European Central Bank
"While the music is playing, you keep dancing," seems the only possible explanation for the fanatical demand for peripheral European bonds as everyone and their pet rabbit front-runs the ECB (or merely rushes to the 'yieldiest' thing given Draghi's implicit guarantee). At 3.1%, it beggars belief how 'risk' is mispriced in these sovereigns should any capital regulations ever mark sovereign debt as anything but riskless. Remember what happened the last time Draghi did any bond-buying (the SMP) - we saw bonds sell off into the actual actions of the central bank... so it seems the market continues to trade on the promise (and yet hope it never comes true)...
We summarized yesterday's both better and worse than expected Chinese GDP data as follows: "a substantial deterioration of the economy, one which was to be expected yet one which can be spun as either bullish thanks to the GDP "beat", and negatively if the purpose is to make a case for more PBOC stimulus." Sure enough here are the headlines that "explain" the latest overnight futures surge which has once again brought the S&P into the green on the year - a 40 point Spoo move in hours since yesterday's bottom when the Nikkei "leaked" Japan's economy is on the ropes :
- Stocks Rise on China Stimulus Speculation
Here one should of course add the comment that launched yesterday's rebound, namely the Japanese warning that its economy is about to contract, adding to calls for more BOJ stimulus, and finally this other Bloomberg headline:
- The Strengthening Case for ECB Easing
And there you have it - goodbye "fundamental" case; welcome back "central banks will once again bail everyone out" case. Hopefully today's news are absolutely abysmal to add "US economic contraction fear renew calls for untapering" to the list of headlines that should send the S&P to all time highs by the end of today.
A look at what German is doing and what it does not want to do.
Moments ago the Nikkei strategically leaked a report that the Japanese cabinet office, quite expectedly, will downgrade its economic assessment in its April report. "Expected" because as we reported, discretionary spending following the sales tax hike, has gotten crushed. Also not unexpected, the USDJPY took the news in stride and posted a modestly bounce in the face of today's relentless selling of the pair. Why? Because to algos and many asset managers desperate for more training wheels from central banks (now that everyone has forgotten how to trade based soely on fundamentals), this means more QE from the BOJ right - after all horrible news for everyone is great news for the 1%.
Not so fast.
One can see that while the traditional 6:00 AM USDJPY buy program is just duying to resume aggressive upward momentum ignition, futures are still leery and confused by the recent post-open high beta selloffs. Then again, things like yesterday's ridiculous no news 3:30pm ramp happen and confused them even more just as momentum is about to take a downward direction. Stocks in Asia (ex-China) advanced amid a reversal in sentiment after Citigroup (+4.15%) inspired positive close on Wall Street, however Shanghai Comp (-1.4%) underperformed as concerns over GDP data on Wednesday following weak money supply data weighed on sentiment. Stocks remained on the back foot (Eurostoxx50 -0.42%), with Bunds supported by the release of lower than expected German ZEW survey and also ongoing concerns surrounding the stand-off between Ukraine/Russia. Short-Sterling bear steepened after UK CPI fell to its lowest level since October 2009, but house prices across Britain posted its biggest rise since June 2010, reviving concerns over an overheating market.
While Grant Williams can’t speak for anybody else, his nearly thirty years immersed in equity, bond, and commodity markets all around the world, have shown him enough to absolutely confirm in his own mind that the markets are rigged. Not just some of them. All of them. In different ways, to be sure, but they’re all rigged. Not only are they rigged, but they are rigged in ways that beggar belief; and in many places they are rigged by the very people who ought to be responsible for stopping any rigging... Whether Bill O’Brien (or Bob Pisani) likes it or not, Michael Lewis was speaking the truth when he said the market was rigged. He was talking about US equity markets, but rigging goes much, much deeper.
With Italian and Spanish bond yields at record lows (and spreads - risk premia - near record lows) one can only ascertain that Europe is fixed, Draghi has no need to do QE, and everything in the world is fine again. Except it's not... Draghi is cornered from QE by a lack of uncommitted collateral and a banking system glued at the hip to the sovereign bond markets. But perhaps, for those who are buying Italian and Spanish bonds, it is not enough to see record high unemployment, record loan delinquencies, and record low credit creation... In order to help further with the BTFD, we offer the following chart - showing Spanish and Italian home prices continue to slump (along with Cyprus).
