An ugly and very heavy volume flush into the European close was followed by the kind of miraculous v-shaped low volume recovery traders have become used to in US equity markets. Having broken below several key technical levels, high beta Russell and Trannies soared (fortgetful it seems that Europe will once again open for business in about 8 hours) to close comfortably in the green on the day. VIX was rammed lower (under 16) to support the exuberance along with EURJPY and AUDJPY. The USDollar faded to close unchanged on the week. Gold flatlined while silver slipped. Oil collapsed early on only to v-shape recover to close modestly higher on the day. Treasury yields bounced 3-5bps higher (after yesterday's huge plunge) but remain 7-10bps down on the week. By the close, The Russell 2000 had its best day in 6 weeks and the S&P's buying-panic scramble to perfectly unchanged - miraculously avoiding the 4-day losing streak not seen since Sept 2013.
While we already documented the crash in Japanese stocks earlier, the biggest market development overnight is the plunge in crude, with both Brent and WTI plunging, the latter sliding under $90 for the first time in 17 months, extending yesterday's selloff after Saudi Aramco cut Arab Light OSP in Asia to 2008 levels. Brent drops to lowest since June 2012. This also confirms that the global slowdown whose can is kicked every so often in a new bout of money printing, is arriving fast. That, and the imminent crackdown on today's Hong Kong protest will likely be the biggest stories of the day, even as the spread of Ebola to the US is sure to keep everhone on edge.
Junk bond investors suffered their biggest quarterly loss since 2011, losing 1.7% in Q3 pushing yields up to one-year highs (despite Treasury yield compression). Managers, knowing full well the underlying liquidity to handle any further selling is not there are out en masse explaining that "high-yield should bounce back in the fourth quarter," relying on the fact that 'historical' defaults are still low and the economy is recovering (as if that's not priced in already). The worst hit segment of the junk market is CCCs and below - at 22-month lows - as Bernanke and Yellen forced investors ever further along the risk spectrum for yield. Of course, equity markets (Russell 2000 aside) have ignored much of this decline until recently, but the plunge in leveraged loan issuance suggests all that cheap-buy-back-funding is rapidly disappearing (even for the best credits and biggest names).
A quick anecdote that should quickly confirm just how broken everything is: earlier today MarkIt reported European manufacturing data that was atrocious, with both German and European PMIs tumbling to levels not seen since mid-2013, and with Europe's growth dynamo now in a contraction phase clearly signalling what has been long overdue: a European triple dip recession. So what happens? Moments later Germany sells €4.1 billion in 10 Year paper at a record low yield below 1%.... even as the Bundesbank had to retain a whopping 17.84% of the auction, the highest since June, with only €4.663 Bn in bids for the €5 Bn target, the first miss since May 21. So hurray for the central banks, boo for the economy, and as for that mythical creature, once known as bond vigilantes, our condolences: good luck figuring out what the hell just happened, and good luck recalling what a free market is.
As Warren Buffett himself once said, "If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you're the patsy." The central bank bond market poker game has been in train for a good deal longer than half an hour, and the stakes have never been higher. Sometimes, if you simply can't fathom the new rules of the game, it's surely better not to play. But such madness is not limited to the world of bonds. Malign, unthinking mental slavery has fixed itself upon the equity markets, too. And as stock markets have powered ahead, index trackers have enjoyed their highest ever retail inflows.
US equity markets were sliding into the Chicago PMI print as early release indications proved correct and it missed expectations. Having flip-flopped from worst since July 2013 to almost cycle highs last month, Chicago PMI printed 60.5 (vs 62.0 expectations) hindered a drop in new orders and production. The silver lining, the employment index improved modestly. Prices Paid surged to its highest since 2012.
