With WTI crude oil prices hovering at record levels for this time of year, the spread to Brent crude has bounced from zero as Syria started up to around $4.50. At the time time we noted the plunge in the spread was as much related to US infrastructure and technical issues as the war premium and now Pierre Andurand, manager of one of this year's most successful commodity hedge funds, believes US crude will trade at a premium to the Brent benchmark within weeks, counter to the expectations of many in the market. As The FT reports, the ex-Goldman trader is known for taking bold positions, and while not commenting in specific trades, he noted "In order for Cushing inventories to stop drawing and start building, I think WTI [the US benchmark] should be at a premium to Brent [the global benchmark]," within weeks.
The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
The Venezuelan government is in a bind. They realize that 'the people' will stand-by idly as the nation's currency is devalued, as inflation soars, and blackouts continue as food shortages grow...(and the stock market soars) but take away a critical personal care item and the riots will begin. As Yahoo Maktoob reports, Venezuela's leftist government said Saturday it temporarily seized a major toilet paper factory hoping that it can end troublesome shortages of the staple personal care item. "The temporary occupation of [the toilet-paper manufacturing plant] is aimed at verifying that toilet paper industry production, marketing and distribution" are all in line with state policies, Vice President Jorge Arreaza said on Twitter, without indicating how long the takeover would last. This action follows 'nationalization' of large farms amid President Maduro's claims that the White House is plotting the "collapse" of his government next month by sabotaging food, electricity and fuel supplies.
It has been a quiet start to Quadruple Witching Friday (expiration of stock index futures, stock index options, stock options and single stock futures) but expect that to change, as erratic price action is a recurring hallmark of Quad Witches, especially with persistent low volume and markets that tend to shut down for no reason. So far stocks have traded steady in Europe this morning, credit spreads widened and Bunds traded in positive territory as market participants positioned for the much-anticipated German elections which are to be held on Sunday, with exit polls to be made available after the close of polling stations at 6pm local time. Ahead of that, and as reported here previously, Germany’s AfD Eurosceptic party could win enough support in the general election on Sunday to gain seats in the German Bundestag, an opinion poll published for a leading newspaper has forecast for the first time. Basic materials and utilities underperformed in Europe, with RWE trading sharply lower in Germany after the company announced plans to cut its dividend by half (and with the Adidas fiasco yesterday, one wonders just how bad things in Europe really are).
The end. The dollar collapsing into zero interest is like a spacecraft crashing into a black hole. The singularity's pull is irresistable.
Yesterday's epic short squeeze in bonds (belly-specs were most short in years) and stocks ("most shorted" were heading notably lower into the statement) seems to have flushed out any and all the marginal buyers (for now) on the basis that the Fed will not be Tapering any time soon. Simply put, the best performers from yesterday were the worst performers today with 5Y and 7Y Treasury yields underperforming (+6bps or so) and the long-end retraced more than half its yield move yesterday. In stocks it was the same story, builders and utilities were the biggest losers today after being the best yesterday. The USD retraced higher with JPY weakness (Abe was not happy) as a major driver (testing up to 99.50). WTI Crude unwound all its Fed gains and then some, trading back to around $106 by the close. Gold, silver, and copper were the winners on the day - extending gains modestly. Stocks tracked oil and bonds today (not FX carry), AAPL slid into the close on disappointing UK pre-order rumors, and HY credit underperformed stocks.
Three weeks ago we explained the importance of the looming cliff - in the government's reserves of helium. With a never-ending pun-trail related to "hot-air" or markets "blowing up", we stick to the facts. With the threat of a glonal helium shortage potentially weighing on fibre-optic cables and flat-screen TVs, the always-reaady-to-negotiate members at the Senate have agreed to support an amendment that prevents the October 7th termination of the helium storage program. So thanks to political "hot air" (we couldn't resist), the helium cliff is resolved... why so easy you wonder? Perhaps this is why "...Helium is also used in national defense applications such as rocket engine testing and purging, surveillance devices, air-to-air missiles and scientific balloons."
Yes, yes, only the Fed matters. Still, there was some event flow overnight which while completely meaningless for the epic liquidity bubble, may have some implications eventually when the music finally stops. In thie regard, perhaps the best summary of the the lunacy coming out of the Marriner Eccles building is the following sentence from Bloomberg: "Bernanke said he was concerned that market interest rates, driven higher by his own suggestion he would scale back QE, would curb growth." One can't make this up.
