Once again, US equity futures are roughly unchanged (while Treasurys have seen a surprising overnight bid coming out of Asia) ahead of an avalanche of macroeconomic news both in Europe, where the ECB will deliver its monthly message, and in the US where we will shortly get jobless claims, ISM non-manufacturing, trade balance, nonfarm payrolls, unemployment, average earnings, Markit U.S. composite PMI, Markit U.S. services PMI due later. Of course the most important number is the June NFP payrolls and to a lesser extent the unemployment rate, which consensus expects at 215K and 6.3%, although the whisper number is about 30K higher following yesterday's massive ADP outlier. Nonetheless, keep in mind that a) ADP is a horrible predictor of NFP, with a 40K average absolute error rate and b) in December the initial ADP print was 151K higher than the nonfarms. Those watching inflation will be far more focused on hourly earnings, expected to rise 0.2% M/M and 1.9% Y/Y. Should wages continue to stagnate and decline on a real basis, expect to hear the "stagflation" word much more often in the coming weeks.
For the 5th month in a row, US treasury bonds started with a 2-day sell-off as yields rose arond 6bps today (back to unch from FOMC). Gold, silver, and copper all gained notably (despite a knee-jerk lower on the ADP data). The US Dollar jumped instantly on the ADP print then flatlined for the rest of the day but USDJPY pushed higher. However, stocks chose to ignore their ubiquitous drivers - VIX was slammed lower (stocks ignored it) and USDJPY surged (stocks ignored it) as early weakness in Trannies was overtaken by Russell 2000 losses as the S&P and Dow flatlined in a very narrow range. Shortly after the US markets opened, credit markets diverged notably from equity markets (but caught up into the close). VIX closed lower. The Dow had its narrowest range since Dec - funny what happens when there's no $190 billion repo injection, eh? The S&P and Dow closed marginally green at new record highs. (and Camera-on-a-stick tumbles 17% from its highs)
The USD is unchanged; Commodities are unchanged; and Treasury yields are up only 2-3bps... but that didn;t stop July 1st from being a banner day for US equity markets (on the back of missed PMI and ISM data). The Dow, Russell 2000, and S&P closed at record highs but sadly the Dow missed out on 17,000 by a mere 1.5 points (despite the best VIX and AUDJPY manipulation $189 billion of repo liquidity free money can buy). Stocks got their start with yet another epic short squeeze at the open then ramped higher thanks to carry to record-er highs; stalling when it seemed Dow 17,000 was elusive. VIX traded with a 10-handle once again.
As with any drug addiction, the first step is admitting you have a problem (or waking up naked in Glasgow train station). It seems HSBC - among a number of other sell-side strategists - are starting to wake up to their undying 'faith' and 'hope' that, based on the world's addiction to free money, there will be a return to the old normal status quo. As HSBC's Chief economist Steophen King notes, "there is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach," and they are finally facing up to the fact that "the world economy has succumbed to a lower structural rate of economic growth." But it is RBS that is waving the red flag as they warn of a "sense that this nervous stasis is dulling our perceptions about risk... it feels like 2007 all over again."
Has Skynet become self-aware? It seems the 'robots' that run the US equity markets (HFT/algo trading dominates what little volume there is left) have decided to cut out the middle man in the market as Associated Press reports this morning that it will employ the story-writing software by start-up Automated Insights to automate the production of U.S. corporate earnings stories. To be frank, given the copy/paste nature of most mainstream media 'analysis' of earnings, we thought this had already occurred but AP notes, "We are going to use our brains and time in more enterprising ways during earnings season." Does that mean that anyone but Zero Hedge will be discussing cashflows or GAAP earnings? It seems the circle is complete, machines write the stories that machines trade on; why not just do everything in binary - it's not like humans have a chance to react anyway before the robots.
In case there is still any confusion on whose behalf the US regulators work when they "fine" banks, the latest announcement from Finra should make it all clear. Recall the spectacle full of pomp and circumstance surrounding NY AG Scheinderman's demolition of Barclays after it was announced that the bank had lied to its customers to drive more traffic to Barclays LX, its dark pool, and allow HFT algos to frontrun buyside traffic. Yes, it was warranted, and the immediate result was the complete collapse in all buyside Barclays dark pool volume, meaning predatory HFT algos would have to find some other dark pool where to frontrun order flow. Such as Goldman's Sigma X. Which brings us to, well, Goldman's Sigma X, which moments ago, in a far less pompous presentation, was fined - not by the AG, not by the SEC, but by lowly Finra - for "Failing to Prevent Trade-Throughs in its Alternative Trading System." The impact: "In connection with the approximately 395,000 trade-throughs, Goldman Sachs returned $1.67 million to disadvantaged customers." The punchline, or rather, the "fine": $800,000.
