It took only a 60 USDJPY pip overnight ramp to send US equity futures 20 points off the overnight lows in the immediate aftermath of the Crimean referendum, which from a massive risk off event has somehow metamorphosed into a "priced in", even welcome catalyst to buy stocks. The supposed reasoning, and in a world in which Virtu algos determine the price action of the USDJPY from which all else flows based solely on momentum we use the word reasoning "loosely", is that there was little to indicate that the escalation between Russia and Ukraine was set to accelerate further. As we said: an annexation is now seen as risk off, something even Goldman appears unable to comprehend (more on that shortly). In macroeconomic news, European inflation - at least for the Keynesians - turned from bad to worse after the final February inflation print dropped from the flash, and expected, reading of 0.8% to just 0.7% Y/Y, a sequential increase of 0.3% and below the 0.4% expected, confirming that deflationary forces continue to ravage the continent. The only question is how soon until Europe comes up with some brilliant scheme that will help it join Japan in exporting its deflation.
- Ukraine anxiety triggers flight to safety, stocks tumble (Reuters)
- Woodrow Wilson’s Ukraine Failure Foreshadows West’s Dilemmas (BBG)
- Fortress Executives Join Peers Selling Stock After Rally (BBG)
- 303 Deaths Seen in G.M. Cars With Failed Air Bags (NYT)
- Putin Deports Executives for Speeding as Sanctions Loom (BBG)
- Russia blocks internet sites of Putin critics (Reuters)
- China Bond Risk Exceeds Ireland as Defaults Unavoidable (BBG)
- China H-Shares Post Biggest Weekly Drop Since October (BBG)
- Surge in Rail Shipments of Oil Sidetracks Other Industries (WSJ)
- Blackstone’s Home Buying Binge Ends as Prices Surge (BBG)
It has been a relatively quiet overnight session, aside from the already noted news surrounding China's halt on virtual credit card payments sending Chinese online commerce stocks sliding, where despite an ongoing decline in the USDJPY which has sent the Nikkei plunging by 3.3% (and which is starting to impact Abe whose approval rating dropped in March by a whopping 5.6 points to 48.1% according to a Jiji poll), US equity futures have managed to stay surprisingly strong following yesterday's market tumble. We can only assume this has to do with short covering of positions, because we fail to see how anyone can be so foolhardy to enter risk on ahead of a weekend where the worst case scenario can be an overture to World War III following a Crimean referendum which is assured to result in the formal annexation of the peninsula by Russia.
It would appear that 1.39 EURUSD is the line in the sand for Mario Draghi. As pressures build on European competitiveness, Draghi appears to have finally got sick of China buying EURs to diversify its FX reserves away from USDs. This time "whatever it takes" is to drag the EUR lower - on the back of suggestions that OMT 2.0 (new measures - double the effectiveness and just as non-existent) and guarding against deflation (not worried about inflation). The jawbone is working for now as EUR breaks down through 1.39.
It was another day of ugly overnight macro data, all of it ouf of China, with industrial production (8.6%, Exp. 9.5%, Last 9.7%), retail sales (11.8%, Exp. 13.5%, Last 13.1%) and fixed asset investment (17.9% YTD vs 19.4% expected) all missing badly and confirming that in a world of deleveraging, the Chinese economy will continue to sputter. Which is precisely what the "bad news is good news" algos needs and why futures levitated overnight: only this time instead of latching on to the USDJPY correlation pair, it was the AUDJPY which surged after Australia - that Chinese economic derivative - posted its third best monthly full-time jobs surge in history! One can be certain that won't last. But for now it has served its purpose and futures are once again green. How much longer will the disconnect between deteriorating global macro conditions and rising global markets continue, nobody knows, but sooner rather than later the central planner punch bowl will be pulled and the moment of price discovery truth will come. It will be a doozy.
"Europe faces 25 years of Japan-style stagnation," warns George Soros in this brief Bloomberg TV interview, adding that without deeper integration, "it’s an incomplete association of nations and it may not survive." While claiming that the financial crisis may be over they now "face a political crisis," with the voluntary association cracking due to the creditors (Germany) being in charge. However, he hopes "Ukraine is a wake-up call to Europe, because Russia has emerged as a rival to the European Union." Putin, Soros worries, "has a very different idea of what a society should be like... he has a blind spot - he believes people can be manipulated and cannot resist." That's not the case according to Soros, who exclaims "people do believe in freedom."
Just when it seemed that the ever deteriorating situation in the Crimean, the unexpected plunge in Chinese exports which has sent the Yuan reeling again, the Copper slam which is down some 10% in two days, and the outright collapse in Japan's capital flows, not to mention the worst GDP print under Abe, may not be quite "priced in" by a market that is now expecting well beyond perfection in perpetuity, further shown by Goldman over the weekend which reprorted that revenue multiples have never been greater, and futures may finally dip, here came - right on schedule - the USDJPY levitation liftathon, which boosted futures from down 10 to barely unchanged, and which should be green by the second USDJPY ramp some time just after 8 am.
