Equity Markets

For those still with capital in the paper markets, Peak Prosperity's Chris Martenson believes there are dangerous risks re-building. In particular, he sees an unacceptably high and growing risk of a cascading series of corrections in the bond markets (corporate and sovereign), which would have a much greater impact on destroying wealth worldwide than any stock market crash could. The return of reckless practices like CDOs and overuse of derivatives indicates that we are far along the timeline in repeating a 2008-like contraction -- but worse. Despite today's heady elevated prices, it's time to get to the sidelines, and use your paper - while it still has the purchasing power it does - to park your wealth in hard assets.

Markets are remarkably schizophrenic about where risk is flowing... and where it isn’t.  For example, ConvergEx's Nick Colas notes, the CBOE VIX Index is up from 12.3 a month ago to a close of 14.0 yesterday. And other risk assets such as Emerging Markets, U.S. Small Caps, Energy names, and developed economy international stocks all show higher 'VIXs' over the same 30 day period.  But... and it’s a big 'But'... just as many sectors/asset classes in our tracking universe show declines in their 'VIXs'.  The most pronounced are domestic Consumer Discretionary, Utilities, and Tech names as well as precious metals and High Yield Corporate bonds, where Implied Vols are 6-17% lower this month and in most cases are at/near 52 week lows.  If you are looking for spots where volatility might make a comeback, these are good places to start. This market reminds us of an old joke: Question: What do you call a person who is both ignorant and apathetic? Answer: I don’t know and I don’t care.

It's one of those days. US equity markets are levitating oin extremely thin volume against the trend in every other risk-asset market. Treasury yields are pushing lower as safety is sought, VIX is bid as protection is sought ahead of the weekend, credit markets are leaking lower (at lows of day), and JPY strength is not helping the carry traders... but then again, none of that matters... we need moar...because all that matters is a green Dow close for the week.

Following the dismal PMIs this morning, most EU equity indices were declining. From around the open of US equity markets, EURUSD began to levitate as the 'bad' news hit Cyprus Popular Bank being 'restructured', no deal with Russia, and ATM lines mounting. Of course, the machines interpreted EURUSD's rise as a positive and European equities (and US equities) got a lift into the EU close. We suspect, in reality, this EUR strength is very different and given the surge in demand for Swiss 2Y rates (now at 2 month lows), EUR-USD basis swaps, and European sovereign bond markets in the last hour, it would appear this is very much repatriation flows and not 'we love the Euro' flows. European stocks did end the day lower though - catching down to credit's earlier week weakness.

Those wondering why the overnight ramp has not yet materialized despite promises from BOJ's new governor Kuroda to openly-endedly monetize Fukushima radiation if necessary in order to reflate the economy, will have to look at Europe where a raft of horrifying PMIs confirms what most have known: the relapse into a multi-dip European recession is progressing nicely, and the hoped for rebound in the core economies of France and Germany is once again on track to not happen, but at least there will be Cyprus to blame it all on this time. The specific reason this time was French and German Flash Manufacturing and Services PMI for March, all of which came far below expectations: German Mfg PMIs printed at a contracting 48.9 vs Exp. 50.5 (back from 50.3), while Services came at 51.6, down from 54.6 on expectations of a rise to 55.0, while French Mfg PMI stayed stubbornly flat at 43.9, despite hopes of a "bounce" to 44.3, even as the Service number ticked even lower from 43.7 to 41.9, below expectations of 44.3 and the lowest since February 2009. End result: Eurozone March Services PMI down from 47.9 to 46.5, vs Exp. of 48.2, while Manufacturing slid from 47.9 to 46.6 on hopes and prayers of a bounce to 48.2. Which then takes us back to Cyprus, where things are not fixed yet, where the parliament is not expected to vote for a revised Bailout proposal yet, and where we got a cornucopia of brilliant one liners, such as these from the new Eurogroup head, who is filling in the shoes of his predecessor Juncker in style, and proving quite well that "things are serious."

Blackrocks's Larry Fink "doesn't really care" about Cyprus, "it's really not something of concern," he tells Bloomberg TV. While gesturing that he can't really discuss specifics as Blackrock is an adviser to Cyprus, he then goes to explain how European and US markets have it all wrong and that "It has some symbolism impact on Europe, but it’s not a really major economic issue." This dip is "just clients taking some chips off the table and reaping some gains from the huge rally," he goes on, dismissing the interviewer's question as nonsense, "this is temporary," and adding that he "is hyperbullish on the US economy," and that "global markets will be up 20% this year." However, what is most fun to watch is his arrogant dismissal of the interviewers question over US depositor fears, there are two reasons that is foolish, he notes "a) we have insurance, so that will not happen; [ZH: umm, so did Cyprus]; and b) we have always prioritized the liabilities [ZH: umm, except for GM]." So all good then, storm in a teacup. Carry On - though he has some stern words for the French and for the Russians.

