This is the third day in a row that an attempt to mount an overnight ramp out of the US has fizzled, with first the Nikkei closing down for the second day in a row and snapping a week-long rally, and then the Shanghai Composite following suit with its 5th consecutive drop in a row as the rumblings out of the PBOC on the inflation front get louder and louder, following PBOC governor Zhou's statement that inflation expectations must be stabilized and that great importance must be attached to inflation. Stirring the pot further was SAFE chief Yi Gang who joined the Chinese chorus warning against a currency war, by saying the G20 should avoid competitive currency devaluations. Obviously China is on the edge, and only the US stock market is completely oblivious that the marginal economy may soon force itself to enter outright contraction to offset the G-7 exported hot money keeping China's real estate beyond bubbly. Finally, SocGen released a note last night title "A strong case for easing Korean monetary policy" which confirms that it is only a brief matter of time before the Asian currency war goes thermonuclear. Moving to Europe, it should surprise nobody that the only key data point, Eurozone Industrial Production for January missed badly, printing at -0.4% on expectations of a -0.1% contraction, down from a 0.9% revised print in December as the European recession shows no signs of abating. So while the rest of the world did bad or worse than expected for the third day in a row, it will be up to the POMO and seasonally adjusted retail sales data in the US to offset the ongoing global contraction, and to send the perfectly manipulated Dow Jones to yet another all time high, in direct refutation of logic and every previous market reality ever.
The only major news from overseas was from the UK where Industrial Production fell 1.5% leading many to worry the country would succumb to a triple dip recession. Naturally the pound (FXB) has been taking a beating with pundits recommending long euro short pound pair trade.
It was a boring enough day that the goings on in Rome caught my attention—a new candidate for pope and he’d be a refreshing change:
Since the second half of 2012, financial markets have recovered strongly worldwide. But this financial market buoyancy is at odds with political events and real economic indicators. In short, we are witnessing a rapid decoupling between financial markets and inclusive social and economic well-being. As a result, the income of the global elite is growing both rapidly and independently of what is happening in terms of overall output and employment growth. Demand for luxury goods is booming, alongside weak demand for goods and services consumed by lower-income groups. All of this is happening in the midst of extremely expansionary monetary policies and near-zero interest rates, except in the countries facing immediate crisis. Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward. And yet, despite widespread concern and anxiety about poverty, unemployment, inequality, and extreme concentration of incomes and wealth, no alternative growth model has emerged.
Average daily trading combined volumes on the three main gold contracts on the Shanghai Gold Exchange in the first two months of the year jumped 24% on the year, according to Reuter’s calculations. "The strong physical demand in China is the main reason behind gold's resilience," a Beijing-based trader told Reuters. Physical demand prospects out of China remain positive in the weeks ahead, UBS AG said according to Bloomberg. China is very vulnerable to a property crash and its own economic crisis. The Chinese stock market has performed very poorly in recent years and Chinese people realise the importance of gold as a store of value.
Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading. To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.
“The demons aren’t gone; they’re only sleeping"
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
The France-based ratings agency has just joined China's Dagong, and US Moody's by Fitch-slapping Italy with a BBB ratings handle. Citing four main reasons: election results which and 'non-conducive' for further structural reforms, deeper than expected recession, greater than expected budget deficits, and a weak government less able to respond to shocks. But apart from all that, as we noted earlier, Italian stocks and bonds are bid.
New highs will become a daily headline feature it seems until we actually have a down day.
Thursday, Jobless Claims fell (340K vs 347K previous), Productivity (-1.9% vs -2% previous) and Costs (4.6% vs 4.5% previous) were very poor reports, and the Trade Deficit grew (-$44.45B vs -$38B). Lastly, Consumer Credit expanded to $16.2 billion from $14.6 billion primarily on student loans (in a bubble) and auto loans (subprime auto loans booming).
