It's one of those days: despite the Iraq conflict spilling out of control and about to involve US drones and warplanes, despite China's naval conflict with Vietnam over an oil rig in disputed territory set to go "kinetic" at any moment, despite the Ukraine civil war having its deadliest day yet this weekend and adding insult to injury Russia halting gas supplies to Ukraine (letting Kiev and Berlin fight for the scraps), despite crude prices rising ever higher and about to unleash a "discretionary income" shockwave on America's summertime motorists, despite yet another massive tax inversion M&A deal in which the buyer has made abundantly clear its stock is overvalued and will be used as the purchasing currency, stocks are inexplicably not at all time highs this morning.
Best week for WTI crude in 6 months (to 9 month highs). Worst week for the Dow Transports in 2 months (3rd worst in 10 months)... and while 5s30s flattened to its equal lowest since January 2009, 10Y Treasury yields ended the week just 1bp higher in yield. Late day VIX smashing was trumped by rumors of the death of Iraq's PM Maliki (which was later denied and sent VIX reeling lower again). The USD ended the week modestly higher (+0.2%) with GBP strength and EUR weakness the main theme. Silver and gold were bid (safety and CCFD unwinds) with the best week in 3 months. Copper and iron ore were down for the 3rd week in a row. "Most shorted" stocks rose for the 5th week in a row (notably decoupling from the broad markets's weakness in the last few days). So it seems that the market does not trade on bad news; it trades on fake rumors.
"The latest escalation in Iraqi tensions has introduced new event risk for global oil markets. However, current options market pricing suggests oil markets are still attaching a low probability to an oil price spike over the coming months. We believe this sanguine approach to oil price spike risk reflects the fact that the major oil infrastructure in Iraq has not (yet) fallen into the hands of the militant extremists." - Deutsche Bank
- Tea Party struggles to repeat Cantor-style shock in Tennessee (Reuters)
- Iran Deploys Forces to Fight al Qaeda-Inspired Militants in Iraq (WSJ)
- Oil Rallies as Militant Advance in Iraq Threatens Crude (BBG)
- Gold Set for First Back-to-Back Weekly Gain Since April (BBG)
- Hedge Funds Get Stung by Slow Markets (WSJ)
- Sterling nears 5-year high after Carney speech (FT)
- Britain Warns Boom in Real-Estate Prices Threatens Economy (WSJ)
- East Europe Leaders Urge EU Unity to Counter Russia (BBG)
- Formula One Said to Be Valued at $8 Billion as Malone Seeks Stake (BBG)
- Dumb and dumber: Abe Plans Company Tax Cut in 2015 as Kuroda Warns on Budget (BBG)
Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan's future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won't have to worry much about 2015 as he won't be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
It seems blood on Iraq streets and infringements near oil reserves is enough to pop crude oil price, break the airlines bubble, stall the Trannies unstoppable surge, and spark volume selling through the US equity markets. We will be reassured that this is a buying opportunity and that 'nothing fundamental has changed' and the US is 'the cleanest dirty shirt' but when the Chinese are tamping down carry with flip-flopping CNY fixes, the ECB has shot his mini-bazooka, and we know the Fed ain't un-tapering anytime soon (as they are fearsome of complacency and financial fragility), it makes one wonder if the corporate buyback machine can overwhelm the geopolitical-risk selling pressure of the rest of the world. Trannies dropped to their worst day in 4 months as all major US equities reversed any Draghi gains. Treasuries were well bid (-6bps and lower in yield on the week) as gold also benefited from safe haven status rising up to $1275. Copper slipped further south. Oil was the big news, spiking up to $106.70 (9 month highs). It's not Tuesday - what did you expect? (and remember there are no Friday POMOs in June).
Here is why, as we predicted yesterday when faced with not only but two brand new scandals, the VA farce and the Berghdal "extraction" fiasco, the most likely outcome is war: OBAMA SAYS IRAQ `CLEARLY IS AN EMERGENCY SITUATION'; OBAMA ADMINISTRATION SAID NOT CONSIDERING GROUND TROOPS IN IRAQ; OBAMA SAYS US IS PREPARED TO TAKE MILITARY ACTION WHEN ITS NATIONAL SECURITY INTERESTS ARE THREATENED. So the US is about to unleash hell against the same Al Qaeda extremists it was arming across the border in Syria? Score one more for US foreign policy. Meanwhile, the one person who benefits the most from rising crude prices, that would be Putin for those who still don't get it, is laughing all the way to the bank.
Now that 25 year old math PhD HFT programmers have finally figured out what this thing called Iraq is, and why headlines around it should factor into algo trading signals, here, for their benefit is a summary of the latest events in Iraq, and also for everyone else confused why crude is back to levels not seen since last summer.
He's funny cause he's... funny.
We are short of Brent while long of WTI, but the political situation over which we’ve no control has taken control of this spread rendering our position intolerable and forcing us to run for cover upon receipt of this commentary. Not to do so would be trading foolishness of the first order
Because in all other situtations when Gartman "puts" on crude positions (with whose money?) which are always a function of geopolitics, he does so only when he has control over the "political situation"? Gotcha.
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?