario Draghi some comfort, but more importantly sending the USDJPY soaring to 102.500 even as US equity futures continue to slide, and not to mention the Nikkei which tumbled -1.7% to just above 14,000 overnight. Perhaps the biggest take home message for traders from yesterday is that the Yen carry trade correlation to the Emini is now dead if only for the time being until DE Shaw and Virtu recalibrate their all-important correlation signal algos. The other big news overnight was the plunge in the Yuan, tumbling 0.5%, 6.2286, up 343 pips and crushing countless speculators now that the "max vega" point has been passed. Expect under the radar news about insolvent trading desks over the next few days, as numerous mega levered FX traders, who had bet on continued CNY appreciation are quietly carted out the back door. Elsewhere, gold and other commodities continue to be hit on rising fear the plunging CNY will accelerate the unwind of Chinese Commodity Funding Deals.
The Yuan has weakened over 250 pips in early China trading. Trading at almost 6.22, we are now deeply into the significant-loss-realizing region of the world's carry-traders and Chinese over-hedgers. Morgan Stanley estimates a minimum $4.8bn loss for each 100 pip move. However, the bigger picture is considerably worse as the vicious circle of desperate liquidity needs are starting to gang up on Hong Kong real estate and commodity prices. For those who see the silver lining in this and construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of China (et al.) will be parked in the S&P are overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it.
Concerns about Fed "over-optimism" admissions and shortening the time from taper to rate-hike sparked a major algo-surging risk-off dump in US equities... but that 1% dip was bought with hands and feet as reassuring figures emerged on screens to pat traders heads gently. Stocks bounced but then faded into the close as Yellen's first press conference saw the worst market performance since Bernanke's May Taper hint. Bonds had a bad day... massive bear-flattening occurred on the release with 5s30s -12bps (5Y +16.5bps, 30Y +4.5bps) to 19-month lows. The USD was smashed 0.75% higher - its biggest gain in 7-months. Gold (and silver) dropped (down 4% on the week) as copper short-squeezed up to key resistance after early significant weakness.
As we explained in great detail yesterday, the selling in commodities is far from over. The extent of China's commodity-backed-financing is only now beginning to be understood and forced sales (along with the vicious circle of collapsing collateral values and increasingly tightening credit) are hard to stop for a government set of reform. Copper prices were heavy overnight in Asia but this morning has seen futures plunge on heavy volume below $289 - the lowest since July 2009- breaking key support levels. For the same reasoning, zinc and aluminum are under pressure, as is steel rebar and gold.
- How Putin Parried Obama's Overtures on Crimea (WSJ)
- West Readies Tighter Sanctions After Russia Seals Crimea Claim (Bloomberg)
- Putin says U.S. guided by 'the rule of the gun' in foreign policy (Reuters)
- JPMorgan Said to Agree on Commodities Unit Sale to Mercuria (BBG)
- Short Sellers Target Chinese Developers as Rout Deepens (BBG)
- HFT finally under the spotlight: High-Speed Trading Firms Face New U.S. Scrutiny (WSJ)
- Chinese Dollar Bond Investors Demand Higher Yields After Default (BBG)
- According to Joe LaVorgna it's the snow's fault: Deutsche Bank Said to Plan Job Cuts at Investment Bank (BBG)
- Israeli airstrikes kill 1 Syrian soldier, wound 7 (AP)
In an overnight session that had little in terms of macro and news flow, the most notable event was that the Dollar-Renminbi finally crossed above 6.20 which as a reminder is the suggested "max vega" point beyond which even more max pain lies for levered accounts long the Yuan. However, in a world in which nothing is discounted and in which no news matters, the "market" broadly ignored this significant development (which as we explained further yesterday means an accelerated unwind of Chinese Commodity Funding Deals, and a potential drop in global commodity prices), and eagerly awaited today's non-event of an FOMC conference, where nothing new will be announced save for the novelty of it being Yellen's first appearance before the press as the head of the Fed. And of course the Fed will almost certainly scrap the 6.5% employment threshold, as the FOMC scrambles to make the economy appear worse than it is reported to be, in a stark reminder that the biggest optically manipulated tool meant to boost confidence in the recovery was nothing but a number meant to serve political purposes.
After trading well above the Dow at last year's peak (and equal with it at 2013 year-end), the Nikkei 225 is now almost 2000 points below the level of the Dow - a 13-month low. Trading not far off the EM-crisis lows of January, Japanese stocks are fading as JPY can't sustain any offer and carry-trades are unwound. Not helped by yet another in a long and illustrious list of mssed trade balance figures since Abe took the helm. Elsewhere in Asia, USDCNY traded up to almost 6.20 (the Maginot line for many derivatives trades) and does not look like the PBOC has it under control and copper has dumped from earlier US exuberance; iron ore is flat; and Chinese stocks are down (along with US futures fading modestly).
Ordinarily Grant Williams would bet the ranch on this spat being defused diplomatically and everybody leaving the negotiating table a little disgruntled (which would mean the outcome was just about perfect); but he suspects that markets have become dangerously conditioned — by one perfectly executed landing after another in recent years — to expect (and position for) the best. The trouble is we've been here before and pulled back from the brink every time, but this time that outcome is expected again by most, and that is extremely dangerous; as markets are most assuredly NOT ready for reality. Add to that the fact that every new Fed chief gets a serious test - perhaps it is Yellen's turn?
What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?Submitted by Tyler Durden on 03/18/2014 19:53 -0400
If you said a short list of commodities manipulated by the Too Big To Prosecute banks, you are probably right, but the answer we were looking for is that these are all the various, and increasingly more ridiculous, commodities that serve to make up the bulk of China's hot money flow (those flows into China which are not reflected in the current account flows or FDI) facilitating synthetic structures, also known as Chinese Commodity Funding Deals.
Forget tapering. Forget Ukraine. The largest single risk to the world economy and financial markets right now is China. What’s going on in China is very reminiscent of South Korea in the 1990s, before that economy’s crash in 1998.
US equity markets are up around 2% from Friday's close - extending yesterday's hope-filled gains on the back of Vladimir Putin not nuke-ing the world this morning and lower-than-expected inflation prompting hope for moar free money tomorrow. This jump is a ridiculous deja vu all over again of Putin's first press conference. Bear in mind that the USD is unchanged on the week and Treasury yields are up a mere 1-2bps - so hardly a resounding risk-on conviction. Following yesterday's epic low volume, today was little better. Copper was flat as Oil prices rose back towards $100. Gold and silver were pummeled - just for good measure (gold's biggest 2-day drop in 3 months) - as was VIX (which took over the role of S&P 500 driver from AUDJPY after Europe closed). The afternoon saw VIX diverging (higher ahead of tomorrow's FOMC) from rising stocks. For the week, USD unch, Bonds unch, Stocks +2%, Gold -2%.