If we don't prepare for the coming high tide, we may all drift out to sea.
With the "adult supervision" of US markets gone today as bond markets are closed for Columbus day, and the USDJPY tractor beam also missing with Japan also offline for Health and Sports day, stocks took their cues from China where speculation was rife that in lieu of cutting RRR, the PBOC has unleashed even more incremental QE by expanding its Collateral Asset Refinancing Program (CAR). Specifically, the central bank said this weekend it will expand a program allowing lenders to use loan assets as collateral for borrowing from the central bank, opening it up to nine more cities from the program's test in Shandong province and Guangdong. The new areas for the program include Beijing and Shanghai. According to some estimates released several trillions in liquidity into the market, and not only sent government bond futures to new highs, but pushed the Shanghai Composite up over 3% overnight.
Even with the drop in oil prices, the $7 trillion invested in Sovereign Wealth Funds makes them important participants in global capital markets; what they do, even at the margin, matters.
How do we know if the current signal is a “threshold crossing” into a better climate for stocks, or the lower bound of a new climate of elevated volatility? We cannot know for sure at this point if a volatility shift has occurred. We do have our reasons to be suspect of stocks in the longer-term, but not based on this data. Perhaps the best takeaway from this study is that a drop in the VIX below the 20 level is not an automatic all-clear sign for stocks. Similar moves have, on several occasions, marked the lower bound of a new high-volatility environment. In other words, stocks are not an automatic home run here. A year from now, it is entirely possible that stocks will have struck out.
US equity markets have shrugged off China's disappointing open and surged back to the highs of the day (with Trannies leading). However, a few of the "gurus" favorite stocks are not buying the dip... as the so-called FANG names are notably weaker over the last 3 days...
The big overnight story was certainly the BOJ's announcement at 11pm Eastern whether or not the Japanese central bank would boost QE. This is how we previewed it: "now all eyes to the BOJ when tonight around 11pm Eastern, Japan's central bank is expected do and say precisely... nothing." Sure enough, nothing is precisely what the BOJ delivered, leading to a big, if brief tumble in the USDJPY suggesting many were expecting at least a little tip from the BOJ.
News That Matters
"Our model indicates the US equity market could potentially drop by 30% in the event of an ‘EM lost decade’ and by 60% in the event of a China hard landing (i.e. S&P 500 back to its lows)."
The best headline to summarize what happened in the early part of the overnight session was the following from Bloomberg: "Asian stocks extend global rally on stimulus bets." And following the abysmal data releases from the past three days confirming that the latest centrally-planned attempt to kickstart the global economy has failed, overnight we got even more bad data, first in the form of Australia's trade deficit, and then Germany's factory orders which bombed, and which as Goldman said "seems to reflect genuine weakness in China and emerging markets in general and this will weigh on the German manufacturing sector."
BIS Warns of ‘Major Faultlines' In Global Debt Bubble - "Unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills"
Following Friday's disastrous payrolls report, which confirmed all the pre-recessionary economic data and signaled that instead of approaching "lift-off" and decoupling from the rest of the world, the US economy is following the emerging markets into a slowdown in what may be the first global, synchronized recession since 2008, the market saw its biggest intraday surge since 2011 and the sharpest short covering squeeze in history, we are happy to announce that the "market" is now solidly back in "bad news is good news" mode.
From time to time, the data (from economic activity, inflationary pressure, risk appetite and asset valuations) points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a point, and the worry is that each indicator is flashing red.
$13 trillion in market losses in just one quarter would be very hard to make up for even in very favorable circumstances. We have no such circumstances. We’ve built our very lives on squeezing China et al for 27 years, and issuing more debt as if there’s no tomorrow - sort of a self-fulfilling prophecy -, and now we’ve belatedly realized that there’s a time limit on that model. But hey, by all means, it’s your money, and it’s your life, so do keep on betting on that recovery, and the return to ‘normal’, whatever that once was. Put it all on red. Go crazy! You do risk becoming a lonely crowd though. Meanwhile, those of us down here with our feet planted in the real earth have just this one question: “How bad can this get, and how fast?”.
"Inconceivable." With the total destruction of the "faith" in The Fed's pr0mised "recovery," stocks and bond yields are collapsing. A glance at the crash in fed reigional surveys should have given the market a hint (and credit did) but US equity markets are in free-fall and gold and silver are surging. Treasuries rallied hard on the bursting of the faith bubble with 10Y yields plunged back under 2.00% and 30Y yields broke below the 200-day moving average.