Despite reassurances from Draghi this morning, the truth of the matter is that cross-border capital flows - which reflect the degree of integration in the global financial system - have plunged in recent years. As of the end of 2012, cross-border capital flows - including lending, foreign direct investment, and purchases of equities and bonds - remain more than 60% below their peak. In the decade up to 2007, Europe accounted for half of the growth in global capital flows, reflecting the increasing integration of European financial markets. But today the continent’s financial integration has gone into reverse. Clearly, cross-border lending, which dominated capital flows in the years leading up to the crisis, has proven to be short term and can dry up quickly.
Though much has been written about the popping of the housing bubble in the U.S. and Ireland, remarkably little has been written about the many housing bubbles that remain unpopped. As a rule, speculative bubbles pop and revert to their pre-bubble levels, so we can anticipate the eventual popping of all remaining housing bubbles. Given the dearth of investment options open to households in China seeking to invest their prodigious savings, it is unsurprising that China's housing bubble continues expanding. Every proponent of housing during bubbles confidently proclaims that "this time it's different," and a decade later the dazed survivors shift through the financial rubble, wondering what went wrong with "guaranteed" fundamentals, trends, valuations, collateral and wealth.
Warning from the German Bankers Association: central-bank save-the-euro policies cause bubbles, capital misallocation, currency wars, and another financial crisis.
The ECB's Press Corps Realize They Have No Idea What OMT Is: "The Rules Are What They Are" Explains DraghiSubmitted by Tyler Durden on 03/07/2013 13:06 -0400
It took six months of humiliatingly empty rhetoric and bluster, before Europe's press corps, or rather just the FT's Michael Steen, finally asked perhaps the one most important question regarding the OMT, which does not stand for On Merkel's Tab, but rather "Outright Monetary Transactions" (full Draghi definition here) and is the magic "open-ended" bond-buying bullet and SMP replacement that has stabilized Europe: namely "what is it?" That it took so long for reporters, and by implication, the markets to actually point out that the emperor is indeed naked and inquire into the legal working of the ECB's deus ex machina is a testament to just what lengths the broader public has been zombified into believing that "the less you know, the better" historically, one of the KGB's better known slogans.
Futures Ignore 13 Year High In French Unemployment, Tumble In German Factor Orders; Rise On Spanish AuctionSubmitted by Tyler Durden on 03/07/2013 07:55 -0400
In today's overnight trading, it was all about Europe (and will be with today's BOE and ECB announcements), where things continue as they have for the past six months: when it is a problem that can be "solved" by throwing bucketloads of money, and/or guaranteeing all risk, things appear to be better, such as today's EUR5.03 billion Spanish bond auction (the 0.03 billion part being quite critical as otherwise how will the authorities indicate the pent up demand by the Spanish retirement fund and various other insolvent ECB-backstopped Spanish banks for Spanish debt). And while events that can be "fixed" with massive liquidity injections are doing better, those other events which rely on reality, and the transfer of liquidity into the real economy, are just getting worse and worse. Sure enough, today we also learned that French unemployment rate just hit a 13 year high. But it wasn't only the French economy that continued to slide into recession: Germany wasn't immune either following "surprising" news that German January Factory Orders tumbled -1.9% M/M on expectations of a 0.6% rise, down from a revised 1.1% in December. The great equalization in Europe continues, as the PIIGS, kept still on artificial life support do everything in their power to drag down the core.
A small note on the frankly hilarious news that the Dow Jones Industrial Average smashed through to all-time-highs. First of all, while stock prices are soaring household income and household confidence are slumping to all-time lows. Employment remains depressed, energy remains expensive, housing remains depressed, wages and salaries as a percentage of GDP keep falling, and the economy remains in a deleveraging cycle. Essentially, these are not the conditions for strong organic business growth, for a sustainable boom. We’re going through a structural economic adjustment, and suffering the consequences of a huge 40-year debt-fuelled boom. While the fundamentals remain weak, it can only be expected that equity markets should remain weak. But that is patently not what has happened. With every day that the DJIA climbs to new all-time highs, more suckers will be drawn into the market. But it won’t last. Insiders have already gone aggressively bearish. This time isn’t different.