Anyone who followed today's trading action with a very distinct sense of summer of 2008 deja vu dread, where soaring crude led to just one thing, soaring stocks, they are forgiven, because this is precisely how one can summarize today's action. In a day devoid of any news (except for the JOLTS survey of course, which confirmed the gaming of NFP payroll numbers), in which bonds did absolutely nothing, with the 10 Year trading in a very tight range just shy of 2.65%, it was all about low-volume levitating equities and the energy complex.
Surging shale oil production has exposed the lag in the U.S. infrastructure to transport the new domestic energy source in a safe and the most cost-efficient timely manner to the end users.
- ICE's NYSE to determine the rate used by key competitor CME: NYSE Euronext to Take Over Libor (WSJ)
- Japan slams China over maritime disputes (FT)
- The Twinkie Returns, With Less Baggage (WSJ)
- Pentagon Workers From Pennsylvania to Ghana Hit by Cuts (BBG)
- Why Prostitutes Aren't Enough to Deprive the World of Eliot Spitzer (BBG)
- Groups gather in Turkish protest park after night of clashes (Reuters)
- Apartment Rents Rise, But the Pace Is Slowing (WSJ)
- Asiana Seen Saving Millions With Tactic to Bar U.S. Suits (BBG)
- Bin Laden's life on the run revealed by Pakistani inquiry (Reuters)
- Fracking Firms Face New Crop of Competitors (WSJ)
Overnight news began in China where the CPI came in 2.7% versus consensus of 2.5% although PPI continues to decline at a faster pace than expected (-2.7% v -2.6%). While nobody believes the actual print, that the PBOC is telegraphing an inflationary "leak" shows its willingness to continue with pro-tightening measures which is why despite an Alcoa "beat", the SHCOMP was up only 0.37%. Elsewhere in China, Bloomberg news quoting Xinhua said that some district governments of Ordos of Inner Mongolia is struggling with finances and had to borrow money from companies to pay salaries of municipal employees. Ordos is the infamous "ghost town" spurred by the mining boom in Inner Mongolia. The Bloomberg article noted that Ordos local government entities have CNY240bn of debt versus CNY37.5 billion of revenue last year. And while the Alcoa "beat", helped handily by a hilariously "tapered" consensus into reporting day, did little for China it was the catalyst that pushed global stocks higher worldwide.
Not much in terms of economic data but lots of corporate news with the official Q2 earnings season kick off, as well as a plethora of Fed speakers which in a centrally-planned world, is all that matters.
The central bank "reason" goal-seeked for today's US overnight ramp - because it sure wasn't fundamentals with both German exports (-2.4%, Exp. +0.1%) and Industrial Production (-1.0%, Exp. -0.5%) missing - was the weekend Spiegel story that despite the unanimous decision by the ECB last week to keep rates unchanged, ECB chief economist Peter Praet and Mario Draghi himself had insisted on a 25 bps rate cut. They were, however, stopped by seven council members from the northern euro states, including Weidmann, Knot and Asmussen. As a result, Draghi was steamrolled in the final vote. Yet somehow this is bullish for risk, pushing equity futures higher and peripheral debt spreads lower, even as the EURUSD has drifted higher. Of course, one can't have an even more dovish ECB as a risk on catalyst alongside a rising Euro, but who cares about news, fundamentals, or logic at this point. All that matters is that US futures are higher, which was especially needed following yet another rout in the Shanghai Composite which dropped 2.44% back under 2,000 following news that China's Finance Ministry has told central government agencies to cut expenditures by 5% this year, and a 1.4% drop in the PenNikkeiStock225 on a weaker USDJPY. Remember: all is well in the global economy (whose forecast is about to be cut by the IMF) if the US is generating a record number of part-time jobs.
Brief discussion of the price action that is lifting the dollar at expense of nearly every other currency.
