With everyone focused on China as the source of next systemic risk, most forgot or simply chose to ignore Europe, which through Draghi's verbal magic was said to be "fixed." Or at least everyone hoped that the rigged European bond market would preserve the "recovery" illusion a little longer giving the world some more time to reform pretend it is doing something to fix it. Turns out that was a mistake, confirmed earlier not only by the plunge in German Factory Orders which cratered -4.3%, down from 7.7% and below the 1.1% revised, and UK Industrial production which missed expectations of a 0.6% boost, rising only 0.3%, but most importantly Italy's Q2 GDP shocker, which as we reported earlier, dropped for the second consecutive quarter sending the country officially into recession. As a result, European stock markets, Stoxx600, has joined the DJIA in the red for the year while Germany's 2 Year Bund just went negative on aggressive risk aversion, the first time since 2012.
"We tried not to equivocate too materially yesterday but we hoped we had made it clear that it was our intent to move off of the centre point of neutrality to something a bit more bullishly inclined.... We’ll err bullishly then, albeit not aggressively so. Rather, as we’ve been in the past, we are “pleasantly” bullish and look to add to our positions..." - Dennis Gartman
It is unclear how much of this morning's momentum-busting weakness in futures is the result of China's horrendous Service PMI, which as we reported last night dropped to the lowest print on record at the contraction borderline, but whatever low volume levitation was launched by the market after Europe's close yesterday may have fizzled out if only until Europe close (there is no POMO today). Still, futures may have been helped by yet another batch of worse than expected European data, namely the final Eurozone PMI prints, which in turn sent the EURUSD to day lows and the offsetting carry favorite USDJPY to highs, helping offset futures weakness. Because in the New Normal there is nothing like a little bad macro data to goose the BTFATH algos...
At this point these soft-survery-based PMIs are becoming a running joke. Japanese macro surprise data has done nothing (and we mean nothing) but disappoint recently and currently stands at 3-month lows. So it makes perfect sense that July Japan Services PMI would print its first expansion since March. On the other hand, after exploding to 18-month highs in June, China Services PMI collapsed to a 2005 record low. As BofA warned previously, it is important to understand how crude these surveys are - these data get way too much air time. They give a timely, rough read on the economy, but should get little weight once hard data are released.
Following a ghastly week for stocks, the momentum algos were desperate for something, anything to ignite some upward momentum and stop the collapse which last week pushed the DJIA into the red for the year: they got it overnight with the previously reported bailout of Portugal's Banco Espirito Santo, where the foreplay finally ended and after the Portuguese Central Bank finally realized that the bank is insolvent and that no more private investors will "recapitalize" it further, finally bailed it out, sticking the stock and the subs into a bad bank runoff entity, while preserving the senior bonds. So much for Europe's much vaunted bail in regime and spreading of pain across asset classes. At least the depositors did not get Cyprused, for now.
Low volatility is being driven, in BofAML's view, by both fundamental and technical factors. Fundamentally, the volatility of real economic activity and inflation has fallen to near 20 year lows in what some are calling the Great Moderation 2.0. However, the recent further collapse in volatility is also explained by a feedback loop fueled by low conviction, low liquidity, low yields and low fear. Central bank policy has been the largest explanatory factor of both the fundamentals and technicals... and that has BofAML concerned about the risks of short-term volatility spikes exacerbated by market illiquidity.
Islamic State fighters seized control of Iraq's biggest dam, an oilfield and two more towns on Sunday after inflicting their first major defeat on Kurdish forces since sweeping through the region in June. Local officials said militants with the extremist group Islamic State took control of the towns of Zumar and Sinjar near the city of Mosul on Sunday, waging fierce clashes with Kurdish forces. The French news agency AFP quoted a United Nations spokesman saying 200,000 people have fled Sinjar and said there are grave concerns for their safety.
Having publicly shunned President Obama, it appears Turkish Prime Minister Erdogan has no problem upsetting the status quo. As Reuters reports, the fifth cargo of crude oil from Iraqi Kurdistan was loading at Turkey's Mediterranean port of Ceyhan on Thursday and was scheduled to set sail on Friday, Turkish energy officials said. Baghdad is unhappy - missing out on the oil revenues. We are sure US is unhappy - oil being sold out of its control. And OPEC may be getting upset as it appears an 'anonymous' buyer is more than willing to buy the oil from the 'not sovereign status' seller militia at a healthy discount. De-petrodollarization?
