The level of micro-management by the Fed appears to have reached a new shockingly high plateau. Recently prices have been driven more by liquidity, fear, greed, and Fed policy, than by valuation. It is time that the Fed stops being a source of interference and confusion. There are also two less obvious or less discussed economic reasons why the Obama administration may be urgently focusing more on the Ebola crises.
If U.S. stocks have stabilized – granted, a big 'IF' - you can thank the fact that markets don’t believe the Federal Reserve’s outlook on interest rates. Bad news will keep the doves “Fed” (yes, a pun… it’s Friday) and the hawks at bay. A spate of good U.S. news while the rest of the developed world slows is the worst potential outcome in this narrative.
"We all hear nonsense in the course of our lives. Sometimes we talk it. Over the past 48 hours I have heard that this apparently unforeseeable re-pricing of global markets is down to Greece, down to Ebola, and/or down to the fact that the street is not offering much liquidity. However, I think the re-pricing was foreseeable and has – so far – barely anything to do with these first two items. At some point I’m sure the market will accept that the re-pricing is much more about reassessing global growth and deflation expectations and collapsing policymaker credibility. And as for the liquidity argument – which HAS been a factor, in my view – how can this be a surprise? After all, as I see it, one of the cornerstones of regulation over the past five or six years has been to ensure that banks are unable to provide liquidity when clients really need it en masse."
Yesterday afternoon's "recovery" has come and gone, because just like that, in a matter of minutes, stuff just broke once again courtsy of a USDJPY which has been a one way liquidation street since hitting 106.30 just before Europe open to 105.6 as of this writing: U.S. 10-YEAR TREASURY YIELD DROPS 15 BASIS POINTS TO 1.99%; S&P FUTURES PLUNGE 23PTS, OR 1.2%, AS EU STOCKS DROP 2.54%.
Only this time Europe is once again broken with periphery yields exploding, after Spain earlier failed to sell the maximum target of €3.5 billion in bonds, instead unloading only €3.2 billion, and leading to this: PORTUGAL 10-YR BONDS EXTEND DROP; YIELD CLIMBS 30 BPS TO 3.58%; IRISH 10-YEAR BONDS EXTEND DECLINE; YIELD RISES 20 BPS TO 1.90%; SPANISH 10-YEAR BONDS EXTEND DROP; YIELD JUMPS 29 BPS TO 2.40%.
And the punchline, as usual, is Greece, whose 10 Year is now wider by over 1% on the session(!), to just about 9%.
The fact that the US economy is nowhere near strong enough to offset the deflation it would import and is already importing through USD strength vs EUR and JPY in particular, has now become a key market theme. Crucially, markets are now collectively having to consider what Bob Janjuah thinks is the reality – that annual trend global growth is converging down at around 2.5%, well short of the pre-crisis levels of over 4%. Janjuah believes "we will see UST 10yr yields closer to 1.5% before they get anywhere near 3.5%, with 10yr Bund yields at 50bp; and a weekly close on the S&P 500 below 1905 was and remains his key pivot point - targeting 1770 as the next stop."
Equity markets live and die on several well-established conventions, according to ConvergEx's Nick Colas, noting that these are the rules that investors use as the bedrock of their fundamental analysis. The volatility of the last few weeks shows that some of these paradigms are now under attack. Chief among the question marks: “Do central banks always have the power to tip the balance between growth and recession?” Another rising concern: “Can stocks constantly shrug off recessionary signals from commodity and fixed income markets?” Lastly, “How many exogenous, if largely unpredictable, global events can equities ignore before their collective weight halts a bull market?” Bottom line: the debate on these topics isn’t over for October or the balance of the year.
