Green Shoots

Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.

As the IMF delivers its first 'health check' on Greece since 2009, the beleaguered nation's finance minister proudly proclaims, "the worst is over," and the country had reached its economic trough. However, while the finance minister appears unaware of the people living in caves, the record youth unemployment (that is rising still), and the accelerating non-performing loans (no green shoots there), the IMF remains a little less confident, "Greece's debt remains much too high". As the Sydney Morning Herald reports, Stournaras added that ''in May 2014, the loan installments will come to an end and the country has to be in a position where it can go on its own to the markets.'' We can't wait (with GGBs under 10% yield to see which greater fool snaps up those beauties). The IMF is a little less sanguine warning Greece of its "insufficient structural reforms," and worries of the "socially painful recession." The last jab, in line with the new normal 'template' (that is not a template but really is), "very little progress has been made in tackling Greece’s notorious tax evasion," as the IMF demands, "the rich and self-employed are simply not paying their fair share."

So far, 91 companies have reported 1Q results (28% of total S&P 500 market capitalization). 37% of companies reporting have beaten earnings estimates (below the historical average of 47%) and 13% have missed estimates (vs. average of 15%). The average EPS surprise has been 3.4%, below the 4.8% historical average. Excluding Financials, there are similar positive surprises (37%) and similar negative surprises (13%). Excluding Financials and Utilities, 21% of companies reporting have beaten sales estimates (below the historical average of 38%) and 24% have missed estimates (vs. average of 18%). The average revenue surprise has been -0.1%, below the 1.3% historical average. In short, things are not going according to plan - though we assume this just means the Q4-fantasy-hockey-stick explosion of revenues, earnings, and margins will just get bigger.

Now is the time to think about how you would live your life if your real value was appreciated and fairly compensated.

A sign of "economic and political turmoil"

The circus continues. For this evening's entertainment, the country's Deputy PM Taro Aso explains the "excessive JPY gain has been corrected," upon which USDJPY instantly strengthens 40 pips reversing all the post-US0-close JPY weakness. Of course, the market reaction was evidently enough for him to swallow his words and 'retract' his comments mere moments later. At the same time, the BOJ declares:

*BOJ MEMBERS AGREED JAPAN'S ECONOMY STOPPED WEAKENING

While their optimism is welcome, facts (as they often do) stand tall in the face of their rhetoric as Japan's Macro index and manufacturing new orders (to name just two recent data points) do not even show second-derivative green shoots. And for the third and final act of this evening's early debacle, 30Y JGB yields have slammed 9bps higher (as JGB Futures prices look set for another halt).

The last two weeks have not been pretty for the 'it's different this time' crowd. Day after day has brough miss after miss in macro-economic data for the US; from PMIs to NFPs, no matter how hard you try, there is not even enough for an 'anecdotal' strategist to pin his BTFD thesis on. Quantitatively, the US macro surprise index has seen its biggest 10-day drop in 10 months, completely reversing all the 'seasonally-adjusted' difference from the 2011 'Deja-Vu' market and macro behavior. So with the first pillar of bullishness (macro data is 'supportive'), it is up to earnings (but but but profitability is at highs) to hold up the market - good luck with that.

Germany, it seems, has had enough with its taxpayers implicitly bearing the burden of the rest of Europe's profligacy as the final solution chosen for Cyprus clearly shows (especially in light of pending German elections). But with all that 'stabilitee' based on one nation's shoulders, the following chart suggests Europe's Atlas is about to shrug. For the last six months, non-German Europe has seen its economies collapse with PMI New Orders pushing new lows now - after some brief episode of hope at the start of the year. Germany, in the meantime has been surging back as expectations of recovery have led sentiment higher and hopes for a European green shoot renaissance. That is until recently. In the last month, Germany's economic momentum has faltered; the green shoots are wilting; and combining real economic weakness with the Europe-wide deposit outflows (hurting the 'financial' economy), Europe is back in the crosshairs.

First, it is Merkel's turn, which last week was furious at Cyprus for daring to reject the first flawed Eurogroup plan impairing insured depositors, only to praise it for now... rejecting said plan. To wit: Chancellor Angela Merkel, "as well as the government, is very happy that the troika, the euro group and Cyprus were able to reach an agreement," German government spokesman Steffen Seibert says in Berlin. He added that difficulties will arise in the short term because of measures aimed to scale back Cyprus’s banking sector, "but in the long run it will lead to a healthier” industry. That remains to be seen, especially when factoring in the Russian response. Which wont be pleasant.

Asia has badly lagged U.S. and European stock markets this year and over the past 12 months. We explain why it's happened and why it may continue.

EURUSD - which was active around the US day session all week and dead otherwise - popped up to take out stops at 1.31 today before fading to end the wek marginally higher. Broadly speaking the European 'Dow' was higher on the week but the individual nation stock indices faded quite notably today with Spain and Italy the worst. European credit markets did not play along at all - with financials especially weak. It does seem like European financial stocks are playin catch down to European credit but the pump remains. In other news, the market's 'old' fulcrum security (and perhaps renewed again) - Spanish bond spreads - had their worst week in the last 4 and surged 23bps (when the rest of the market was practically unchanged). Their is a lot simmering under the surface in Europe, but for now, stocks remain cognitively dissonant thanks to the 'promise' even as Italian and Spanish debt levels push top new all-time highs (ahh the austerity of it all).

Why do I bring all of this up? Because it was China’s stimulus and China’s economy that supposedly lead the world back towards growth again. China is the proverbial canary in the coalmine, the economy that most quickly reveals what’s coming and where we’re all heading…

As we recently noted, despite the incessant chatter that the worst is behind them and the unending belief that if European politicians repeat a lie often enough it will become truth, the following chart perhaps better than many others shows the sorry state that exists in Europe's core and periphery - no green shoots, no second-derivative shifts, and only the 'Merkel-Draghi' wager holding things together. And despite US equity strength, European markets disappointed today with EURUSD back under 1.3000, European stock indices closing red (not holding US equity-driven gains), and Italian and Spanish bond spreads leaking wider into the close (about 10bps off their intrday tights).

You can choose to ignore this and believe that Europe’s Crisis is fixed just as EU political leaders claim. But Europe in general is out of options in terms of solving its debt crisis.

In the aftermath of yesterday's surge in German hopium measured by the ZEW Economic Survey which took out all expectations to the upside, it was inevitable that the other double-dipping country, France, telegraphed some optimism despite a contracting economy and would follow suit with a big  confidence beat, and sure enough the French INSEE reported that February business sentiment rose from 87 to 90, on expectations of an unchanged number. And the subsequent prompt smash of investor expectations in Switzerland, where the ZEW soared from -6.9 to +10.0 tells us that something is very wrong in the Alpine country if it too is trying so hard to distract from the here and now. And while one can manipulate future optimism metrics to infinity, it is reality that is proving far more troublesome for Europe, as could be seen by the Italian Industrial Orders print which crashed -15.3% Y/Y on expectations of a smooth -9.5% drop, down from -6.7% previously. Since industrial orders are a proxy for future demand, a critical issue as Italy enters 2013 after six consecutive quarters of economic contraction and with no relief on the horizon, it is only fitting that Italy should shock the world with an off the chart confidence beat next.