The year's best performing major index was its biggest loser this week. Trannies tumbled almost 4% - the worst week in 22 months. The rest of the indices fell 2-3% with the Russell 2000 down 4 weeks in a row for the first time since November 2011. Dow ends -0.5% and Russell -4% for 2014. Away from stocks, Treasury yields collapsed today erasing most of the post-GDP losses and ending the week only 3-5bps wider at the long-end and 1.5bps lower at the front-end. 10Y closed under 2.5%. The USD Index mirrored bonds, surging on GDP and then plunging today to end the week up 0.35%. Gold and silver oddly decoupled today (silver lower) ending week down 1% and 2% respectively on the week. Ugly week for WTI crude, ending under $98 (Feb lows) down 4.4%. High-yield credit spreads rose 9.7% (to over 350bps - worst since Nov 2013) for the worst non-roll week since May 2012.
- As we predicted yesterday, the "big" Gaza ceasefire lasted all of a few hours (Reuters)
- To Lift Sales, G.M. Turns to Discounts (NYT)
- Espirito Santo Family’s Swift Fall From Grace Jolts Portugal (BBG)
- Argentine Debt Feud Finds Much Fault, Few Fixes (WSJ)
- Fiat Says Ciao to Italy as Merger With Chrysler Ends Era (BBG)
- Euro zone factory growth eases in July as inflation fades away (Reuters)
- CIA concedes it spied on U.S. Senate investigators, apologizes (Reuters)
- Ukraine Reports Losses After Pro-Russian Ambush Near Malaysia Airlines Flight 17 Crash Area (WSJ)
- U.S. says India refusal on WTO deal a wrong signal (Reuters)
- Why Putin Has 2006 Flash Before His Eyes After Sanctions (BBG)
If yesterday's selloff catalysts were largely obvious, if long overdue, in the form of the record collapse of Espirito Santo coupled with the Argentina default, German companies warning vocally about Russian exposure, the ongoing geopolitical escalations, and topped off by a labor costs rising and concerns this can accelerate a hiking cycle, overnight's latest dump, which started in Europe and has carried over into US futures is less easily explained although yet another weak European PMI print across the board probably didn't help. However, one can hardly blame largely unreliable "soft data" for what is rapidly becoming the biggest selloff in months and in reality what the market may be worried about is today's payroll number, due out in 90 minutes, which could lead to big Treasury jitters if it comes above the 230K expected: in fact, today is one of those days when horrible news would surely be great news for the momentum algos. Still, with futures down 0.6% at last check, it is worth noting that Treasurys are barely changed, as the great unrotation from stocks into bonds picks up and hence the great irony of any rate initiated sell off: should rates spike on growth/inflation concern, the concurrent equity selloff will once again push rates lower, and so on ad inf. Ain't central planning grand?
For reasons that have no rational explanations at this time, the US and Europe have embarked on a concerted program to demonize Putin, ostracize Russia, and bring the world as close to a major conflict as it's been since the Cold War, a time hardly memorable to many in the current crop of our elected officials. A dangerous dynamic is brewing between the West and Russia/Putin. We are seeing a rush to war very similar to the one that led up to Saddam's ouster, but this time, we have much less justification (hard to believe) and the opponent is tremendously more capable. There is little sense in the course the West is currently pursuing, little to gain, and much to lose. The main conclusion here is that not only is the US poking the bear, but it is doing so with increasing frequency and upping the ante dangerously with each step.
It has been a deja vu session of that day nearly a month ago when the Banco Espirito Santo (BES) problems were first revealed, sending European stocks and US futures, however briefly, plunging. Since then things have only gotten worse for the insolvent Portuguese megabank, and overnight BES, all three of its holdco now bankrupt, reported an epic loss despite which it will not get a bailout but instead must raise capital on its own. The result has been a record drop in both the bonds (down some 20 points earlier) and the stock (despite a shorting ban instituted last night), which crashed as much as 40% before stabilizing at new all time lows around €0.25, in the process wiping out recent investments by such "smart money" as Baupost, Goldman and DE Shaw. The result is a European financial sector that is struggling in the red, while adding to its pain are some large cap names such as Adidas which also tumbled after issuing a profit warning relating to "developments" in Russia. Then there was European inflation which printed at 0.4%, below the expected 0.5%, and the lowest in pretty much ever, and certainly since the ECB commenced its latest fight with "deflation", which so far is not going well. The European cherry on top was Greece, whose dead cat bounce is now over, after May retail sales crashed 8.5%, after rising 3.8% in April.
It appears global geopolitical risk is fixed... WTI crude futures have tumbled back below $100 this afternoon to their equal lowest since early May. Despite warnings from Russia over higher energy prices, oil is well below MH17 headlines levels...
Equity bulls should be exuberant. The last time Alan Greenspan warned of exuberance and potential for a correction, stocks soared for a few more years. While Yellen's stock-picking skills have been questioned in recent days, Greenspan has once again weighed in:
*GREENSPAN SAYS 'KEY QUESTION' IS WHETHER U.S. FACES FALSE DAWN
*GREENSPAN PREDICTS AT SOME POINT EQUITIES TO HAVE CORRECTION
Although Greenspan declined to second-guess the Fed, he sees a problem moving toward "normalized" policy for his descendants.