The situation in Egypt has not been tenable since the Muslim Brotherhood and President Mohamed Morsi took over, post-revolution, but now that the military has stepped in, ousted Morsi and placed him in detention, foreign investors are celebrating. No one knows what’s going to happen next, but the general consensus—at least for investors—is that things couldn’t get any worse, only better. (Unless you’re Qatari, but more about that later.)
After a few hours of calm yesterday, crude oil prices are once again surging back over $102 as the commander of the Third Field Army stated that troops deployed in Suez and South Sinai saw their "state of readiness" raised to "Maximum Alert." The announcement came after Cairo's airspace was closed for 40 minutes and flights were diverted to other airports because of air force drills. The 'state of emergency' has sent stocks sliding and put a modest bid into precious metals amid a call by Islamist allies of ousted Egyptian Prwsident Morsi to "take to the streets" and express their outrage.
- Egypt Girds for Muslim Brotherhood Protests (WSJ)
- SAC Capital's Steven Cohen Expected to Avoid Criminal Charges (WSJ)
- SAC insider-trading probe could last years (Reuters)
- RBI seen selling dollars around 60.59 levels: dealers (Reuters)
- China signals will cut off credit to rebalance economy (Reuters)
- Egypt army arrests key Muslim Brotherhood figures (BBC)
- Rise in Steel Prices Alarms Buyers (WSJ)
- Draghi-Carney Seek Independence Day Break From Bernanke (BBG)
- Samsung Warns Results Will Miss Forecasts (WSJ)
- Russia Prosecutor Seeks 6 Years in Jail for Putin Critic Navalny (BBG)
While the skeleton crew of market participants are still digesting yesterday's uber-dovish, "forward guidance" conversion by the BOE and ECB, driven in response to the Fed's increasingly tight (at least relatively) monetary policy, they now have month's biggest economic and market catalyst to look forward to. In a day which promises to be rife with illiquidity as the bulk of US market participants are within 100 feet of a sandy beach, we are about to get the number that will shape the market's mood for the next month: will the Fed's tapering planes be strengthened in response to strong NFP, or not. As Deutsche accurately points out, the curveball to throw in is that June-August numbers have tended to be seasonally weak over the whole period we have data (back 70+ years) and again over the last 10 years. Today's number is therefore going to be fascinating. A number between 150-200k is unlikely to change anyone’s opinion on the Fed whereas a number below might start to build a case for a taper delay. Above 200k and the September taper momentum will build. Such a high number (especially in a weak seasonal period) is unlikely to be great for markets but the ECB/BoE might have cushioned some of the hawkish blow for now. For the record the market is expecting 165k on payrolls and 7.5% (DB same) for unemployment. A full NFP preview post is coming shortly.
When enough of us realize the extent of inflation, bond buyers will likely demand higher coupon rates; the government's cost of debt service could soar.
Given the US holiday, markets are likely to be thin today but there are some big news stories floating around at the moment. If the fast and furious events from the past few days in a revolutionary Egypt bear a striking resemblance to what happened in the spring of 2011, it is because they are strikingly comparable. Only this time, following the ouster of yet another US-supported "leader" by the US-supported military, the country's CDS has normalized at a level that is roughly double where it was two years ago as the implicit backing of the US looks increasingly shaky, following what was yet another bungled foreign policy venture by the Obama administration. But for now, the people are celebrating, just as they did in 2011. One wonders what happens between now and the next coup, somewhere two years (or less) hence. For now focus merely on who controls the Suez - after all that is really all that matters for the US. The other major story of yesterday, Portugal, continues to be in limbo,
The algos could have a problem getting out of this one. From Mrs.Watanabe (JPY -170pips, NKY -500 points from highs) getting hammered (and the Hang Seng -5%) to European sovereign bond spreads exploding (Portugal +170bps - biggest spike in 2 years to 8 month highs) and financial stocks collapsing (-4%), safe-havens are heavily bid from gold and silver (+3% from lows) to US Treasuries (10Y dropped 8bps) and global equity markets are taking it on the chin. Not pretty...
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.