Markets, risk assets in particular, do not like political dis-unity. The FOMC seem dis-unified; delivery differing messages. Comments by Dudley and Fisher were not just marginally different, but rather stark contrasts. Trust in the Fed and in its’ communication strategy have been tarnished. Markets are now confused as to when, why, and how the Fed will be able to change course. When the taper is in full-swing that equities and bonds will drift to lower prices. However, the immediate trade may require paring risk, and rebalancing portfolios, i.e. stocks down, bonds drifting higher in price (risk off).
Everything was proceeding according to central-plan with a gradual rise in risk and a decline in the USD until 4 am Eastern, when the German IFO Business Climate data was released and missed across the board (107.7 vs Exp. 108.0; Current assessment 111.4 vs Exp. 112.5; Expectations 104.2 Exp.104.0), reminding everyone now that Merkel is cemented for the near future, the immediate prerogative for Europe is to get the EUR lower, one way or another. A returning bid to the dollar also has pushed 10 Year yields under 2.70%, while once again sending various EM currencies sliding, and bringing back cross asset volatility to a world whose Sharpe ratio over the past several months has plummeted into negative territory. Increasing concerns about a government shutdown (misplaced) will likely prevent a solid bid from developing under markets.
Despite the best efforts to squeeze shorts from the European close (end of POMO), the afternoon session punctuated by Fed's Fisher notable comments pushed stocks back lower with the S&P joining the Dow in the all-FOMC-gains-gone club. Financials and Materials (-1.5% from FOMC) are the worst performers since Bernanke did not say "Taper" and while stocks have given it all back, bonds remain at their highs (in price) and lows (in yield) from that un-announcement. Treasury yields dropped 2-3bps more today (still down 15-20bps depending on maturity) as growth hopes fade. JPY strength was trumped by EUR weakness today which pushed the USD higher from overnight opening lows (from China PMI and Merkel) but by the close the USD was unch. Gold and silver were holding positive until Fisher's comments and they slid to -0.5% or so. WTI dropped 1.2% to $103.50. The S&P had its 3rd down day in a row for the first time in 5 weeks (as momo names join the financials among the leaders lagging).
Perhaps no sentence sums up the dismal reality investors face with the 'communications' strategy, the credibility, and the actions of the Federal Reserve, better than the following statement from Dallas Fed's Fisher:
- FED'S FISHER SAYS VOTE LAST WEEK NOT TO TAPER DID NOT REFLECT THE DISCUSSION AT THE POLICY-SETTING TABLE
It seems that we should therefore ignore each and every Fed whisperer and President (voting or non-voting) as only man counts... Et Tu Yellen...
We have heard from the doves, now the hawks. Dallas Fed's Fisher (a non-voting member) pulls no punches in his speech this morning. Confirming Esther George's comments last week, and our views on the same:
- *FISHER SAYS HE TRIED LAST WEEK TO PERSUADE FOMC TO TAPER QE
- *FISHER SAYS DECISION NOT TO TAPER QE UNDERMINED FED CREDIBILITY
But that was not it. The well-known hawk went to warn that:
- *FISHER: BIGGEST BANKS ARE `DAGGER POINTED' AT ECONOMY'S HEART
- *FISHER SAYS NO QE TAPER ADDS TO `UNCERTAINTY' ABOUT FED POLICY
None of this should come as a surprise as Fisher told Santelli earlier in the year that "this cannot go on forever!"
Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.
The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
Dispassionate macro overview.
Still Laundering Terrorism and Drug Money ...
- Hedge Funds Cut Back on Fees (WSJ) as we predicted would happen in May
- Syria's Assad denies chemical weapons use; U.S. presses case for strike (Reuters)
- Unemployment Falling for Wrong Reason Creates Fed Predicament (BBG)
- U.S. tapped into networks of Google, Petrobras, others (Reuters)
- Chinese Zombies Emerging After Years of Solar Subsidies (BBG)
- Monte Paschi doubles planned capital hike to 2.5 billion euros (Reuters)
- Loan Size to Be Cut for Fannie, Freddie (WSJ)
- Japan Growth Revision Opens Door to Sales Tax Rise (FT)
- Inside the End of the U.S. Bid to Punish Lehman Executives (NYT)
- Financial Crisis: Lessons of the Rescue, A Drama in Five Acts (WSJ)
- Time Warner Joins IBM in Health Shift for Retirees (WSJ)
- Mideast Derails Key Issues in Congress (WSJ)
As macro news continues to trickle in better than expected, the latest batch being benign (if completely fake) Chinese inflation data (CPI 2.6%, Exp. 2.6%, Last 2.7%) and trade data released overnight which saw ahigher than expected trade balance ($28.5bn vs Exp. $20.0; as exports rose from 5.1% to 7.2%, and imports dipped from 10.9% to 7.0%, missing expectations), markets remain confused: is good news better or does it mean even more global liquidity will be pulled. As a result, the release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Even though the news buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Going forward, there are no major macroeconomic data releases scheduled for the second half of the session, but Fed’s Williams is due to speak.
September is likely to be dominated by a number of key event risks, in addition to ongoing uncertainty around the US growth outlook, the Fed’s reaction function and heightened EM volatility. We highlight the major events and likely market implications.
As rising Taper (and QE unwind) uncertainty, the biggest trade driving the rate complex, and by implication, the entire risk complex, is being put (no pun intended) to rest. As BofA explains: "the FOMC (the biggest buyer of duration and convexity risk in the world) is long the option to taper asset purchases (and eventually raise rates) if the data improves. That leaves the market short the option that the Fed may decide to taper. The market has looked to hedge this “short gamma” exposure by selling duration and buying vol."
A look the end of the rising cycle and the start of the falling cycle, including its dynamics and capital destruction. How does the central bank respond?
When “QE Infinity” Turns Into A Pipedream: Hot Money Evaporates, Rout Follows – See Emerging MarketsSubmitted by testosteronepit on 08/21/2013 11:27 -0500
The Fed and other central banks have accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding.