"two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes." - Albert Edwards
There rarely seems to be a “reason” for why market crashes happen. Market observers are e.g. debating to this day what actually “caused” the crash of 1987. It is in the nature of the beast that once liquidity evaporates sufficiently that not all bubble activities can be sustained at once any longer, bids begin to become scarce in one market segment after another. Eventually, they can disappear altogether – and sellers suddenly find they are selling into a vacuum. Once this happens, the usual sequence of margin calls and forced selling does the rest. Risk premiums normalize abruptly, and there doesn't need to be an obvious reason for this to happen. Compressed risk premiums can never be sustained “forever”.
Even Hellicopter Ben would have balanced remarks. However, Janet Yellen has taken dovishness to an all-time high or low dpending on your perspective.
The USD is soaring after somewhat hawkish Fed Minutes (up 1% this week) - pushing up towards critical resistance at 1-year highs. Treasury yields slammed 3-4bps higher and are holding those losses (30Y up 11bps this week). High yield credit is at the worst levels of the day as stocks retrace gains towards record highs. WTI crude jumped 1% on the minutes, back above $96 as gold slipped modestly back below $1290. Stocks, having kneejerked lower (below VWAP) have been ripped back higher by a VIX-slamming algo that decided that FOMC uncertainty is exactly the signal to buy certainty.
The stock market is presently a roulette wheel with dimes on black and dynamite on red... The ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective. Galbraith reminds us that the 1929 market crash did not have observable catalysts: “the crash did not come – as some have suggested – because the market suddenly became aware that a serious depression was in the offing... for it is in the nature of a speculative boom that almost anything can collapse it."
Friday's main event, Ukraine's alleged attack of a Russian military convoy, has come and gone, and as we mused on Friday has promptly faded into the memory of all other fabricated headlines released by the country engaged in a major civil war and an even more major disinformation war. To be sure, Germany's DAX has recovered virtually all losses, US futures are up about 9 points, and the 10 Year is back to 2.37%. One wonders what algo-slamming headline amusement Ukraine has in stock for us today, although anyone hoping for a quick "de-escalation" (there's that word again) will have to wait following yesterday's meeting of Russian, Ukraine, German and French ministers in Berlin where Russia's Lavrov said he saw no progress on Ukraine cease-fire, Foreign Minister Sergei Lavrov says in Berlin, adding that a cease-fire should be unconditional.
High yield mutual funds and ETFs reported a small $0.71bn inflow (of knife catchers) last week (ending on August 13th) after four straight weeks of outflows including a record $6.7bn outflow in the prior week. As BofAML notes, the turn in flows follows a strong rebound in high yield bond prices (drop in spreads), which (before the Ukraine news) had reversed more than half of the losses incurred in July. However, European high-yield funds saw further significant outflows, $3bn more compared to $4bn last week and European equities saw massive outflows. Furthermore, modest equity inflows hide the fact that the only buyer of stocks in the US remain corporates (buybacks) as institutional sellers dominate.
News of the Ukrainian destruction of part of a Russian military convoy sent European stocks (and bond yields) plunging. German DAX futures lost all the gains from the US close last Friday as 2Y bonds closed at -1bps and 10Y bunds at a record low 96bps. European equity indices all lost significant ground on the news today but generally held on to some gains on the week. Peripheral bond spreads pressed wider today but ended the week lower (Spain -5bps, Portugal -25bps). High yield spreads jumped over 20bps on the news. Europe's VIX soared over 20 today (from 16 earlier).
The record-breaking outflows in high-yield bonds are not the only indication that the U.S. economy could be on the verge of very hard times. Retail sales are extremely disappointing, mortgage applications are at a 14 year low and growing geopolitical storms around the world have investors spooked. For a long time now, we have been enjoying a period of relative economic stability even though our underlying economic fundamentals continue to get even worse. Unfortunately, there are now a bunch of signs that this period of relative stability is about to end. The following are 14 reasons why the U.S. economy's bubble of false prosperity may be about to burst...