While the bond market is still reeling from Friday's shocking Bill Gross departure, and PIMCO has already started to bleed tens of billions in redemptions (see "Billions Fly Out the Door at Pimco About $10 Billion Is Withdrawn After Departure of Gross"), stocks which may have been hoping for a peaceful weekend after Friday's ridiculous no volume ramp in the last two hours of trading, got hit by a double whammy of first Catalan independence fears rising up again after Catalan President Mas signed a decree committing Catalonia to a referendum bid on November 9th, leading to a move wider in Spanish bond yields, and second the sharpest surge in Hong Kong violence in decades, which led to a 2% drop in the Hang Seng, are now solidly lower across the board, with the DAX dropping below its 50 DMA, while US equity futures are printing about 9 points lower from Friday's close despite another epic ramp in the USDJPY which flited with 110 briefly before retracing to 109.50, and also threaten to push below the key technical support level unless the NY Fed's "Markets group" emerges out of its new Chicago digs and buys up enough E-minis to restore confidence in a rigged market.
Gold bullion in Singapore climbed $9.29 to $1230.29 and gold was on track for a gain of almost 0.8% for the week prior to concentrated and continual selling in London and then on the COMEX pushed gold lower. Trading action had all the hallmarks of the Gold Anti Trust Action Committee's (GATA) 'gold cartel' and their determination to keep gold prices capped and "animal spirits" low in the gold market.
First it was the foreign exchange markets, then commodities, followed by fixed income markets. Now it’s the equity markets. Wherever we look, volatility has been creeping higher. To some extent, this is not surprising. At the end of the US Federal Reserve’s first round of quantitative easing, and at the end of QE2, the markets wobbled. So with QE3 now winding to a close (and with the European Central Bank (ECB) still behind the curve), a period of uncertainty and frazzled nerves should probably have been expected.
It was all up to the Japanese banana market to fix things overnight: after the biggest tumble in US equities in months, and Asian markets poised for their third consecutive weekly drop, the longest streak since February, Japan reported CPI numbers that despite still surging (for example, in August TV prices soared 9.5%, but "down" from 11.8% the month before), when "adjusting" for the effects of the April tax hike, missed across the board. As a result the USDJPY was at the lows and threatening to break the recent parabolic surge higher which has helped move global equities higher in the past few weeks when the usual spate of GPIF-related headlines, because apparently the fact that Japan will and already has begun sacrificing the retirement funds of its citizens just to keep Abe's deranged monetary dream alive for a few more months has not been fully priced in yet, sent the USDJPY soaring yet again.
It has been a relatively subdued session, with not much action in either stocks or bonds - European stocks rise for the second day on US market momentum from yesterday; Asian stocks are mixed advance while metals decline with Brent, WTI crude, U.S. equity index futures. The biggest highlight in overnight action, however, was once again the Dollar whick climbed to a fresh 4-year high, on pace to strengthen for 2 straight months for first time since March. The reason: ongoing sentiment that there will be a major dispersion between central banks, with the USD tightening just as other central banks join the liquidity fray. To wit, ECB data showed that lending decline in Europe slowed to -1.5% y/y in Aug. vs -1.6% in July and the latest statement from Draghi who said in Lithuania that economic reform possible without devaluing currency.
Having infamously "thrown in the bearish towel" late last year (must read), Hugh Hendry's Eclectica fund has not enjoyed the kind of money-printing melt-up euphoria he had hoped for in 2014. According to his August letter to investors, the fund is -10.9% year-to-date, shrinking the firm's performance since inception to a mere +0.7%. His positions are intriguing but his commentary can be summed with this sentence alone, "when central banks are actively pursuing a goal of higher prices the most rational course is to tenaciously remain invested in equities." And so he is...
US equity markets ramped vertically this morning, catching up to USDJPY's early exuberance... the trouble is - we've seen this before (yesterday) and as Europe closes maybe Bonds and Credit are on to something...
If yesterday the bombardment, no pun intended, of bad news from around the globe was too much even for Mahwah's vacuum tubes to spin as bullish - for stocks - news, then tonight's macro economic updates have so far been hardly as bombastic, with the only real news of the day has Germany's IFO Business Climate reading, which dropped from 106.3 to 105.8, declining for the 5th month in a row, missing expectations, and printing at the lowest level of since April 2013! (More from Goldman below) Net result: Bunds yields were once again pushed in the sub-1% category, even if stocks today are higher because the European data is "so bad it means the ECB has no choice but to do (public instead of just private) QE" blah blah blah.