Relatively slow day in Europe but the selling theme continued with the worst 5 days in 2 months in the broad equity markets and sovereign bond spreads continuing to push wider (+20bps on the week). Corporate and financial credit spreads widened significantly again - now 10% worse than a week ago. So it seems the rotation to European 'value' drew just enough greater fools in to mark a short-term top. Europe's VIX topped 20.5%, its highest in 6 weeks. And on a final 'bright' note, the Turkish stock index is down 32% in the last 3 months in USD terms (and Greek bonds continued to lose faith).
As the cash equity markets opened in the US this morning, it appears a slew of options-based bearish bets were placed across a variety of stocks (starting with letters H to L). This slammed the Dow down into the red and to the all-important 15,000 Maginot Line. All was 'normal' until that critical indicator of 'wealth' finally broke 15,000 and almost instantly the exchanges went into "catastrophic error" mode which has resulted in trades from 0930ET to 0947ET on the CBOE being "busted". The exact time when the selling was under-way (so we can't have those sells being counted?). However, there is a rumor that what really drove it was Goldman losing millions on options trades (including JPM), and instead of the NYSE forcing the firm to eat its losses as it did with Knight, it decided to unwind 17 minutes of trades. These are the 'markets' in which investors are supposed to trade?
- So no great rotation into EM? Capital Flows Back to U.S. as Markets Slump Across Asia (BBG)
- Muslim Brotherhood leader arrested in Egypt (Reuters)
- Allies Thwart America in Egypt: Israel, Saudis and U.A.E. Support Military Moves (WSJ)
- Dear Bloomberg: when you buy the loans of a distressed retailer, you are not betting on a rebound, you are betting on being the fulcrum security in a bankruptcy: Kyle Bass Said to Bet on J.C. Penney Comeback With Loan Purchase (BBG)
- Bubbles Bloom Anew in Desert as Buyers Wager on Las Vegas (BBG)
- Britain rejects Spanish request for Gibraltar talks (Reuters)
- U.K. Mortgage Lending Rises to Highest Since Lehman Collapse (BBG)
- Pension Funds Dispute Math in Detroit Bankruptcy (WSJ)
- Christie Says Gayness Inborn as He Signs Therapy Measure (BBG)
UPDATE 2: India's Sensex -20.3% YTD in USD terms (bear market)
UPDATE 1: USDINR breaks above 64.00 (20% devaluation in 3 months)
Hot money outflows continue to crush most of Asia's currencies this evening led by Indonesia's Rupiah (-1.7%) and Indian Rupee (-1% to a new record low). From the Won to the Ringgit, the USD is bid and now trades at its strongest relative to Asian FX in 13 months. Equity markets are not faring any better as that leveraged carry is eliminated. Indonesia's Jakarta stock index is down 4.66% today (-12.4% From Thursday's close); India's Sensex is -1.6% today (-7.2% From Thursday's close) with Thailand and China's Hang Seng close behind with losses over 1.5% on the day. Even the Nikkei (in spite of JPY weakness) has given back all its early gains (after getting back to even from US day session futures losses). JGBs are modestly bid but EM bonds are getting slammed (India's 10Y +23bps to new 12-year high yield of 9.47%). But apart from all that, the markets are fine...
BlackRock's fixed income CIO Rick Rieder is worried about the impact that higher rates will have on the stock market. In this brief interview with Bloomberg TV's Tom Keene, Rieder explains that while equities look 'cheap' given where rates are, this is a mis-pricing and warns (as we have repeatedly) that "people don't spend any time looking at cash-flow discounted by cost of financing, which is really where we think equity should be valued." In that case (as we have noted), a surge in financing costs will weigh heavily on stocks. While he is concerned about investors' general lack of awareness of the risk in bond funds - "the volatility in fixed income could actually be higher than the equity market," he fears the impact of higher rates on mortgages and other credit vehicles on the recovery. However, as Rieder notes they have been saying for a long time, "QE’s too big. You’ve got to taper down QE. It's created this tremendous distortion in interest rates," as he sees fair-value for the 10Y around 3.25%.
UPDATE: Everbright Securities (the Chinese fat-finger stock brokerage) just announced they SNAFU'd again - this time by 'mistakenly' selling 10Y government bonds at 4.2%
AsiaPac and EM markets are awash with red this evening. While Japanese stocks are very modestly higher on the bad-news-is-good-news that Abe's economy saw the third largest trade deficit on record (dramatically worse at over JPY1tn than expectations of JPY773), most of the rest of the overnight markets (including US Treasuries) are in the red. From plunging Aussie vehicle sales data (-3.5% from +4.0% in the prior month, to a -0.3% QoQ print for Thailand's GDP (confirming recession as opposed to expectations of a +0.2% gain); and from Indonesian current account deficit (and currency depreciation) concerns smashing stocks -4.0% (most since Oct 2011) to the ongoing collapse in India currency, bond, and now equity markets, all is not well ahead of the European open. Chinese stocks are also down for the fourth day in a row as Friday's fat-finger concerns drive brokers down hard and spike 7-day repo rates.
How is the Federal Reserve going to stem the deflationary tide with equity markets at their highs?
Analyst expectations for top line growth in the back half of 2013 continue to fade, and worries over a looming “Revenue recession” grow commensurately. As ConvergEx's Nick Colas notes, the first quarter of 2013 posted an average negative 0.6% revenue comparison for the 30 companies of the Dow Jones Industrial Average, and Q2 (with a few companies left to report) looks to be +0.3%. But back out the financials, and he points out that the number goes negative to the tune of (0.3%). Analysts are still chopping away at their back half expectations, now down to 1.9% for Q3 and 2.1% for Q4 2013. Those are down from 4-5% expected comps back in March, so the trend is still clearly not our friend. As we have pointed out previously, equity markets have been powered by multiple expansion year-to-date, but, as Colas asks (rhetorically) do you really want to pay up at this point in the business cycle for still declining expectations?