Just when you think the selloff couldn’t get any scarier, it did. The last hour of trading took over 1% out of the S&P 500 in rapid fashion, reportedly on fears of an Ebola check at a major U.S. airport. Today we offer up a “Top 10” list of specific markets and indicators to watch for signs of a near term market bottom. They include the CBOE VIX Index (key levels at 26 and 32), the action in small cap stocks and crude oil, and the dollar. Less quantifiable issues – but important nonetheless – are headlines related to Ebola (probably getting worse before better), 10-year Treasury bond yields (2.0% and 1.5% possible here), and European policymakers addressing a host of difficult monetary and fiscal policy issues. Bottom line: this is unlikely to be a dramatic “V-bottom” low given the range of issues of concern to investors. Look for the majority of our “Top 10” to stop going down before calling a bottom.
It appears the weakness in US equity markets (the last of the hot money flow darlings to be hit) is now rippling back down the bubble-complex of world equity markets. Dubai, infamous for its huge surge in the last 2 years and 36x over-subscribed IPO of a company with no actual operations - which marked the top before a 30% collapse - was open for business today and crashed 6.5%. This the Dubai Financial Markets General Index biggest daily drop in 14 months... the ripple effect is beginning.
As Monday Looms, Experts Warn Japan's Half-Trillion Dollar Fat-Finger-Trade "Could Absolutely Happen" In The USSubmitted by Tyler Durden on 10/11/2014 13:46 -0500
Just over a week ago, the Japanese stock market participants were stunned when stock orders amounting to a whopping $617 billion (yes Billion with a B) - more than the size of Sweden’s economy - were canceled for reasons still unknown in what was one of the biggest 'fat finger' trading errors of all time. Since then, US equity markets have suddenly become notably more volatile - and fallen significantly, VIX has seen odd intraday 'spikes', S&P futures saw the very odd 'satan signal', and USDJPY has suffered its worst losses in 3 years. This raises the question of whether US market microstructure is any better than Michael Lewis' Flash Boys' book describes.. (as we head into a bond market holiday, dismal liquidity, and a potential Black Monday), “That could absolutely happen here,” Tabb Group's Larry Tabb warns Bloomberg.
"Financial Markets Are Artificially Priced: What Do You Do?" - Bill Gross' First Janus Capital LetterSubmitted by Tyler Durden on 10/10/2014 11:37 -0500
Financial markets are artificially priced.... We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside. That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?
This week has seen some market volatility (see VIX Chart) reminiscent of the functioning market from days of old. The markets are spooked, bad news is overtaking good news and bearish views are becoming vogue. We are seeing a titanic battle taking place between the various bull and bear camps and they are starting to unleash some serious firepower.
Two months ago, US and European equity markets exploded higher after RIA tweeted that Russia sought a de-escalation in Ukraine. Today, after an ugly week of higher volatility and even higher anxiety, RIA is at it again, tweeting the following - Kiev agrees to withdraw troops from several Eastern Ukraine cities – DPR leader Zakharchenko - and stocks have started to ramp...
The Bank of Korea - South Korea’s central bank - released data that says South Korean domestic deposits have reached 16.19 billion Chinese renminbi in July this year, which is a 55-fold increase from the same period last year when renminbi deposits accounted for only 290 million. The signs are clearly all there. Everyone realizes that the present system is on its way out and are taking appropriate measures. The Russians, the Germans, the French, the Brits, the Canadians, the Koreans…
- IRELAND SELLS 10-YEAR BONDS AT RECORD-LOW YIELD OF 1.63%
- GERMAN 10-YEAR BUNDS RISE; YIELD FALLS 2 BASIS POINTS TO 0.88%
- DUTCH 10-YEAR GOVERNMENT BOND YIELD DROPS TO RECORD-LOW 1.021%
- PORTUGUESE 10-YEAR BOND YIELD DROPS TO RECORD-LOW 2.942%
- FRENCH 10-YEAR GOVERNMENT BOND YIELDS DROP TO RECORD-LOW 1.214%
- U.S. 10-YEAR NOTE YIELD DROPS TO 2.296%, LOWEST SINCE JUNE 2013
- SPANISH 10-YEAR BOND YIELD DROPS TO RECORD-LOW 2.038%
- FINNISH 10-YEAR YIELD DROPS TO 1% FOR FIRST TIME ON RECORD