With rumors this evening of the White House calling around for support for Yellen, Marc Faber's comments today during a Bloomberg TV interview are even more prescient. Fearing that Janet Yellen "would make Bernanke look like a hawk," Faber explains that he is not entirely surprised by today's no-taper news since he believes we are now in QE-unlimited and the people at the Fed "never worked a single-day in the business of ordinary people," adding that "they don't understand that if you print money, it benefits basically a handful of people." Following today's action, Faber is waiting to seeing if there is any follow-through but notes that "Feds have already lost control of the bond market. The question is when will it lose control of the stock market." The Fed, he warns, has boxed themselves in and "the endgame is a total collapse, but from a higher diving board."
The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.
Saudi Arabia is pumping out more crude that at any time since the 1970s and in Kuwait and The UAE, oil production levels have hit record highs. As The FT reports, the US might be 'drowning' in oil, but the world is still dependent on Saudi Arabia for the marginal barrel. This is crucial since, "whatever is happening in the US, the Gulf states remain critical to the global oil trade,” says Credit Suisse's Jan Stuart, "the fact they are producing so much shows that the global oil balance is far more stretched than consensus would have you believe." The trigger for the jump in Gulf production has been huge disruption to supplies from Libya; and with the three large Gulf producers meeting 17.1% of global demand (it has never topped 18%), the dependence on the Gulf appears to be growing. The concern remains, despite apparent nonchalance, that consuming nations like the US, China, and India will be stifled should production disruptions last.
Overnight trading started with Asian markets continuing where yesterday's S&P 500 fizzle ended, wishing Summers could withdraw from Fed running again, as both the Nikkei and SHCOMP were well lower by the close. Perhaps all the easy multiple-expanding, headline-driven money is made, or perhaps economic fundamentals will finally start having to justify a 17x multiple on the S&P (a good is good regime for those who may be too young, or old, to remember), but overnight US futures were dull, and no doubt anticipating today's start of the "Most important FOMC meeting ever", which concludes tomorrow with an announcement by the Fed of what and how much (if any) tapering it will commence with an eye toward halting QE next summer, although more realistically what will happen is an Untaper being announced before then. While the start of the FOMC meeting is the main event, today we get CPI, TIC flows and the NAHB housing market index. Today's POMO is another modest $1.25-$1.75 billion in the long-end sector.
While the only market moving event of note had nothing to do with the economy (as usual), and everything to do with the Fed's potential propensity to print even more dollars and inject even more reserves into the stock market (now that Summers the wrongly perceived "hawk" is out) some other notable events did take place in the Monday trading session. Of note: while India's August inflation soared far higher than the expected 5.7%, rising to 6.1% from 5.79% (making life for the RBI even more miserable, as it is fighting inflation on one hand, and a lack of liquidity on the other), in Europe inflation decelerated to 1.3% from 1.6% in July driven by a drop in energy prices, while core inflation was a tiny 1.1%. In a continent with record negative loan growth this is to be expected. Additionally, as also reported, Merkel appears to be positioned stronger ahead of this weekend's Federal election following stronger results for her CDU/CSU, if weaker for her broader coalition. In Libya, oil protesters said they would continue stoppages at oil terminals until their demands are met in yet another startling outcome for US foreign intervention. Finally, some headline on Syria noted a Kerry statement "will not tolerate avoidance of a Syria deal", while Lavrov observed that it may be time to "force Syria opposition to peace talks." And one quote of the day so far: "Don't want market to become excessively exuberant" from the ECB's Mersch- just modestly so?
"The (potential) hawk is dead, long live the doves," appears the chorus of approving 'traders' who have just bid the S&P 500 futures up over 1% to a new all-time high. The USD is getting monkey-hammered, Gold futures jumped $20 and Silver futures are up 3.5% (from the Friday PM fix) but are fading back close to the Friday trading close. Treasury futures open up over 1 point (implying 30Y -4bps, 10Y -8bps, 5Y -11bps) - jubilant at the money-printing to come - oh and WTI crude is -1.3% at $107.
What do you do when there are some of the biggest and most catalyzing events in recent years waiting just around the corner? Why you buy stocks of course with both hands and feet... The Dow gained around 3% on the week - its best since the first week of January - outperforming its higher-beta peers (as AAPL lost over 6% for its 3rd worst week of the year). This was the lowest non-holiday week volume of the year. It seems weak retail sales and a collapse in confidence also spurred buying (and yet more short-covering: Shorts +0.5%, RUT +0.17%) and the opposite-world of QE rules the day/week (until next week perhaps). Bonds rallied (best week in 4 months), the USD dropped its most in a month, and VIX had its biggest weekly drop in 6 weeks. Gold and Silver were clubbed like baby-seals this week until lunchtime today - when they started to surge green on the day.