Equity markets saw their highest volume in 7 weeks as the major indices plunged the most since June 20th, falling back to their lowest level in 5 weeks. 380 new 52-week lows dominated the meager 18 new 52-week highs. The early snap higher in Treasury yields (following the claims data) sparked the 'disorderly rotation' out of stocks that we have warned of and as stocks saw no significant BTFD mentality so Treasuries went modestly bid (ending the day only 5bps higher in yield) with the belly (7Y) 8bps off its intraday high yields. The USD was smashed lower as JPY and EUR strength dominated flow (and carry-unwind) which further helped push the story of the day - gold and silver - up large on the day (+2.1% and 5.6% respectively on the day). VIX surged to 14.5%, credit underperformed, as the Dow broke its 50DMA (15,280) closing near its 100DMA (15,097). Nikkei futures are -530 From yesterday's highs
In a session that has been painfully boring so far (yet which should pick up with CPI, jobless claims, industrial production and the NY Empire Fed on deck, as well as Wal-Mart earnings which will no doubt reflect the continuing disappointing retail plight) perhaps the only notable news was that Japan - the nation that brought you "Fukushima is contained" - was caught in yet another lie. Recall that the upside catalyst (and source of Yen weakness) two days ago was what we classified then as "paradoxical news" that Japan would cut corporate taxes in a move that somehow would offset the upcoming consumption tax hike. Turns out that, as our gut sense indicated, this was merely yet another BS trial balloon out of Japan, which admitted overnight that the entire report was a lie.
A low cost of capital is the underpinning of much of the exuberance that shareholders are showing for stocks as management are able to lever-up (in the face of deteriorating fundamentals) to reward shareholders (via buybacks or state-sponsored dividends). With rates surging in the last few days, a critical question is how much will it take to accelerate outflows from bond funds and lead to significantly wider credit spreads for corporations? As BofAML notes, the consensus is now that a 3.5% 10Y rate is enough to trigger a disorderly rotation by which institutional investors are unwilling (based on risk expectations) to bid for the yieldier credit market debt as retail flows out. This is crucial since if the credit markets sell-off, firms will be unable to fund the expectations priced into equity markets and lead to a shift back to the sidelines from risk-assets in general.
A recent survey of asset managers globally, managing USD 27.4 trillion between them, found that 78% of defined-benefit plans would need annual returns of at least 5% per year to meet their commitments, while 19% required more than 8%, "a target of 5% per year can be reached but only by using leverage, shorting, and derivavtives." And sure enough, as Deutsche Bank (DB) reports, in short, investors have rarely been more levered than today! According to DB, a MoM change in NYSE margin debt >10% has to be taken as a critical warning signal as there are astonishing similarities in the sequence of events among all crises. As the S&P 500 just hit a new all-time high, investors might want to ask themselves when it is a good time to become more cautious – yesterday, in our view. Simply put, the higher margin debt levels rise, the more fragile the underlying basis on which prices trade; with even a less severe sell-off in equities capable of triggering a collapse.
Intraday volatility remains extreme in almost every asset class. Today it was bonds and corn's turn as the former saw 7Y yields jump over 10bps (for the worst 2 days in 6 weeks on moar Taper talk) and the latter dropped 4% on the day to 3-year lows (on record crop expectations). Equity markets performed the now-ubiquitous intraday reversal as early shorting was squeezed back quickly to a green close. short-term VIX was smashed lower soon after the US open but faded back higher into the close to end around 12.5% (but the VIX term structure is now at 4 months steeps). FX markets were very active (JPY -2% and AUD -1% on the week) pulling the USD +0.75% but Treasuries have been battered (10Y near 2 year high yields) with 7Y adding 15bps this week (and Utility and homebuilder stocks have suffered the most). Gold dropped a little on the USD strength, silver stayed green and copper and oil were flat. Oh and Carl Icahn tweeted and pulled Tech and the Nasdaq to outperform.
Perhaps the best source of real, actionable financial information, at least as sourced by Wall Street itself, comes in the form of the appendix to the quarterly Treasury Borrowing Advisory Committee (TBAC, aka the Goldman-JPM chaired supercommittee that really runs the world) presentation published as part of the Treasury's refunding data dump. These have informed us in the past about Goldman's view on floaters, as well as Credit Suisse's view on the massive and deteriorating shortage across "high quality collateral." This quarter was no different, only this time the indirect author of the TBAC's section on fixed-income market liquidity was none other than Citi's Matt King, whose style is well known to all who frequent these pages simply because we cover his reports consistently. The topic: liquidity. Or rather the absolute lack thereof, despite what the HFT lobby would like.
Outside the fetid terrarium where US economists live, like skinks kept as pets by bankers, other forces are in motion. For instance, there’s the non-theoretical, non-financial economy, which is now apparently based on the trade in tattoos, and the journey by automobile from the nearly foreclosed home to the tattoo studio, and to the hamburgers, pizzas, and fried chicken thighs consumed on each end of the journey. It seems, based on the latest odds, that Larry Summers will be entering the scene the way Vincent Price used to enter a Hammer Studio horror film - reliably delivering some deadly unpleasantness. We don’t think a more perfect figure might be found for piloting the garbage barge of American finance over a Niagara Falls of consequence.