It seems, as we noted earlier, that the machines running the crude oil pricing algos are running on a 24-hour delay but as ISIS pushes on towards Baghdad, takes Tikrit and images of burning refineries hit YouTube, crude oil prices have shot up. WTI Crude is back over $106, a level not seen since Sept 2013 and is the highs for this time of year since 2008's consumer-sapping levels. This recent strength has already leaked into gas prices (though there is more to come if the normal lag is anything to by) as regular gas prices have not been higher for this time of year since 2011. So there we have it - the excuse for Q2 GDP consumption weakness....
With another day of little otherwise completely irrelevant macro news (because following last night's abysmal Australian jobs data one would think the AUD would be weaker; one would be wrong), market participants - all 3 of them - and algos (which have finally uncovered where Iraq is on google maps) are finally turning their attention to the latest conflict in Iraq (because they obviously no longer care about the martial law in Thailand or the civil war in Ukraine), where the Al Qaeda spin off ISIS overnight seized at least 310K B/D in refinery capacity in northern Iraq according to the Police, and what is more concerning, is now less than a 100 kilometers away from Baghdad. Will ISIS dare to venture further south? Keep an eye on crude for the answer.
And just like that the war in Iraq, "Bush's war" according to so many, is about to come back with a vengeance this time under Nobel peace prize winning president, and what makes it most grotesque is that this time the US will be waging combat with at a military force that it itself is training and arming in neighboring Syria. Which of course is good news for the military-industiral complex and US Q3 GDP, if not so good for millions of innocent civilians soon to be known as "collateral damage."
Oil prices are set to hike in the next few days with the growing fear that fighting in the northern city of Mosul will spread southwards in Iraq.
As reported earlier, and as most know by now, as if out of nowehere the al-Qaeda faction Islamic State of Iraq and al-Sham (ISIS) has, over the past 24 hours, stormed across northern Iraq, taken over key northern cities and even taken control over countless modern US weapons and military equipment including Humvees and Blackhawk helicopters. As we further reported, after looting nearly half a billion from the Mosul central bank, ISIS is also the "world's richest terror force." So weapons? Check. Money? Check. What happens next? This map, from the Institute for the Study of War explains clearly what ISIS' ambitions in the middle east are: creating a grand nation-state that basically controls virtually all of Syria and most of Iraq.
Yesterday's market action was perfectly predictable, and as we forecast, it followed the move of the USDJPY almost to a tick, which with the help of a last minute VIX smash (just when will the CFTC finally look at the "banging the close" in the VIX by the NY Fed?) pushed the DJIA to a new record high, courtesy of the overnight USDJPY selling which in turn allowed all day buying of the key carry pair. Fast forward to today when once again we have a replica of the set up: a big overnight dump in USDJPY has sent the dollar-yen to just over 102.000. And since Nomura has a green light by the BOJ to lift every USDJPY offer south of 102.000 we expect the USDJPY to once again rebound and push what right now is a weak equity futures session (-8) well above current levels. Unless, of course, central banks finally are starting to shift their policy, realizing that they may have lost control to the upside since algos no longer care about warnings that "volatility is too low", knowing full well the same Fed will come and bail them out on even the tiniest downtick. Which begs the question: is a big Fed-mandated shakeout coming? Could the coming FOMC announcement be just the right time and place for the Fed to surprise the market out of its "complacency" and whip out an unexpected hawk out of its sleeve?
"Treasury-selling" Tuesday came and went and for the 2nd week in a row, bond yields rose (+2-3bps) following the 7th losing Monday in a row. Equity markets languished amid dismal volumes but were rangebound all day apart form AUDJPY and VIX-driven pumps to try and close green and keep the Tuesday dream alive (and the running count of new all-time highs). The USD jumped once again as EUR tested lower (near Draghi spike lows). Gold and silver saw a squeeze higher at the open this morning and maintained gains (as fears of CCFD unwinds spread) but copper rose as WTI crude touched 9-month highs then reversed sharply lower. As we forecast this morning, a mid-day VIX plunge and late-day JPY tumble (and another VIX plunge) sparked just enough exuberant buying panic among the machines to manipulate stocks to a green close and save the Tuesday plan. Stocks have fallen only 2 days in the last 3 weeks...
One major factor to the slow growth/low inflation in the U.S. is the Wall Street Yield Trade. By incentivizing unproductive use of capital, low interest rate via monetary policy is actually deflationary.
