Flight to Safety
It’s not about the current Dollar & Treasury market safe haven bid, it’s about tomorrow’s confidence in our monetary system.
- Obama open to appointing Ebola 'czar', opposes travel ban (Reuters)
- Schools Close as Nurse’s Ebola Infection Ignites Concern (BBG)
- How the World's Top Health Body Allowed Ebola to Spiral Out of Control (BBG)
- European Stocks Rise Amid Growing Pressure for Stimulus (BBG)
- Putin Threatens EU Gas Squeeze Raising Stakes for Ukraine (BBG)
- ECB to Start Asset Purchases Within Days, Says Central Banker Coeuré (WSJ)
- Investors search for signs of end to stock market correction (Reuters)
Global stocks plummeted yesterday and again today, on investor concern that U.S. and Chinese inflation data are signalling a global slowdown in economic activity. U.S. retail sales fell in September and producer prices declined for the first time in a year.
It’s generally considered that higher volatility in bond markets would accompany higher rates. Thus, if rates are falling, volatility will remain subdued. However, as the PIMCO Eurodollars liquidation showed, the market was already short. So the position liquidation is coming in a rally, rather than a sell-off. On top of that, inflation is falling and with oil under pressure should remain low. Meanwhile the Fed hawks evidently lost the argument to the doves in September, and their hand has been strengthened by the dollar rally. So the conditions are set for higher vol to accompany the fall in rates.
Olivia Newton John had it right................
Whether it is the lack of any favorable news out of China (in fact, quite the contrary), which the BTFDers on Friday were praying for, or the worsening of the global Ebola pandemic with not only a second confirmed case hitting Texas but panicky reports of Ebola infections from Boston all the way to Los Angeles, or simply the lack of any words of encouragement from the Fed, the Friday rout has continued into the early Sunday night trading, and as of moments ago, the December E-mini future dropped to 1880.5 taking out the August lows, and sliding to levels last seen in May.
Futures and commodities markets reaction to the US Air strikes on Syria. Flight to safety with the yield in the 10 year yield lower to 2.551 in pre-US equity open.
Q. What are traders talking about at the present time here at the New York Stock Exchange?
Cashin: We are concerned about two questions. First, how will the Fed do in keeping money reasonably easy without causing inflation? Second, where do we stand with the current geopolitical challenges? For now, these challenges seem to be short term concerns. But should we begin to see a financial contagion and pressure building on banks in Europe, perhaps out of the Ukraine situation, things could theoretically turn into what I call a «Lehman moment». That is when markets come under pressure but seem to be under control, and then things change suddenly.
For those just catching up on the main news event of the weekend, namely the sudden surge in Scotland "Yes" vote polling surpassing 50% for the first time, here is a complete round up of the background, updates and expert reactions from RanSquawk, Bloomberg and AFP.
Late yesterday, after Nobel peace prize-winning president Obama revealed his latest military incursion, years of pent up can-kicking almost caught up with futures, which dared to tumble by a whopping 0.7%, a move which hit Europe far more than the US, and shortly after Europe's open, the Euro Stoxx 50 Index dropped 10% from its 2014 high, marking an official correction in Europe where the Dax continues to be the key risk indicator, and which dropped as low as 8,903 before recovering to a drop of only 0.9% while German Bunds continues to print record highs day after day on fears what the escalating Russian trade war will do to the German economy, and other such "costs." US futures meanwhile have seen most of their losses recovered thanks to the usual relentless low volume USDJPY levitation, which pushed ES down to just -0.2% after a nearly four times greater drop. Still, while futures may be surging, the 10 Year has not gotten the memo and remains stuck just above 2.36% or its lowest print since June 2013, a clear indication that at least the bond market has given up all hope of a so-called US recovery for the conceivable future. What is most important however, is that at this pace, the Friday confidence effect, i.e., a green close, may be recovered: let's all just wait and see what the NY Fed trading desk decides to do, and escalating world wars aside, let's just pretend that HY didn't just sugger the biggest weekly HY outflow in history didn't just take place.
Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.
In case you were wondering why US equities are charging higer yet again today on mediocre news (while bonds shrug), we offer another potential reason... Russian stocks are now in bull market territory off the mid-March "sanctions" lows... not exactly the "costs" that the US had in mind and thus even more curcial that S equities are lifted (by any nunber of visible and invisible hands) to show just how powerful the status quo of the West still is (the S&P is up 5% in the same period). Perhaps even more importantly, this refutes any thesis that bonds are higher only due to Russian capital outflow (i.e. flight to safety).
Oil prices have increased recently as tension in Ukraine has escalated and raised concerns about the risks of disruption in Russian energy exports. There is a risk that the security situation in the east Ukraine will worsen even further ahead of the 25 May elections. As Nordea notes, Russia is as important an oil exporter to Europe (of both crude and refined products) as it is a gas exporter, and the consequences of a cut in Russian oil supplies could be as grave since the global oil market has little back-up capacity to lean on. As a result, a halt in the oil deliveries from Russia to Europe will spark a sharp spike in oil prices (potentially to $150/bbl) and in a worst case scenario an oil crisis and European recession (and major slowdown in global growth) and US shale oil or an SPR release will prevent the spike.
Last month it was a tribute to his cat. This month, the manager of the world's largest bond fund discusses sneezing: "A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500. It feels sooooo good that people used to sneeze on purpose." He also discusses the aftermath: "The old saying goes that when the U.S. economy sneezes, the world catches cold. That still seems to be true enough, although Chinese influenza is gaining in importance. If both sneezed at the same time then instead of “God bless you” perhaps someone would cry out “God have mercy.” We’re not there yet, although in this period of high leverage it’s important to realize that the price of money and the servicing cost of that leverage are critical for a healthy economy. " He also talks about some other things, mostly revolving around long-term rates of return assumptions and what those mean for investors.
This is the multi trillion-dollar question.