With a March 16th date set for Crimea's referendum (to confirm that the region, which has an ethnic Russian majority, is a part of Russia) and a few short days after Ukraine's Prime Minister Yatsenyuk is due to meet President Obama in the White House, Reuters reports that The United States will not recognize the annexation of Crimea by Russia if residents of the region vote to leave Ukraine. Obama has said a referendum on Crimea would violate international law and the Ukrainian constitution... but this raises 3 awkward (and apparently hypocritical) questions on the right to self-determination... and pins March 16th as a crucial inflection point between Russia and US.
Big Bubble Brutally Bursts ... Bringing Bankruptcies, Bond Busts
The word “tantrums” referenced in the title was the paper’s attempt to explain adverse market reactions, e.g., last year’s reaction from ‘taper-talk’. The authors stated that risk premiums can jump quickly, simply because non-bank market participants (read: mutual funds) are motivated by their peer performance rank. The authors had 3 subsequent conclusions: 1) the relative peerperformance race causes momentum in return; 2) return chasing can reverse sharply; and 3) changes in the stance of monetary policy can trigger heavy fund inflows and outflows. These conclusions partially explain (empirically) the herd mentality and momentum in recent years behind tight credit spreads and elevated equity prices. Investors are so fearful of missing the upside and underperforming peers that they frantically scramble to remain ahead of them (i.e., seek risk). However, the conference and paper suggests that there is a threshold point during the Fed’s attempt to normalize policy where the tide reverses and investors join in a selloff in a race to avoid being left behind. This is why I’ve been calling it the greater fool theory. The most surprising part of the conference was Rubin’s keynote speech. Rather than speak about Washington’s messy politics or such, he basically gave a speech that criticized and questioned Fed policy.
With the world still on edge over developments in the Ukraine, overnight newsflow was far less dramatic than yesterday, with no "bombshell" uttered at today's Putin press conferences in which he said nothing new and simply reiterated the party line and yet the market saw it as a full abdication, he did have some soundbites saying Russia should keep economic issues separate from politics, and that Russia should cooperate with all partners on Ukraine. Elsewhere Gazprom kept the heat on, or rather off, saying Ukraine recently paid $10 million of its nat gas debt, but that for February alone Ukraine owes $440 million for gas, which Ukraine has informed Gazprom it can't pay in full. Adding the overdue amounts for prior months, means Ukraine's current payable on gas is nearly $2 billion. Which is why almost concurrently Barosso announced that Europe would offer €1.6 billion in loans as part of EU package, which however is condition on striking a deal with the IMF (thank you US taxpayers), and that total aid could be as large as $15 billion, once again offloading the bulk of the obligations to the IMF. And so one more country joins the Troika bailout routine, and this one isn't even in the Eurozone, or the EU.
While everyone was focusing on the threat of tumbling debt dominoes in China's shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate - as well as shadow banking - bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.
Since Ukraine is the only wildcard variable in the news these past few days, it was to be expected that following i) the end of the large Russian military drill begun two weeks ago and ii) a press conference by Putin in which he toned down the war rhetoric, even if he did not actually say anything indicating Russia will difuse the tension, futures have soared and have retraced all their losses from yesterday. And not only in the US - European equity indices gapped higher at the open this morning in reaction to reports that Russian President Putin has ordered troops engaged in military exercises to return to their bases. Consequent broad based reduction in risk premia built up over the past few sessions meant that in spite of looming risk events (ECB, BoE policy meetings and NFP release this Friday), Bund also failed to close the opening gap lower. At the same time, USD/JPY and EUR/CHF benefited as the recent flight to quality sentiment was reversed, with energy and precious metal prices also coming off overnight highs.
We were perhaps even more amused than our readers by our Friday headline "Stocks Close At New Record High On Russian Invasion, GDP Decline And Pending Home Sales Miss." It appears that today the market forgot to take its lithium, and is finally focusing on the Ukraine part of the headline, at least until 3:30 pm again when everything should once again be back to market ramp normal. As expected, the PMI data from China and Europe in February, was promptly ignored and it was all about Ukraine again, where Russia sternly refuses to yield to Western demands, forcing the shocked market to retreat lower, and sending Russian stocks lower by over 11%. This is happening even as Ukraine is sending Russian gas to European consumers as normal, gas transport monopoly Ukrtransgas said on Monday. "Ukrtransgas is carrying out all its obligations, fulfilling all agreements with Gazprom. The transit (via Ukraine to Europe) totalled 200 million cubic meters as of March 1," Ukrtransgas spokesman Maksim Belyavsky said. In other words, it can easily get worse should Russia indeed use its trump card.
In addition to the already noted fireworks out of China, where the Yuan saw the biggest daily plunge since 2008 and the ongoing and very rapid newsflow out of the Ukraine, focus this morning was very much of the latest Eurozone CPI data, which despite matching previous low levels, came in above expectations and in turn resulted in an aggressive unwind of short-EUR bets as market participants were forced to re-asses the likelihood of more easing by the ECB. Still, even though the Euribor curve bear steepened and Bunds came under significant selling pressure, the EONIA forward curve remained inverted, signifying that there is still a degree of apprehension over what is unarguably very low inflation data.