As we previously noted, it would appear - unlike the exuberance in the market - the 'taper downside risk' is very much in equity markets rather than bonds. Today's aggressive equity and credit hedging and bond stability perhaps signal more apprehension than a rallying volumeless equity market might suggest but if the following 2 charts are anything to go by, a shift to removing the punchbowl (no matter how biased to longer, lower, forward rate guidance - of course stymied by 2016 economic projection dilemmas) has seen bonds surge and stocks purge...
Equity markets were quietly confident that no matter what the mortgage market did, the Fed would save them in 2007. Bond markets had already got a little nervous as collateral squeezes and forced liquidations had led to a large jump in bond risk relative to equity risk - but again this was eschewed by any number of equity long-only managers and their non-money-managing partners-in-crime - the sell-side strategist - who confirmed that any dip should be bought and the increased risk in bonds was exactly the catalyst to rotate to stocks for the long-term. Fast-forward $8 trillion and five years and the patterns of bond and equity risk look awfully similar - as does the echo chamber of status quo opinion at the 'events' facing the market. History may not repeat, but we suspect it will at least rhyme here...
Of course, everyone knows that one of these is a speculative asset that people will buy (and not sell) no matter how high the price on the basis that The Fed will continue to print money and subsidize 'valuations' and the other is a long-term asset to preserve wealth. But which of these assets would one expect to react to a considerably hotter-than-expected inflation print and dramatically worse-than-expected retail sales print? The answer (for all those efficient market, hyperbolic discounting types) may surprise...
Five years after the collapse of Lehman Brothers triggered the largest global financial crisis since the Great Depression, outsize banking sectors have left economies shattered in Ireland, Iceland, and Cyprus. Banks in Italy, Spain, and elsewhere are not lending enough. China’s credit binge is turning into a bust. In short, the world’s financial system remains dangerous and dysfunctional. Worse, despite years of debate, no consensus about the nature of the financial system’s problems – much less how to fix them – has emerged. And that appears to reflect the banks’ political power. Unfortunately, despite the enormous harm from the financial crisis, little has changed in the politics of banking. Too many politicians and regulators put their own interests and those of “their” banks ahead of their duty to protect taxpayers and citizens. We must demand better.
This is the first consecutive monthly drop in 14 months and the largest miss vs expectations on record. Printing at 76.8 (against an expectation of 82.0), this is the lowest in 5 months and points to the picture we have been painting of a consumer increasingly affected by rising rates and soaring gas prices amid stagnant incomes. As Citi notes below, this is the exact same pattern we have seen play out in the last 2 cycles and suggest significant downside risk to US equities. The economic outlook sub-index collapsed to its lowest since January.
Equity markets have to explaining to do, regardless of where you think they are heading. As ConvesrgEx's Nick Colas notes, if bullish, riddle me this: are stocks just going to hop-skip-jump over Fed tapering, U.S. budget battles, a new Federal Reserve Chair, Syria, Greek bailout 3.0, German Elections, and other near term speedbumps? Last time we checked "hope" still isn’t a strategy. And for the bears: Colas asks, how has that been working out for you over the last week of boa constrictor-like squeezes higher? Not so good. In the following note, Colas takes an out-of-the-box approach to explaining the recent rally by looking at some new academic work on the subject of stress. As it turns out, stress is only harmful if you believe it is. Maybe markets have 'learned' that lesson and view all these potential stomach-churning headlines as annoyances, rather than existential crises-in-waiting.
With US equity markets on a 7-day roll and excited TV anchors proclaiming the worst over and new all-time highs must signal recovery as they 'celebrate' five years on from Lehman, the following two charts of the state of real America should open a few eyes to just how blinded American has become to the truth (unless you live it). A stunning 20.0% of Americans were found to have struggled to afford food in the last year - surging in recent months to its highest since the peak of the crisis in 2008 - as American's ability to consistently afford food has not recovered to pre-recession levels. Furthermore, Americans access to basic needs (13 factors including housing, healthcare, and food) hovers near record lows - dramatically lower than pre-recession levels. The Gallup polls point to a very different image of American than Dow 15,000 - and is set to get worse as the food stamp program is set to be cut in November.
As opposed to the "pixie dust tout of fairy tales forever" that is trotted out by the herd every day, the fllowing brief look at Taper realities, 'manufactured' numbers unreality, systemic Muni bonds concerns, and of course, political risk provide color for what was described this morning on CNBC as a market bereft of 'bear market theses. As Tartakower once wrote, "The winner of the game is the player who makes the next-to-last mistake;" until then ts all foreplay.
