After Friday's surge fest on weaker than expected news - perhaps expecting a tapering of the taper despite everyone screaming from the rooftops the Fed will never adjust monetary policy based on snowfall levels - overnight the carry trade drifted lower and pulled the correlated US equity markets down with it. Why? Who knows - after Friday's choreographed performance it is once again clear there is no connection between newsflow, fundamentals and what various algos decide to do. So (lack of) reasons aside, following a mainly positive close in Asia which was simply catching up to the US exuberance from Friday, European equities have followed suit and traded higher from the get-go with the consumer goods sector leading the way after being boosted by Nestle and L'Oreal shares who were seen higher after reports that Nestle is looking at ways to reduce its USD 30bln stake in L'Oreal. The tech sector is also seeing outperformance following reports that Nokia and HTC have signed a patent and technology pact; all patent litigation between companies is dismissed. Elsewhere, the utilities sector is being put under pressure after reports that UK Energy Secretary Ed Davey urged industry watchdog Ofgem to examine the profits being made by the big six energy companies through supplying gas, saying that Centrica's British Gas arm is too profitable.
Although there are no policy making meetings, central banks will still dominate the agenda in the week ahead.
Following the 2nd dismal jobs print in a row, it would appear the market's new "common knowledge" is that the Fed will be forced to un-taper - despite Hilsenrath's "Fed stays the course" perspective. Everything is up today (apart from the USD). The disconnects from recent correlations were extreme as stocks lost the plot against FX carry, commodities, and bonds. The best 2 days in a row for stocks in 4 months sent most indices to critical technical levels and dragged all but Trannies and the Russell back into the green on the week. Oil prices surged back above $100. Bonds rallied (and bull steepened). Gold, silver, and copper all gained notably (with silver's best week in 6 months). Buy, buy it all... apart from VIX which was monkey-hammered back to 15% (down over 2 vols). So with FX carry left in the dust, what was the ammunition for the move? a 6.3% rip squeeze in the "most shorted" stocks.
UPDATE: Stocks have bounced on USDJPY's jump back to 102 (as we warned) but Treasuries are not playing along
Bonds are surging and gold is well bid as the jobs report had little to offer the hopeful. The anti-goldilocks number slammed bonds with the 10Y Yield to unchanged on the week (down around 8bps on the kneejerk), gold is testing $1270 as JPY strength provides ammunition for derisking in the equity markets. S&P futures spiked 11 points higher on the release as algos went wild, then fell over 20 points from that high and are bouncing back modestly now. Of course, we are still 45 minutes from the US open so expect USDJPY to be levered back to 102 and lift stocks to make retail believe everything is fine...
While Bitcoin has been relatively more stable than high-frequency-traded US equity markets in the last few weeks, the news that HFT tool provider Perseus Telecom will be accepting Bitcoin for its services. As The FT reports, move highlights high-frequency traders’ increasing interest in trading Bitcoin as global regulators indicate a growing acceptance of fast-emerging digital currencies - despite several high-profile arrests.Perseus CEO, Jock Mr Percy said the extension of high-frequency trading into virtual currencies would change the nature of the Bitcoin market over time.
As the Fed continues to extract liquidity from the financial markets, it is likely that we will continue to see increased volatility in the markets. However, despite the ever bullish calls by the mainstream analysts, the current market rout has awoken many overly complacent, excessively bullish, investors. The 5-panel chart below really tells you all you need to know about the current market environment. We are overbought, over extended and exceedingly bullish. The combination of these metrics has a history of bad outcomes. Unfortunately, because these measures are generally overrun in the short term by price momentum and sentiment, they are disregarded as "this time is different."
Today the lingering problems of the "emerging" world and concerns about the Fed's tapering take a back seat to what the European Central Bank may do, which ranges from nothing, to a rate cut (which sends deposit rates negative), to outright, unsterilized QE - we will find out shortly: with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today it virtually assures a surprise . However, despite - or perhaps in spite of - various disappointing news overnight, most notably German factory orders which missed -0.5% on expectations of a +0.2% print, down from 2.4%, the USDJPY has been supported which as everyone knows by now, is all that matters, even if it was unable to push the Nikkei 225 higher for the second day in a row and the Japanese correction persists.
