While bond markets are selling off (in anticipation of 'Taper'?), and equity markets are flat; it seems the equity market hedgers are not afraid anymore. After rising notably last week, VIX futures are being hammered lower as we head into the big announcement. Profit-taking on vol curve steepeners or a picture of complacency?
There was non-Fed news in the overnight market. Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities." Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.
Equity markets were very much in a land of their own relative to broad risk asset classes all day until the FT's Harding "mo' Taper" memo hit and slammed reality back into the herding masses. Still convinced that the Fed will 'only' taper if the data confirms it, we suspect the broad market is missing the signals from broken markets and frothy levels that mean the Fed will use the modest improvements as a crutch upon which to jawbone tapering into our minds. Today's price action was - in the words of the great Bob Pisani, "just silly." A ramp out of the gate following Japan's lead which followed a Hilsenrath-inspired ramp-job from Friday combined with a beat for NAHB (and Empire Fed) sent all the high-beta into overdrive (builders +2.2%) - but nothing else was really moving (FX was relatively flat, bonds went sideways, commodities wriggled in a small range). The Harding hit and we gave back all the post-Hilsenrath gains, 330-ramped to VWAP and held it magically into the close (though the USD ended at its lows of the day, bond yields at their highs, and credit markets at their lows).
We have removed the levels to protect the innocent but which of these equity (or bond) markets would you be adding to today?
The recent market weakness (selling off in equity indices and widening in credit spreads) shares many elements of the previous dips this year, which should give bulls some comfort (the Italian- and Cyprus-led dips didn't last very long). However, there are elements which are concerning - as Citi notes, positioning in long equity and credit positions are notably 'long', and how weak cash credit has been this time around. As Citi points out, investors and the Fed are trapped in a prisoner's dilemma. Will everyone collaborate (investors hold to cash positions & dovish Fed) or betray (investors start unwinding cash positions & hawkish Fed)? The strategy each player follows will determine whether the weakness this time around is to be faded (like the previous ones this year) or not.
"I am going to hit on some of the landmines that you can encounter within order-matching engines, and then I am going to give a forecast on, at least from my perspective, what’s going to happen over the course of 2013"
For the first time since April 2012, the broad European equity markets have dropped for 4 weeks in a row. The drop of almost 6% is the largest since June 2012 and brings European stocks to almost unchanged on the year. But while stocks have been battered this week (even with yesterday's bounce), sovereign bonds are relatively calm still.
It appears the cracks in the armor of the central bankers created by an over-enthusiastic BoJ's impact on the quadrillion JPY JGB markets are now rippling through the global market place. While every talking head that dares to speak has proclaimed the weakness in bonds as nirvana for equity bulls, it seems they were wrong, very wrong. As bond market tremors ignite everywhere, so equity markets come a little unglued at the prospect that the Fed, ECB, BoJ, and PBOC may not be so omnipotent after all...
Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.
The cluster of Omens is starting to build - now 3 in the last 7 trading days. This cluster is now the most frequent since the 2007 highs - more 'clustery' than the 2010 signals. Volume today was dismal - among the lowest of the year in both futures and cash. Equity markets were bid out of the gate on the back of Japanese exuberance - and JPY carry - which oddly hadn't helped European risk markets. Credit markets, which decoupled from equity's reality around lunchtime Friday - were on a one-way street wider today - entirely ignoring equity's efforts at exuberance. The USD saw earlier (JPY weakness-driven) gains entirely unwound by the close and ended unchanged but gold (small gain) and silver (+1.1%) outperformed as WTI limped modestly lower. Treasuries added 3-4bps in yield (up around 16bps from Friday's low yields). VIX also didn't play along with equity's general lack of direction and rose 0.5 vols to 15.5%. Homebuilders are underperforming once again but financials remain the best performers off Friday's lows (for now). Nikkei futures did nothing all day - hovering at last week's dead-cat-bounce highs.
"It all began with Greece," and as Mark Grant notes today, "somebody, somewhere is going to take a hit." It appears the 'news' is piling up thick and fast in the 'islands' nation. As Reuters reports, Greece did not receive any binding bids for natural gas producer DEPA. This was part of the asset-sale program demanded by the TROIKA, with Hellenic Petroleum's sale later in the year now potentially on hold. The sad truth is that the country cannot pay their bills, cannot pay their pension obligations, cannot fund social services and is just about out of money to even run their government. The reality is; they are bankrupt again and there is no way out without some form of debt forgiveness and more money. Debt forgiveness, alone, will not cut the mustard now by itself and some kind of end game may well be near. That is increasingly reflected in 2012's no-brainer trade as GGBs are now back below 60 and down over 10% from their highs and the Athens Stock Index just entered bear market territory, down 20% from its highs.
As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.
The last few weeks have seen some modest volatility return to the US equity markets (a 5% high-to-low correction) sparking 'markets-in-turmoil' discussions as Fed Taper and Abenomics-Anxiety makes the headlines. But with today's payroll print and a comfort-blanket of stock-and-options quote-stuffing, fed-liquidity-providing momentum, today's rally will allow us all to sleep well over the weekend. However, one look at the following charts should suggest that things have changed... the most successful (momo-driven) trades around the world are coming undone in a hurry as the fear of a slowing of the global liquidity 'flow' rises - and the US equity investor is not immune...
To get a sense of the momentous volatility in Japan, consider that the Nikkei225 is more or less in the same numeric ballpark as the Dow Jones, and that each and every day now it continues to have intraday swings of more than 500 points! Last night was no different following swing from 13100 on the high side to 12548 on the low, or nearly 600 points, with all this ridiculous vol culminating in a close that was just red however for a simple reason that the rumor of the Japanese Pension Fund reallocation taking place hit shortly before the close sending the USDJPY higher by 200 pips... only for the news to emerge as an epic disappointment when it was revealed that the GPIF would raise its target allocation to domestic equities from 11% to... 12%. So much for the "Great Japanese Rotation."