Despite earlier comments from Obama on Tuesday night, who called for a pause in authorizing military strikes on Syria, which led to another drop in crude prices overnight, the drop has since reversed and both WTI and Brent Crude contracts are trading in the green. Whether this is the result of a note by Goldman analysts who noted that the Brent crude sell-off was overdone and that they see no improvement regarding the conflict in Libya which is constraining oil production, or because Russia is once again throwing hurdles in the international process to force Syrian disarmament, is unknown. The lack of any key catalysts and no USDJPY levitation, led to most global markets unchanged, and futures currently trading sideways. What is not trading sideways is Apple which is down over 2% to just over $480 as all hopes of a China Mobile deal fall apart, coupled with pervasive critical panning of the new iPhones which, aside for the commodity version, is just the old iPhone with an extension that allows the NSA's new fingerprint database to be filled in record time.
For the second day in a row, better than expected Chinese "data" set sentiment across the board when following an improvement in its trade data (even as crude oil imports dropped to an 11 month low), last night China reported a better than expected August Industrial Production print of 10.4%, compared to 9.7% for July, and higher than the 9.9% expected. This was driven by a pick up in Chinese M2, which rose from 14.5% to 14.7% Y/Y, as the PBOC has once again resuming what it does best, injecting liquidity into the system, even if said liquidity no longer makes its way into the proper channels, as new CNY loans missed the expected CNY730bn, rising to 711.3bn for August. Elsewhere, not all was good on the Industrial Production front, following a French miss of -0.6% on expectations of a rebound to +0.5%, as well as a miss in mfg production of -0.7%, down from -0.4% and below the expected 0.7%. This, in parallel with Moscovici once again saying the 2013 deficit will be "slightly higher than 3.7%" means that just like in 2012, and with German economic metrics continuing to contract, as the periphery stages a modest rebound it is the core that threatens Europe's stability once again. Finally, and since in Europe everything is ultimately funded by current account positive Germany either directly or via TARGET2, the recent Italian economic strength, which also means a bounce in imports, meant that Italian TARGET2 liabilities (through which Germany indirectly funds Italy's current account deficit) are once again back at a 4 month high. And so the cycle repeats.
As macro news continues to trickle in better than expected, the latest batch being benign (if completely fake) Chinese inflation data (CPI 2.6%, Exp. 2.6%, Last 2.7%) and trade data released overnight which saw ahigher than expected trade balance ($28.5bn vs Exp. $20.0; as exports rose from 5.1% to 7.2%, and imports dipped from 10.9% to 7.0%, missing expectations), markets remain confused: is good news better or does it mean even more global liquidity will be pulled. As a result, the release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Even though the news buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Going forward, there are no major macroeconomic data releases scheduled for the second half of the session, but Fed’s Williams is due to speak.
An exuberant Japanese investing public bid the open of equity trading in their oh so-penny-stock-like prestigious Nikkei 225 stock index by 540 points from Friday's close. That these 4% rips in major global stock markets have become ubiquitous is now no surprise to anyone but, sadly, for Abenomics supporters the world over, final Q2 GDP missed expectations modestly (+0.9% vs +1.0% exp.) with the 3rd worst trade balance (on a BoP basis ) ever not helping matters. Is that GDP hit enough to maintain Abe's decision to hike taxes? Maybe, maybe not. In thge hour since the data hit, the Nikkei has collapsed back 220 points and USDJPY, having surged up over 100.00 into the GDP print, is fading lower (stronger JPY). The rest of Asia is quiet for now, gold and Treasury bond prices are very slightly lower and amid very thin trading in S&P futures, equities are up 3 points.
Following a supposedly "warm" 20-30 minute conversation this morning with President Obama, Russian President Putin has rattled the sabre one more time:
PUTIN SAYS RUSSIA TO ASSIST SYRIA IN CASE OF EXTERNAL ATTACK
This will not end well... and of course will raise more doubts among Congress that this 'strike' makes sense. Equity markets are not amused...
This week's brief 'outage' in US equity markets has been shrugged off by most, with some proclaiming that "we are getting used to it now." However, there is at least one group that are not ignoring this. Paddy Power has inaugurated bets on the next exchange in the world to suffer from a greater-than-2-hour outage, and the winner (for now) is... NASDARK. At 5/2 Odds, the pride of US capital markets is more than double as likely to suffer such an outage again by the end of 2014 than Tokyo and London and four times as likely as the emerging market Brazil's BOVESPA. USA is number 1 once again, well played...
Ahead of tomorrow's all-important facade of the NFP print, US equity markets traded on very low volume in the 2nd narrowest range in 6 months. Sectors were a litte more disprsed with rate-sensitive names hurt and Utes underperforming. The real story of the day was the "Taper-On" trades in Treasuries, precious metals, and the USD. The belly of the Treasury curve smashed another 10-11bps higher (now up 21bps from Friday's pre-Obama speech) as the 10Y trod water at 2.98% from the European close only to jump up to 2.99% into the close. As we crossed the US open, gold and silver were summarily punched lower, down 1-2% on the week as the USD surged following Draghi's chatter and better macro data this morning. Credit markets were decidely more nervous going into the close than stocks. Gold and the S&P 500 are now exactly equal with each other and unchanged from the 6/18 FOMC "Taper" moment (and Silver is up 7%).