Thanks to a bounce off 101.00, USDJPY supported yet another marginal bounce off fresh 2014 lows in US equities (led by a heavyily turmoiled Russell this morning following the better than expected ISM Services). Nasdaq and Trannies bounced off its 100DMA and the Dow rallied back to modestly green and tested the 200DMA from below. The ubiquitous late-day ramp attempt failed and the Dow lost its marginal green color into the close; Trannies and Russell underperforming. Notably though, despite stocks ending flat to down, Treasury yields surged 6-8bps off post-ADP lows (and 3-4bps up on the day). Gold and silver spiked on the weak ADP data and faded back on the day with Silver outperforming on the week (+3.5% vs 1.1% gold). Credit and VIX once again were not playing ball this afternoon and diverged from stock's bounce but we do note that equities are showing notably more volatilty relative to FX carry in the last 2 days. YTD: Dow -7%, Russell -6%, S&P -5%, Nasdaq -4%
Tom DeMark's analogs - that we have been discussing for the last few weeks - have received some attention today as his medium- and short-term echoes of 1929's crash continues to line up ominously. However, there is a much more concerning and repetitive cycle that BofAML notes suggests weakness in US equity markets through September.
These distortions are now being corrected.
The point isn't that "the Fed can't do that;" the point is that the Fed cannot create a bid in bidless markets that lasts beyond its own buying. The Fed can buy half the U.S. stock market, all the student loans, all the subprime auto loans, all the defaulted CRE and residential mortgages, and every other worthless asset in America. But that won't create a real bid for any of those assets, once they are revealed as worthless. The nuclear option won't fix anything, because it is fundamentally the wrong tool for the wrong job. Holders of disintegrating assets will be delighted to sell the assets to the Fed, of course, but that won't fix what's fundamentally broken in the American and global economies; it will simply allow the transfer of impaired assets from the financial sector and speculators to the Fed.
Precious metals had begun to jump higher before the ADP data hit but once it did - and disappointed - gold and silver spiked (over $1,270 and $20 respectively). Equity markets kneejerk reaction was a spike higher which immediately faded into a crash to recent lows. Dow futures are testing 2014 lows - as are S&P 500 futures. 10Y Treasury yields touched 2.60%; Nikkei futures are once again testing 14,000 as USDJPY breaks below 101.
It's snowing in New York so the market must be down. Just kidding - everyone know the only thing that matters for the state of global risk is the level of USDJPY and it is this that nearly caused a bump in the night after pushing the Nikkei as low as 13,995, before the Japanese PPT intervened and rammed the carry trade higher, and thus the Japanese index higher by 1.23% before the close of Japan trading. However, since then the USDJPY has failed to levitate as it usually does overnight and at last check was fluctuating within dangerous territory of 101.000, below which there be tigers. The earlier report of European retail sales tumbling by 1.6% on expectations of a modest 0.6% drop from a downward revised 0.9% only confirmed that the last traces of last year's illusionary European recovery have long gone. Then again, it's all the cold weather's fault. In Europe, not in the US that is.
The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.
It is still all about the Yen carry which overnight tumbled to the lowest level since November, dragging the Nikkei down by 4.8% which halted its plunge at just overf 14,000, only to stage a modest rebound and carry US equity futures with it, even if it hasn't helped the Dax much which moments ago dropped to session lows and broke its 100 DMA, where carmakers are being especially punished following a downgrade by HSBC of the entire sector. Also overnight the Hang Seng entered an official correction phase (following on from the Nikkei 225 doing the same yesterday) amid global growth concerns and has filtered through to European trade with equities mostly red across the board. Markets have shrugged off news that ECB's Draghi is seeking German support in the bond sterilization debate, something which we forecast would happen a few weeks ago when we pointed out the relentless pace of SMP sterilization failures, with analysts playing down the news as the move would only add a nominal amount of almost EUR 180bln to the Euro-Area financial system. Elsewhere, disappointing earnings from KPN (-4.3%) and ARM holdings (-2.5%) are assisting the downward momentum for their respective sectors.