BTFATH! That was the motto overnight, when despite a plethora of mixed final manufacturing data across the globe (weaker Japan, Europe; stronger China, UK) the USDJPY carry-trade has been a one-way street up and to the right, and saw its first overnight buying scramble in weeks (as opposed to the US daytime trading session, when the JPY is sold off to push carry-driven stocks higher). Low volumes have only facilitated the now usual buying at the all time highs: The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing - yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13.
It is the last day of not only the month but also the quarter, not to mention the halfway point of 2014, which means that window dressing by hedge funds will be rampant, as they scramble to catch up some of the ground lost to the S&P 500 so far in 2014. Most likely this means that once again the most shorted names will ramp in everyone's face and the short side of the hedgie book will soar, further pushing hedged P&L into the red, because remember: in a market in which all the risk is borne by the Fed there is no need to hedge.
"... it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.... Never before have central banks tried to push so hard... Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms.... The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end."
"If you're not concerned, you're not paying attention" say Axel Merk, founder and Chief Investment Officer of Merk Funds (and former President of the Federal Reserve Bank of St Louis and a former FOMC member). Like many, he sees today's excessive high-price, low-volume, zero-volatility markets as an unnatural and dangerous result of misguided intervention by the Federal Reserve... "Now, the capital base and the equity of the Fed is very small. Odds are that the losses would wipe out the equity at the Fed."
For a week or two, the 'news' appeared to confirm the 'hope'; faith that Q1's dysphoria would emerge phoenix-like into Q2 euphoria as a 'hibernating' American public emerging from their weather-shelter and spent-spent-spent all their borrowed-borrowed-borrowed money. That ended last week! Despite the dramatically low volume liftathon in stocks since the FOMC meeting, major risk markets around the world are cracking. European bonds and stocks had a bad week, Treasuries rallied the most in 6 weeks, and the key to it all, USDJPY, slipped to 4 week lows. Why? As the chart below shows, US macro data is collapsing again (right on cue) and stands at 2-month lows... (and is the worst-performing macro nation in the world this year!)
This week's "Things To Ponder" is focused on things that, in my opinion, far too many individuals are ignoring. Bob Farrell once wrote that "when all experts and forecasts agree; something else is bound to happen." Today, that is the case as much as it ever was. Despite rising geopolitical risks, weak economic data, deteriorating fundamentals and softer internals - the overwhelming belief is "equities are the only game in town." Of course, we have seen this mentality many times in past history whether it was 1929, 1987, 2000 or 2007. While every market peak was different, there were all the same.
With US equity markets hovering near record-er highs, we thought a quick summary of the state of the world's growing geopolitical risks would 'help' rationalize the BTFATH mentality. Here is Deutsche Bank's map of the most potentially destabilizing risks around the world...
Following yesterday's S&P surge on the worst hard economic data (not some fluffy survey conducted by a conflicted firm whose parent just IPOed and is thus in desperate need to perpetuate the market euphoria) in five years, there is little one can comment on how "markets" react to news. Good news, bad news... whatever - as long as it is flashing red, the HFT algos will send momentum higher. The only hope of some normalization is that following the latest revelation of just how rigged the market is due to various HFT firms, something will finally change. Alas, as we have said since the flash crash, there won't be any real attempts at fixing the broken market structure until the next, and far more vicious flash crash - one from which not even the NY Fed-Citadel PPT JV will be able to recover. For now, keep an eye on the USDJPY - as has been the case lately, the overnight USDJPY trading team has taken it lower ahead of the traditional US day session rebound which also pushes the S&P higher with it. For now the surge is missing but it won't be for longer - expect the traditional USDJPY ramp just before or as US stocks open for trading.
US equity indices are showing signs that a pullback may be developing, Citi's FX Technicals group notes, as the S&P 500 Index, the NASDAQ Composite Index and the Dow Industrials Index all posted bearish key days yesterday. A short-term correction on the order of 3%-6% may be developing on the back of this. The Dow Transports Index, which has been the leading US equity Index this year, has already been showing signs of stress as well. The VIX Index is also turning higher from low levels and should head up towards at least 14% if not 18% if the pullback in equities materializes.