Just when the market thought it had priced in a new equilibrium without (or with - it is not quite clear) a Syria war, here comes Thursday with a data dump that will make one's head spin. Central bankers are once again on parade starting overnight, when the BOJ announced no change to its QE program and retaining its monetary base target of JPY270 trillion. The parade continues with both the BOE and ECB, the latter of which is expected to address the recent pick up in Eonia rates and take praise for the recent very much unsustainable "recovery" in the periphery even as Germany continues to slide lower (this morning's factory orders plunged 2.7% on exp. -1.0%), which in turn lead the Bund to pass above 2.0% for the first time since March 2011. Speaking of bonds blowing out, the US 10Y is now just 6 bps away from 3.00%, the widest since July 2011, and likely to breach the support level, taking out a boatload of stops and leading to the next big step spike in rates as the second selling scramble ensues. And just to keep every algo on its binary toes, today we also get a NFP preview with the ADP private payrolls at 8:15 am (Exp. 180K, down from 200K), Initial Claims (Exp. 330K), Nonfarm Productivity and Unit Labor Costs (Exp. 1.60% and 0.9%), Factory Orders (Exp. -3.4%), Non-mfg ISM (Exp. 55), Final Durable Goods, EIA Nat Gas and DOE Crude Inventories, oh and the G-20 meeting in St. Petersburg where Putin and Obama are not expected to share much pleasantries, and where John Kerry's swiftboat may not be allowed to dock.
US equities were drifting quietly lower after a modest rise overnight fadsed through Asian anxiety and European political issues in Italy but all that changed once McCain said "no" and proposed a broader-scope, deficit-growing Syrian plan. Stocks instantly rushed higher to Russia "catastrophic consequences" levels from last week with Trannies and the NASDARK having their best day in a month. Commodity markets - most notably silver, copper, gold, and crude oil - were all sliding lower before McCain, and oddly accelerated lower in his news. Treasures also rallied into the morning and then sold off significantly after McCain's comments with 10Y now up 11bps on the week at high yields with 10Y closing at its highest yield in 25 months. The USD slipped lower as AUD smashed to its best 3-days in 21 months and EUR slid but that left the USD unchanged on the week (compared with S&P's +1.6%). Stocks gave up some gains into the close but ended with Healthcare and Discretionary almost unchanged from Kerry's 8/26 speech.
Today's morning summary is a carbon copy of yesterday's. Some things happened, China continues to make up data to fit its current policy outlook, things in Europe continue to go bump in the night ever louder as we approach the German election despite reflexive diffusion indices - this time Service PMIs - desperately signalling a surge in confidence, Italy has just reminded everyone it is a big political basket case as Berlusconi is said to consider withdrawing his support for the Letta government and calling for elections this year, and so on, but it is still all about Syria. Last night the Senate Foreign Relations Committee has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any US military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. In other words, a "surgical strike" lasting a minimum of 90 days, and then with indefinite additional extensions tacked on. Yet judging by the modest drop in crude and gold, the market may need more than just fighting words at this point to push to th next level of risk aversion.
The magic was the magnificent illusion that money printing increased wealth. It certainly looked that way, despite all the common-sense interpretation that would have you believe that it doesn't. But that's the beauty of a wonderfully performed magic trick. Something impossible seems to happen. You know it can't happen, but it looks like it did, and what's the harm in letting yourself believe? Assuming that the goal is reducing unemployment... it really was a wonderful 50 years. Pumping out money increased the labor force participation rate from about 59% in 1960 to 67% by about 2000 by creating jobs in military procurement, lobbying, and (as we went through successive bubbles) brokerages and finance, government, home construction, real estate sales, retail, etc. Now the losses in manufacturing and primary wealth creation are overwhelming the jobs created in the FIRE economy, and the US looks to be heading back to the golden era of the 50s, with labor force participation back below 60%. Too bad they'll all be low-paying jobs.
While the Dow suffered its worst monthly loss since May 2012, it is actually holding up better than the rest of the US equity indices since Kerry's speech on Monday. With the Trannies down 4% since Kerry, they cap the worst in the last 23 months. Energy outperformed (unchanged) on the week and financials were major losers down 3% but hombuilders were hammered post-Kerry also ending at the lows of the week. VIX closed at its highest in over 2 months with its biggest weekly jump in over 4 months. Away from equities, FX, commodity, and bond markets also turmoiled... The last few minutes saw stocks crater and ramp as illiquidity, month-end, and anxiety left traders (and machines) breathless.
Overnight, the market continued to digest news out of the UK that the formerly solid pro-war alliance has splintered following a historic vote by the House of Commons, leaving Obama to "go it alone." The result was a rather sizable slamdown in both crude and gold, accelerating as Europe opened for trading, and pushing gold back under $1400. This happened even as data out of Europe showed that European unemployment remained at a record high 12.1%, while inflation missed expectations and printed at 1.3%, or below 2% for the seventh month. Earlier in the session, headline data out of Japan showed that inflation had risen at the fastest pace since 2008. However, before the deflation monster is proclaimed dead, the core-core figure (excluding foods and energy) of the Tokyo CPI was down 0.4% yoy, unchanged since June for three months, suggesting that prices are still largely driven by energy-related costs. In other words cost-push inflation is rampant, which is the worst possible scenario and means the BOJ's QE is going to all the wrong place.
