Equity Markets

Maybe we now know why JPM decided to release results after market close instead of, as it always does, before the open: simply said, the results were lousy top to bottom, the company resorted to its old income-generating "gimmicks", it charged off far less in risk loans than many expected it would, and its outlook while hardly as bad as it was a quarter ago, was once again  dour.

We think the market may have gotten ahead of itself, accepting the narrative that the Fed will raise rates as many other countries ease. We believe the market is gradually realizing that the Fed is far less flexible than it hoped it would be, thus causing a re-pricing of expectations. We don't think this will necessarily change the Fed's "desire" to pursue an exit. This re-pricing of expectations may have profound implications for the U.S. dollar, and with it, the price of gold.

For the past two weeks, the thinking probably went that if only the biggest short squeeze in history and the most "whiplashy" move since 2009 sends stocks high enough, the global economy will forget it is grinding toward recession with each passing day (and that the Fed are just looking for a 2-handle on the S&P and a 1-handle on the VIX before resuming with the rate hike rhetoric). Unfortunately, that's not how it worked out, and overnight we got abysmal economic data first from China, whose imports imploded, then the UK, which posted its first deflation CPI print since April, and finally from Germany, where the ZEW expectation surve tumbled from 12.1 to barely positive, printing at just 1.9 far below the 6.5 expected.

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.