Flight to Safety

Frontrunning: January 14

  • Islamic State launches militant assault on Indonesia's capital (Reuters)
  • Three winners emerge in $1.6 billion Powerball jackpot (Reuters)
  • European Stocks Tumble, Credit Markets Weaken on Growth Concern (BBG)
  • Stocks and commodity currencies floored by new oil plunge (Reuters)
  • China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)
  • Anxious phone calls, tense moments before Iran's Supreme Leader okayed U.S. sailors' release (Reuters)

"Buy The Dips! What Could Possibly Go Wrong?" Axel Merk Warns "A Hell Of A Lot"

The lack of fear in risky assets is another way of saying that risk premia have been low, or as we also like to put it, that complacency has been high. Not fully appreciative of this inherent risk, it seems many investors have refrained from rebalancing their portfolios, and bought the dips instead. We believe the Fed’s efforts to engineer an exit from its ultra-low monetary policy should get risk premia to rise once again, that if fear should come back to the market, volatility should rise, creating headwinds to ‘risky’ assets, including equities. That said, this isn’t an overnight process, as the ‘buy the dip’ mentality has taken years to be established. Conversely, it may take months, if not years, for investors to shift focus to capital preservation, i.e. to sell into rallies instead.

Global Stocks Slide, Futures Drop After Turkey Shoots Down Russian Warplane

It had been a relatively quiet session overnight when as reported previously, the geopolitical situation in the middle east changed dramatically in a moment, when NATO-member country Turkey downed a Russian fighter jet allegedly over Turkish territory even though the plane crashed in Syria, and whose pilots may have been captured by local rebel forces. The news promptly slammed Turkish assets and FX, sending the Lira tumbling, pushing lower European stocks and US equity futures while sending 2 Year German Bunds to record negative yields.

Stocks Jump On Hope For More Central Bank Intervention After Japan's Quintuple Recession, Syrian Strikes

As so often happens in these upside down days, was the best thing that could happen to the market, because another economic slowdown means the BOJ, even without sellers of JGBs, will have no choice but to expand its "stimulus" program (the same one that led Japan to its current predicament of course) and buy up if not government bonds, then corporate bonds, more ETFs (of which it already own 50%) and ultimately stocks. Because there is nothing better for the richest asset owners than total economic collapse.

Dow Drops 140 Points, Bonds & Bullion Pop As Markets Open

As futures markets reopen, a flight to safety bid is evident with gold ($1090) and bonds bid as US equity futures extend Friday's losses (erasing half of the October surge gains). The Dollar is modestly bid against the euro (EURUSD 1.06 handle looms) and oil is holding slightly in the green (war premium)...

Clinton Takes Aim At Soaring Drug Costs, Proposes $250 Monthly Cap

As WaPo reports, "Hillary Clinton is proposing a $250 monthly cap on the amount patients with chronic and serious medical problems would have to pay out of pocket for prescription drugs as a way to reduce the effect of skyrocketing drug prices on consumers." "Nobody in America should have to choose between buying the medicine they need and paying rent," Clinton says. 

Which Asset Class Will Be Most Impacted By A Rate Hike?

Going into Thursday, everyone - and we do mean everyone - is scrambling to predict which asset classes are most susceptible to a Fed hike. Amid the rampant confusion, BofAML asked fund managers to weigh in. Here are the results.

Is The Fed Making A Huge "Policy Mistake"? This Market Reaction Will Give The Answer

To be sure, whether or not Janet Yellen has made a mistake will become all too clear over time. All one need do is observe whether EMs careen further into chaos and/or whether the PBoC becomes even more schizophrenic, but as far as what to watch in the immediate aftermath of the FOMC announcement, we return to what we noted after September’s NFP print when we quoted BofAML. To wit: “If they do hike, watch the long-end.”

Mystery Buyer Of US Treasurys Revealed

While we already knew that China was selling - and following the record selling of FX reserves in August, so does everyone else - an even more interesting question emerged: who is buying? Thanks to the WSJ we now know the answer: "A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street."