Another very volatile day across asset-classes with no-one having a clue what is going on. Good-news (GDP) was instantly interpreted as bad-news (moar Taper) and bonds and stocks sold off notably but as the US equity market opened, JPY was sold and carry took over lifting stocks back to pre-FOMC-minutes levels once again... but bonds also rallied significantly with it (in a non-Taper-ing manner) as the USD rallied. But once that run-stop was covered on low volume levitation, stocks limped lower from the European (and POMO) close onwards, ending towards the lower-end of the day's cash range. Treasury yields dropped 7bps from their post-GDP highs leaving the 30Y -3bps on the day (and 7Y and less unch). VIX rose (turning higher before stocks topped), almost tagging 17% as it closed. But burying the lead, commodities were slammed with WTI slammed back under $108; gold, silver, and copper all hit with the latter -3.5% on the week. 'Average' volume day in futures.
Those curious if the Indian Rupee cratered once again in overnight trading will be disappointed: following the previously reported intervention by the RBI in which it would provide US dollars only to crude companies, the currency rose strongly at the open only to fade and trade rangebound before closing in the mid 67 range. In other words, much more will be needed by the central bank to stabilize the currency, the markets and the economy. The main overnight story, however, remains the Syrian conflict and market reactions to it. Stocks traded higher in Europe early today, with credit spreads tightening as market participants scaled back expectations of an imminent strike on Syria after US Defense Secretary Hagel said that the US will act on Syria only with international collaboration. Of note, the G-20 is set to take place next week where Syria is widely expected to be the hot topic for discussion among global world leaders. But while futures ramped in early trade following a spike in the USDJPY over 98, they have since retraced most of their upside, and crude is back to nearly unchanged.
Astute investor, Jim Rogers has warned overnight in an interview with Tara Joseph of Reuters that "oil and gold will go much, much higher" due to "market panic" regarding Syria and the coming end of free money... "when this artificial sea of liquidity ends we're gonna see panic in a lot of markets, including in the US, including in West developed markets."
The key overnight events were already discussed previously, but here they are again: the wholesale selloff in Asia (which subsequently shifted to Europe), the accelerating outflows from India (moment ago the SEBI website announced a net INR13.7 billion selling in Indian stocks yesterday and the near record collapse in the Indian Rupee to new record lows, and the ongoing uncertainty over Syria and what it will do to crude prices (if SocGen is right, nothing good). In brief: a market conditioned and habituated to a world in which Bernanke promises "to make everything ok" suddenly finds itself in the throes of uncertainty and following 4 years of dumb trend-following, has no idea what to do.
Overnight the emerging market rout continued, with the India Sensex down another 3.18%, the Philippines tumbling 4%, Jakarta down 3.7% and Dubai crashing 7%. A driving factor continues to be the fear over an imminent air campaign launched at Syria, leading both WTI and Brent higher by 1%, and gold finally breaking out above the $1400 tractor beam, and printing at $1412 at last check, a hair away from a 20% bull market from the lows. In other news, the market is once again "surprised" to learn that Summers, who as we have been showing for over three weeks is the frontrunner for the Fed chair, is the frontrunner for the Fed chair according to CNBC. Of course, there is nothing preventing this from being the latest trial balloon (and nothing that suggest Summers will actually be hawkish as conventional wisdom seems to think: the guy basically works for the financial sector) but futures aren't waiting to find out, and US traders are walking in this morning to a red screen with ES down just over 10 point and sliding. Any minute now the great unrotation from stocks into bonds (10 Year was 2.77% at last check) is about to be unleashed. And if Obama actually goes to war (without talking to Congress of course), watch the bottom fall from the market.
What a difference a day makes. On Friday, Doctor Copper was surging on the back of dismal home sales data and the hope of moar money; today, following the terrible durable goods data, the economist-metal is plunging rapidly.
Last week it was the Nasdaq, today it was the Eurex Exchange, which broke down "due to technical issues" shortly after 2 am Eastern and which was offline for over an hour. Further keeping a lid on liquidity and upward momentum is today's UK market holiday which has resulted in a driftless move lower across European stocks, following a red close in the Nikkei225. It only means that the inevitable ramp up in the disconnected from all fundamentals and reality market will have to come only during US trading hours when the NY Fed trading desk steps up its POMO-aided levitation.
BofA's MacNeill Curry warns that "several major FX, commodity, and bond markets are flashing warning signals of a change of trend." Specifically, he notes that JPY is set to resume its devaluation path (USDJPY bullish) with a 106.00 target; US 10Y Treasury bonds are "at risk" of a bullish turn on a break back below a yield of 2.802%. This would suggest the charts are beginning to price in a "Taper-on" story (as USD repatriation flows cease and allow the JPY to weaken and bonds rally back on 'moar printing') and perhaps that is what fits with his view that the Indian Rupee melt-down is showing signs of stalling.
As Western economies start to regress in earnest following decades of failed and destructive monetary inflation and debt accumulation, yield-starved investors are allocating real capital to the one industrially untapped continent in the world: Africa. However, we’re not seeing industry moving to Africa to set up shop. Rather, politically-directed capital flowing into the African resources sector is fueling and financing the strongest consumer boom in the world. It’s a vendor financing model for Asia, and it portends a major boom and bust cycle for the African continental economy.