The Cyprus finance minister Michael Sarris may or may not have submitted his resignation after the president formally declined to accept it, but now that he is back on the saddle he is back to spreading hope, cheer and goodwill. Those wondering why both the EURUSD, and its derivative, US stock futures have surged overnight and retraced all of yesterday's losses and then some, it is not due to any anachronistic events such as "good economic news" (especially since the Spanish PM said Spain will have to cut its economic outlook once again, or rather, as usual), but due to the following phrase uttered by Sarris a few hours ago: "We are hoping for a good outcome, but we cannot really predict" regarding his views on talks with Russia. That's right - the entire overnight ramp is based on the hope of one man, who thinks Russia can be blackmailed through deposit haircuts, into bailing out the tiny island which has now said nein to Europe and bet the ranch on a well-meaning Vladimir Putin. What can possibly go wrong: according to the GETCO algos all alone in levitating stocks, absolutely nothing. What is clear is that Cyprus is fully intent on seeing Europe "blink" whether due to Russia's involvement or just because it thinks (correctly) it has all the leverage as the alternative is a breakdown of the Eurozone.

Things are escalating rather quickly... Treasuries have soared to yesterday's low yields (below 1.90%), S&P 500 futures are cracking lower on heavy volume -10 points (with the cash S&P below yesterday's lows) - after the other indices all went green earlier. The FX market is in a mini-crisis with EURUSD dumping and JPY strengthening considerably and rapidly. In Europe, it is worse as Portuguese, Spanish , and Italian bond spreads are snapping wider to post Cyprus wides; Spanish and Italian equity markets are tanking down 3-4% on the week; and GGBs are back under EUR50 - their lowest in 3 months. Gold and Silver are rising as Copper and Oil slide. Swiss 2Y rates are negative at their lowest in over 2 months. VIX is up 33% from Thursday's lows and back above 15% - biggest 2-day jump since Nov 11.

Most investors are nervous now and need to hold things together to include the Fed meeting announcement Wednesday. If bulls are lucky they’ll get their Turnaround Tuesday.  

European equity, credit, and sovereign bond markets all started their day with a jolt. Smashing down to multi-week lows following the FX market (and US futures) implied opens. The reflexive buying began almost immediately but was slow and steady - leaving Spain and Portugal out in the cold still (+32 and 21bps respectively in the last 3 days - the biggest 3-day jump in 4 montsh). Spanish and Italian equity markets trod water near their lows through the European session but once the US opened in its magical way, they rallied 1.5% off the day's lows! EURUSD also rallied back - aided by POMO but didn't close the gap unlike US equities. European financials suffered most - as expected - but even they bounced back off earlier lows - though credit is still shouting loudly that stocks have it all wrong. Away from the mainstream manipulated measures of how awesome a 10% deposit haircutis, Swiss 2Y was in demand all day - trading as lows as 0.003% on safe-haven demand and the 3month EUR-USD basis swap (indicator of bank stress) tumbled its most in 6 weeks.

While the equity markets inch back to their 'safe' place of de minimus volumes and slow leakage higher, it seems real money is flooding into the safety of Switzerland (and gold). Swiss 2Y rates are testing back into negative territory once again and have dropped (on demand) their most since August 2012.

The stock market has now been up for ten straight days. Many on Wall Street are singing “Happy Days Are Here Again.” For them, that is probably the case. They finally have something to sell that will bring the rubes back into the markets. We are not in Kansas anymore. Fear is ebbing and greed is coming back. Those on the outside looking in are rounding up cash so that they don’t get left behind. The shills assist them with their pictures of economic recovery, new era crap and whatever other nonsense they can peddle successfully. So the cycle goes, as it has since the New York Stock Exchange came into existence. We are in another game of musical chairs where the music is playing joyfully. As in all such events, there are too few chairs to accommodate the participants when the music stops. And it always does!

It appears paying more for gasoline and higher taxes trumps the exuberance of the equity markets as UMich Consumer Sentiment crashed in February. Printing at 71.8 on expectations of 78.0 this is the biggest miss on record based on Bloomberg data. The 71.8 level is the lowest since December 2011 as it appears that the Fed's only remaining policy tool is just not sparking that animal spirit in the real economy's anchor - the US consumer - as while current conditions did drop, it is future expectations that plunged.

With Greenspan emerging from his crypt to confirm that he is now as clueless about everything as he was 15 years ago (although the absolutely zero reaction out of "stocks" to his statement that stocks are "very undervalued" is perhaps indicative that SkyNet may just be learning), it is appropriate to remind readers that this thing known as the "market" died some four years ago. What we have now is a vehicle with a "role in the policy fight to support spending" while "today’s stock market has arguably lost some of its ability to reflect underlying economic trends." Not our words - those of Bank of America's Ethan Harris, who, four years after the fringe blogs, finally "gets it."

"Equity prices in the US and Europe have been hovering at multi-year highs. To the extent that this reflects powerful policy easing, equity markets may have lost some of its ability to reflect economic trends in exchange for an important role in the policy fight to support spending." This is a statement from a Bank of America report overnight in which the bailed out bank confirms what has been said here since the launch of QE1 - there is no "market", there is no economic growth discounting mechanism, there is merely a monetary policy vehicle. To those, therefore, who can "forecast" what this vehicle does based on the whims of a few good central planners, we congratulate them. Because, explicitly, there is no actual forecasting involved. The only question is how long does the "career trade", in which everyone must be herded into the same trades or else risk loss of a bonus or job, go on for before mean reversion finally strikes. One thing that is clear is that since news is market positive, irrelevant of whether it is good or bad, virtually everything that has happened overnight, or will happen today, does not matter, and all stock watchers have to look forward to is another low volume grind higher, as has been the case for the past two weeks.