European Central Bank
So far the overnight session has been a replica of yesterday, with the all important carry trade once again fizzling overnight during Japan trading hours, and dipping as low at 101.60 before staging a modest rebound to the 101.8 level. We expect the "invisible" 102.000 USDJPY tractor beam to be again engaged shortly and provide market support and/or levitate stocks higher as the now standard selling in Japan, buying in the US trade pattern repeats. On the other hand, US equity futures appear to have decoupled from the pure carry trade, and instead latched on to USD weakness and EUR strength following European Q4 GDP data, which came at 0.3% on expectations of 0.2%, up from 0.1%. Considering the constant adjustments to the European definition of GDP, at this point Mongolia would have been able to demonstrate growth if it was in Europe (but apparently not Greece which once again missed GDP expectations with Q4 GDP of -2.6% vs Exp. -2.0%). Expect ES and USDJPY to recouple shortly, as they always do - the only question if the recoupling will take place lower or higher.
While January was a bad month for the market, it was certainly one which the majority of hedge funds would also rather forget as we showed yesterday. So with volatility, the lack of a clear daily ramp higher (with the exception of the last 4 days which are straight from the 2013 play book), and, worst of all, that Old Normal staple - risk - back in the picture. what is a collector of 2 and 20 to do (especially since in the post-Steve Cohen world, one must now make their money the old-fashioned way: without access to "expert networks")? For everyone asking this question, here is Deutsche Bank with its take on which will be the best and worst performing strategies of 2014. So without further ado, here is the Deutsche Bank Asset and Wealth Management's forecast of hedge fund performance matrix...
The chart below is very familiar to anyone who was observing the hourly turmoil in the European bond market in November of 2011, when Italian bonds crashed, when yields soared to record levels, and every downtick of the Euro could have been its last. What the chart may not show are the dramatic transformations in Italy's government that took place just as the Italian bond spread exploded, which saw the resignation of career-politician Sylvio Berlusconi literally days after yields soared, and the instatement of Goldman technocrat Mario Monti as Italy's next Prime Minister. In fact as some, certainly this website, had suggested the blow out in Italian yields was merely a grand plan orchestrated to usher in a new Italian government that would, with the support of yet another Goldman alum, the ECB's then brand new head Mario Draghi, unleash a new era in Italian life, supposedly one of austerity, and which would give the impression that Europe is being fixed all the while preserving the broken European monetary system for at least another year or two. In other words a grand conspiracy theory of a pre-planned bloodless coup.... And so, as lately so often happens, courtesy of the narrative by Alan Friedman of what really happened that summer, this too conspiracy theory has just become conspiracy fact.
Although there are no policy making meetings, central banks will still dominate the agenda in the week ahead.
In what was a shocking and disappointing at the same time decision, overnight the German Constitutional court, which had been contemplating the legality of the ECB's still non-existent OMT program, conceived in July 2012 to prevent the collapse of the Eurozone and still only existing in Mario Draghi's head as it has zero legal documentation supporting it, said that, in its judgment, the ECB's Outright Monetary Transactions program likely exceeded the central bank's powers. "There are important reasons to assume that [the OMT] exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget," the German court said Friday. "Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT decision incompatible with primary law," the German court said.
- Here is why AAPL bounced off $500: Apple Repurchases $14 Billion of Own Shares in Two Weeks (WSJ)
- German Court Refers OMT Decision to Europe's Top Court (WSJ)
- Inflation Fuels Crises in Two Latin Nations (WSJ)
- U.S. job growth seen snapping back from winter chill (Reuters)
- Google to own $750 million Lenovo stake after Motorola deal closes: HK exchange (Reuters)
- Frigid Winter Spells Trouble for U.S. Economy (BBG)
- Winter Games to open, Putin keen to prove doubters wrong (Reuters)
- Regulators Ready to Proceed on Bank Leverage Limit (WSJ)
- Abe Eyes Window for Biggest Military-Rule Change Since WWII (BBG)
- Draghi as ECB Master of Suspense Keeps Investors on Edge (BBG)
- Abe lays out detailed plan for expanding defense powers (Nikkei)
- Inflation Fuels Crises in Two Latin Nations (WSJ)
- Obama walks into crossfire of Asian tensions (FT)
- Harvard Makes Professor Disclose More After Blinkx Slides (BBG)
- Hedge Funds Rework Currency Positions in Market Drop (BBG)
- Canada, U.S. Strike Tax-Information Sharing Deal (WSJ)
- Indonesia calls for greater clarity from Fed on tapering (FT)
- Sony to cut 5,000 jobs, split off PC, TV operations (Reuters)
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.
Tai-Pan tells the story of Western, and especially British, traders at the time of the Opium Wars with China.
"Great God, I warned Robb not to put all the money in one bank. Na with all the speculating that was going on in England, na when a bank could issue paper in any amount that it liked."
The world is not that different today. The threats and warning signs are there for everyone to see even today.
How many times in the last few days have we been told that Turkey - or Ukraine or Venezuela or Argentina - are too small to matter? How many comparisons of Emerging Market GDP to world GDP to instill confidence that a little crisis there can't possible mean problems here. Putting aside this entirely disingenuous perspective, historical examples such as LTCM, and ignoring the massive leverage in the system, there is a simple reason why Emerging Markets matter. As Reuters reports, European banks have loaned in excess of $3 trillion to emerging markets, more than four times US lenders - especially when average NPLs for historical EM shocks is over 40%.
My point with this is that when the capital markets “break” due to a loss in credibility, the shift tends to be both swift and violent.
The gap between the rich and poor continues to grow. The wealthiest 1% held 8% of the economic pie in 1975 but now hold over 20%. Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China. Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.
Greece Is Back: Germany, France, Creditors Hold Secret Meeting Due To Greek Bailout "Mounting Concerns"Submitted by Tyler Durden on 01/31/2014 11:43 -0400
There was a time - roughly between May 2010 and the spring fall of 2011 - when all the world had to worry about was Greece. Then the realization finally dawned that since a Grexit from the Eurozone would kill the EUR and the European integration dream with so much "political capital" invested, crush Deutsche Bank, and bring back the much dreaded (by German exporters) Deutsche Mark, it became clear that there is no fear that Greece, which is now a decrepit shell of a country with a collapsed economy and society in shambles, has now become a slave state to European bureaucrats, business and banks (in Nigel Farage's words), will never be formally kicked out of Europe and only an internal coup would allow it to finally break free from the clutches of unelected European tyrants. And then the world moved on to more important things: like Japan, China Emerging Markets and how they are all enjoying the Fed's taper. Sadly, we have to report, that Greece is once again baaaaack.
I predicted this clearly, with loads of evidence, last spring. I even tipped the SEC/UK authorities. Tthe chickens come home to roost. Let it be known, Wall Street's margin IS my business model!!!
- Obama warns divided Congress that he will act alone (Reuters)
- Fed Decision Day Guide From Emerging Markets to FOMC Voter Shift (BBG)
- Fed poised for $10 billion taper as Bernanke bids adieu (Reuters)
- Bernanke’s Unprecedented Rescue Unlikely to Be Repeated (BBG)
- Argentina Spends $115 Million to Steady Peso (WSJ)
- Billionaires Fuming Over Market Selloff That Sinks Magnit (BBG)
- SAC’s Counsel Testifies at Insider Trading Trial in Unexpected Move by the Defense (NYT)
- Automakers Fuel Japan’s Longest Profit Growth Streak Since 2007 (BBG)
- Turkey Crisis Puts Jailed Millionaire at Heart of Gold Trail (BBG)
- Ukraine expects $2 billion tranche of Russian aid soon (Reuters)