If it was crashing German business confidence yesterday setting the somber mood for European economic "growth" in the second half, with a European GDP decline if not outright contraction now almost practically inevitable, then overnight it was disappointing data from virtually every other spot in the globe (and Europe again) to hammer the message in, starting with a historic 6.8% drop in Japanese GDP driven by a record plunge in consumption, quickly followed by total social financing out of China which in aggregate rose by only RMB273.1bn in July, or just 18% of what was expected, with missing industrial production and retail sales just the cherry on top. Then it was Europe's turn again, where June Industrial Production contracted -0.3% on expectations of a 0.4% increase, to set the stage for tomorrow's Eurozone GDP print which, following Italy's triple-drip recession shocker last week, probably means it will be not only Japan but also Europe which are about to have taken a sharp move for the worse. All of which of course, explains why just as Europe opened, the USDJPY blasted off and took both EuroSTOXX and US equity futures higher with it, and at last check ES was some 10 higher.
There was some doubt, when the 3 Year auction priced at 0.992% or the highest since May 2011, if the August auction would finally see 3Y paper pricing wide of 1%. It did not: in fact, with a When Issue of 0.93%, the auction priced through moments ago, at a high yield of 0.924%, surprisingly the lowest level since April. The internals were somewhat more exciting, with the Bid to Cover dropping to just 3.04, the lowest coverage since June of 2013, which as the only BTC with a 2-handle going back all the way to 2010. As for the takedown, Indirects were largely unchanged at 36.2%, just below the 38.2% last month, offset by a jump in Directs from 12.7% to 19.0%, both in line with average, which meant that Dealers were left holding just 44.8% of the final allocation, the lowest since February.
If the global equity "markets" were in need of a sharp "horrible news is great news" boost overnight, it came courtesy of Germany's ZEW investor confidence survey, which printed at a stunning 8.6, a plunge from the 27.1 in July and far below the 17.0 expected - the lowest print since December 2012 -largely suggesting that a European triple-dip is all but assured. And if that wasn't enough, strong language from John Kerry, assured to fan the flames of geopolitical instability, came hours ago when the US SecState said even more Russian sanctions may be coming. And just to make sure the NY Fed trading desk has to come up with a new narrative is the latest development in the Russian "humanitarian convoy" saga, which as we reported last night, has departed Russia but which Ukraine is now refusing to allow into its country. All in all, it's is setting up to be another super bullish day in the rigged markets for which all that matters is... Tuesday.
According to yesterday’s Wall Street Journal, the bailed out financial criminals at Goldman Sachs are set to launch the latest and greatest toxic derivative product directly into the portfolios of willing muppets the world over... and it all starts this September. Yes, it’s called the “Fixed Income Global Structured Covered Obligation,” (ironically close to the acronym FIASCO) and no, you will not have a clue what’s in it. No seriously, you won’t have a clue.
Since there is nothing on today's data docket, it will be all about, you guessed it, geopolitical risks, where "consensus" is best summarized by these two Bloomberg headlines:
- Stay USD Long as Geopolitical Risks Loom
- USD is mixed and world stock markets rise as concerns over geopolitical risks ease
That pretty much covers it, although in addition to the Ukraine civil war one can now add an Iraq coup to the list of geopolitical fiascoes instigated by US foreign policy.
When we first brought the market's attention to high-yield credit's flashing red warning, it was shrugged off as unimportant by most - stocks are rallying so who cares (even though we explained in detail why equity investors should care). Now that the mainstream media has all become high-yield bond experts we thought it worth considering how much worse this could get. As Barclays notes, for those keeping track, retail funds have thus far seen 22 consecutive days of redemptions for a total of $16.9bn in assets - the longest streak in history and while the effect of retail selling on valuations has not been negligible, it has also not been proportionate to the magnitude of the outflows (yet).