The tidal patterns of this market have become so well-known to even the least observant: push the USDJPY (or other JPY carry pairs) higher starting around 6am Eastern, then ramp it just before US open to launch cross-asset momentum ignition algos in FX which then carry over to spoos and the broader "market." In the meantime, overnight selling of USDJPY allows a reset before ensuing buying during the US daytime session. Rinse. Repeat. Sure enough, just after 6 pm Eastern, the same USDJPY which catalyzed yet another all time high close had been sold off, leading to a 0.85% drop in the Nikkei and US equity futures which are showing an unprecedented ungreen color. Don't worry though: the pattern is too well-known and practiced by now, and we fully expect USDJPY levitation to pick up shortly, which is the only signal ES-algos need, trampling over any kind of newsflow both good and bad, and leading to yet another all time record high which it goes without saying is completely detached from any underlying reality at this point and at any time over the past 5 years.
After last night's tumble in copper and surge in CNY during Asia, Europe steadied the ship with more plunging yields (especially the front-end) but the US was all about USDJPY ignition at the open to blast the S&P through 1,950 comfortably and decouple stocks once again from reality. VIX was higher and credit markets were not as exuberant and by the time Europe closed and POMO was done, stocks crumbled back to unchish (apart from the Russell - lifted by another epic short squeeze from the Biotech sector this time). This is the best 4-day swing in the Russell 2000 since Jan 2013 (led by Biotechs today) Gold, silver, and copper ended almost unch as Oil surged 1.7% to over $104 (biggest day in 2 months). Treasury yields bear flattened (5Y +4bps, 30Y +1bps). The USD rose 0.3% - its best day in a month - as EUR closed at 4-month lows.
With the VIX smashing last week to levels not seen since early 2007, the S&P rising to all time highs, and European core and peripheral bond yield this morning touching historic lows, it would appear that the "market" has priced in every possible negative outcome. Which, as Goldman showed over the weekend is clearly not the case at least as investors are concerned who continued to sell stocks across the board in May even as the market broke out to record levels making many wonder who is buying stocks (for more read here)? Expect more of the same, and with some luck we will get a single digit VIX in the coming days as newsflow slows down following payrolls week and ahead of the world cup start in Brazil.
If predicting yesterday's EURUSD (and market) reaction to the ECB announcement was easy enough, today's reaction to the latest "most important ever" nonfarm payrolls number (because remember: with the Fed getting out of market manipulation, if only for now, it is imperative that the economy show it can self-sustain growth on its own even without $85 billion in flow per month, which is why just like the ISM data earlier this week, the degree of "seasonal adjustments" are about to blow everyone away) should be just as obvious: since both bad news and good news remain "risk-on catalysts", and since courtesy of Draghi's latest green light to abuse any and every carry trade all risk assets will the bought the second there is a dip, the "BTFATH mentality" will be alive in well. It certainly was overnight, when the S&P500 rose to new all time highs despite another 0.5% drop in the Shcomp (now barely holding on above 2000), and a slight decline in the Nikkei (holding on just over 15,000).
It was all fun and games until Draghi started speaking... the initial exuberance of what sounded like QE but wasn't really sent EUR to 1.35, stocks higher, and Treasury yields soaring. Then as reality sunk in that it was just not all that much... Gold started to surge, EUR rally back, stocks fade, and Treasurys rally... WTI crude is fading (and Bitcoin is rising) We're gonna need a bigger QE, Mario.
In today's abnormally quiet overnight session one could hear a pin, or the USDJPY, drop: with everyone focusing on the ECB announcement in one hour, not a single algo is willing to make any big moves, or even start some momentum ignition, ahead of Draghi's announcement, which absent launching full scale QE, which it won't, will be a disappointment which means the EUR will ultimatly move higher after a kneejerk lower as the market forces Super Mario to do even more next time. As Bloomberg adds, a cut in refi and deposit rates is fully priced in and latest price action suggests investors brace for disappointment if ECB stops short of signaling asset purchases or other liquidity measures to combat deflation.
Crude oil prices dropped after earlier macro data but fell more aggressively around 1130ET. Desks are scrambling for reasons for the heavy volume selling pressure though some have noted that suggestions by Ukraine's newly elected president will meet with Putin were responsible for some 'war premium' being lifted. WTI and Brent both fell at the same time... The selling appears orderly - not machines-gone-wild...