On the 'growth' side, Commercial and Industrial loans are rising at a double digit annual rate of change (although it is unclear whether this is an indication of business optimism or stress - after all, we did see a big jump in these loans leading into the last recession). On the flip side, the bond market and the US dollar index seem to be flashing some warning signs about future growth. Simply put, the outlook for the economy is decidedly uncertain right now and we think so is the confidence in Janet Yellen. We think the more dire outcome for stocks would be if Toto fully pulled back the curtain on monetary policy and revealed it to be nothing more than a bunch clueless economists sitting in a conference room with no ability to control the economy or the markets. If US growth disappoints after all the Fed has done, how could anyone continue to view the Fed wizards as omnipotent? That would send the stock market back over the rainbow to the reality of an economy with big structural problems that can only be solved through political negotiation, something that has been notable only by its absence over – at least – the last 6 years. Are we headed back to Kansas?
- Three dead in shootings at Kansas Jewish centers; man to face charges (WSJ)
- Sanctions Blowback in Russia Targets Burgers to Movies (BBG)
- Deadly Virus's Spread Raises Alarms in Mideast (WSJ)
- China group buys $6bn Glencore Peru copper mine (BBG)
- Iran lodges complaint against United States over U.N. envoy ban (Reuters)
- Russian assets down sharply on Ukraine conflict fears (Reuters)
- ECB comments knock euro, but not much (Reuters)
- World-Leading $25 Hourly Wage Roils Swiss Businesses (BBG)
Futures are treading water once more now that Ukraine has stormed to center stage from the backburner after everyone was convinced Putin would let the situation cool off after annexing Crimea. Guess not. Adding the renewed geopolitical jitters to what has already been a beta stock bloodbath into a holiday shortened week assures some high volatility fireworks. Cautious sentiment was observed over in Asia (Nikkei 225 -0.36%) amid renewed fears that geopolitical tensions in Ukraine will flare up again following reports of exchange gunfire with pro-Russian militants. This sentiment carried over into the European session with stocks lower across the board (Eurostoxx50 -0.71%). EUR is lower after ECB’s Draghi said any further strengthening of the EUR would warrant further action by the ECB, including non-standard measures such as quantitative easing - it is amazing how frequently and often the Virtu algos still fall for Draghi's jawboning trick which has now become all too clear will never be implemented and certainly not if he keeps talking about it daily, as he does.
Dispassionate discussion of the macro-political economic climate.
It’s perplexing that analysts are perplexed by the rout.
This is the key issue for market participants: Is the dollar breaking lower or is it just testing the lower end of its range ? Here is my take.
The evil of modern central banking can nowhere better be seen than in this week’s mad stampede into $4 billion of Greek bonds. The fact is, Greece is not credit-worthy at nearly any coupon yield, but most certainly not at the 4.75% sticker that was attached to the offering. And the claim that Greece’s fiscal affairs have turned for the better is really preposterous. But none of this matters, of course, because the howling pack of money managers who scooped up the Greek debt at an oversubscribed rate of 5X were not pricing the non-credit of the former Greek state, but the promises of Mario Draghi. The very worst evil of monetary central planning is that it enables clueless politicians to believe in their own fiscal fairy tales, and to persist in the ritual can-kicking that is the scourge of central bank intoxicated politicians everywhere. In the context of its shattered economy, the Greek budget is a house of cards. Still, its current leaders, whose tenure is precarious by the day, get their turn in the spotlight to issue utterly specious pettifoggery...
Overnight weakness in Asia spilled into Europe and the bloodbath is continuing - especially in the peripheral markets which have until now been invincible in the face of deteriorating fundamentals. Just like US hyper-growth hope, Portugal, Spain, and Italy stock markets have soared this year - among the world's best performers - but are getting monkey-hammered in the last 2 days (down over 5%). Despite more chatter of ECB QE, peripheral bond spreads are also jumping higher (+7bps) as German Bund yields are slumping back below 1.5% - the lowest in 10 months. US futures are ugly too.