Despite an early dump on dismal data, US equity markets (except Trannies) 'v-shape-recovery'ed back up to unchanged or better (as Europe closed and POMO ended) on the heels of an increasingly more beta-sensitive AUDJPY rampfest. Trannies never really recovered (3rd down day in a row) and Russell was less exuberant in its dead-cat-bounce but the Dow and S&P closed very modestly green. High-yield credit markets continue to widen - now at 10-week wides (up 35bps from tights) - notably divergent from stocks. Away from the shenanigans in stocks, the USD ended unchanged; Treasury yields were up 1-2bps; and gold closed very modestly lower. Oil slipped 0.5% to $101.60. VIX closed unch. Only the Nasdaq is green post MH17 Headlines on 7/17 and The Russell 2000 is -1.9% and Homebuilders -9% year-to-date.
An overview of the major events next week within the context of the capital markets, which could be at inflection points.
You can be forgiven for thinking that the world is a pretty terrible place right now, exclaims JPMorgan's Michael Cembalest. With 11.7% of the world's population currently at war (and a considerably larger percentage seemingly on the verge), it seemed an appropriate time to summarize the main geopolitical risk points in the world.
Treasury yields pushed 4-5bps higher on the day - the worst in 3 weeks - as yesterday's test of 2014 lows saw some reactive bond-selling. Asian and EU PMIs sent stocks to record-er highs but absymal US PMI and housing data took the shine off the exuberance early on (despite the best efforts at a 5th short-squeeze ramp at the open in a row). AUDJPY was in charge of stocks once again helping the S&P desperatly cling to unchanged. Espirito Santo bankruptcy headlines stumbled stocks at around 1300ET (but that dip was bought). The USD rose modestly (now up almost 0.5% on the week) led by GBP and EUR weakness but that was nothing compared to the dumpfest in precious metals. Silver's worst day in 6 months and a big drop in gold retraced them to near June FOMC levels. Credit markets continue to diverge bearishly from stocks (now 30bps wider than the tights as stocks rally to new highs). Despite the ubiquitous late-day ramp, stocks ended the day mixed around unchanged (and VIX higher on the day). By the close the S&P 500 closed +0.045% to a new all-time-record high.
For the 5th day in a row, US equity markets have been ignoted higher at the open by a sudden and extreme short squeeze among the weakest balance sheet companies. "Most Shorted" stocks have surged 3% in the last 5 days (double the S&P) but have only just managed to get back to unchanged for 2014 (against a 7.7% gain in the S&P).
On a day with no macro data and more warmongering, it only makes sense that stocks should continue to levitate. Aside from The Dow (troubled by weakness in Boeing dragging 20 points off the index), US equity markets rose with the S&P 500 breaking to new all-time record highs just shy of 1990 (2000 tomorrow?) Treasuries were very quiet, trading in a 2bps range and ending basically unch. Gold and silver limped lower (but were also quiet) as the USD pushed modestly higher (with AUD strength on the inflation print overnight the big story). Oil prices recovered yesterday's losses closing back above $103. Biotechs were a notable mover (on M&A hopes) as they retraced all Yellen's warning losses. This is the 3rd day in a row that "most shorted" stocks were snap-squeezed higher at the open.
One of the biggest mistakes that investors make is falling prey to cognitive biases that obfuscate rising investment risks. Here are 5 counter-points to the main memes in the market currently...
It is quite clear that Bernanke achieved his goal of inflating asset prices by expanding the Federal Reserve's balance sheet by 371.64% since the end of the financial crisis. However, was he as successful in fulfilling his other objectives? The following charts perform the same cost/benefit analysis on real economic health... Did the Fed's monetary intervention programs keep the economy from sliding into a much deeper recession? Probably. Have the programs been effective in achieving Bernanke's stated goals? Not really.
Following the overnight ramp in various JPY crosses (dragging equity futures higher, and the Nikkei up 0.8%) it is as if the market is desperate to put all of last week's geopolitical events in the rearview mirror, and while yesterday there were no economic events of note, today's CPI and existing home prints should provide at least some distraction from the relentless barrage of one-line updates on Ukraine and Gaza. Still, that is precisely where the biggest risk remains, with an emphasis on the possibility of more Russian sanctions, this time by Europe.
The death toll among Palestinians from the Israeli offensive in the Gaza Strip reached over 500 on Monday, Gaza health officials said, as the two sides counted their dead following the bloodiest day of fighting so far in the two-week campaign. CBS reports the officials said some 3,150 Palestinians had been wounded. The IDF just announced 7 Israeli soldiers were killed today, raising the Israeli death toll to 25 (including 2 civilians). A glance at the stunning images below beggars belief that world equity markets (and Israel's) are shrugging at this escalating violence. We assume they 'believe' in the power of John Kerry.
"Retirement Off" It appears the 'proof' that markets were Teflon and could shrug off the worst spate of geopolitical concerns in years... is wrong. US equity markets have given up all the gains from Friday's knee-jerk massive short-squeeze fest... as Treasury yields have tumbled lower all day long...
In the absence of any major economic events, it will be another day tracking geopolitical headlines out of Ukraine (lots of accusations, propaganda and fingerpointing on both sides, zero actual evidence and facts - expect more European sanctions to be announced today to match last week's latest US-led round ) and Israel (where the death toll has now risen over 500, almost entirely on the Gaza side), and then promptly spinning any bad news as great news. For now, however, futures are modestly lower from the Friday close pushed down by the AUDJPY which has rebased around 95.00. We expect the momentum ignition correlation algos will promptly take of that as soon as the US market opens, a market which has now been described as bubbly by the BIS, the Fed and the IMF.
A dispassionate look at the issues and events shaping the investment climate in the week ahead.
We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.