Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year? At this point in 2014, it’s probably a coin toss. There are several factors in favor of a further rally, to be sure. Corporate profits are still robust, revenue expectations are modest, and long term interest rates remain equity-friendly. On the flip side of the U.S. equity market coin: long term valuations are toppy, plenty of other markets (commodities, bonds) seem to signal an impending global recession, and a host of geopolitical concerns now seem to be hitting a full boil. Also, let’s not forget that the Russell 2000 peaked in, oh, March (1209) and July (1208) and is down 8.8% from that last high. By that measure, equities are already rolling over. It is true that markets climb a wall of worry. Until it falls on them.
- How you know it is all a lie: Pelosi Presses Obama to Talk Up Stronger U.S. Economy (BBG)
- Secret Goldman Sachs Tapes Put Pressure on New York Fed (NYT), Uh, no they don't
- Clashes Break Out at Hong Kong Protest Site (WSJ)
- N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork (BBG)
- Ebola’s Disease Detectives Race to Track Others Exposed (BBG)
- UPS, FedEx Want Retailers to Get Real on Holiday Shipping (WSJ)
- No more mailman at the door under U.S. Postal Service plan (Reuters)
In is only fitting that a week that has been characterized by deteriorating macroeconomic data, and abysmal European data, would conclude with yet another macro disappointment in the form of Markit's sentiment surveys, for non-manufacturing/service (and composite) PMIs in Europe which missed almost entirely across the board, with Spain down from 58.1 to 55.8 (exp. 57.0), Italy down from 49.8 to 48.8 (exp. 49.8), France down from 49.4 to 48.4 (exp. 49.4), and in fact only Russia (!) and Germany rising, with the latter growing from 55.4 to 55.7, above the 55.4 expected, which however hardly compensates for the contractionary manufacturing PMI reported earlier this week. As a result, the Composite Eurozone PMI down from 52.3 to 52.0, missing expectations, as only Germany saw a service PMI increase. And yet, despite or rather thanks to this ongoing economic weakness, futures have ignored all the negative and at last check were higher by 9 points, or just over 0.4%, as the algos appear to have reconsidered Draghi's quite explicit words, and seem to be convinced that his lack of willingness to commit is merely "pent up" commitment for a future ECB meeting. That or, more likely just another short squeeze especially with the "all important" non-farm payrolls number due out in just over 2 hours, which for the past 24 hours has been hyped up as sure to bounce strongly from the very disappointing, sub-200K August print.
Low interest rates are a direct cause of credit bubbles, and this is what is happening in Singapore
One thing we know from history is that people in power tend to become very paranoid about losing it. People who hold power based on fraud and deceit, and who start to lose the support of the masses, are particularly vulnerable to extreme paranoia. This is exactly what I think is happening to people in power throughout the world. From Hong Kong to Scotland. From Catalonia to the Middle East. All across the globe, young people are uniting in protest to achieve the same goal. They see a status quo in power that has destroyed their futures. They see centralized power far from where they live primarily being used by the super rich to become super richer. They are sick of it and they want something else. In fact, they are now beginning to demand something else.
- As we warned in May 2013... Gross Exposes $42 Trillion Bond Market’s Key Flaw in Exit (BBG).... hint: no liquidity
- WTI Crude Slips Below $90 for First Time in 17 Months (BBG)
- Traders Thank Fed for Once-in-Decade Surge in Profit (BBG)
- Islamic State committing 'staggering' crimes in Iraq: U.N. report (Reuters)
- Philippine Islamist militants threaten to behead German on October 17 (Reuters)
- Draghi’s Buying Spree for the ECB Might Start Modestly (BBG)
- Russian Officials Say No Plans for Capital Controls (WSJ)
- Indians Join the Wave of Investors in Condos and Homes in the U.S. (NYT)
- Leader of Mexican drugs cartel captured (FT)
- Dallas Ebola patient vomited outside apartment on way to hospital (Reuters)
While we already documented the crash in Japanese stocks earlier, the biggest market development overnight is the plunge in crude, with both Brent and WTI plunging, the latter sliding under $90 for the first time in 17 months, extending yesterday's selloff after Saudi Aramco cut Arab Light OSP in Asia to 2008 levels. Brent drops to lowest since June 2012. This also confirms that the global slowdown whose can is kicked every so often in a new bout of money printing, is arriving fast. That, and the imminent crackdown on today's Hong Kong protest will likely be the biggest stories of the day, even as the spread of Ebola to the US is sure to keep everhone on edge.
"Crowds pin police against wall, shouting "you can not enter". Police shuttling in huge wooden crates. More gas tonight?!... Wow, crowds surging. Police trying to maintain supply line. Protesters are gearing up for gas - goggles are being passed around.... Police are carrying a boxes labelled "batons" and metal "flammable" tins. Tonight is going to get messy." - SCMP's Bryan Harris
Václav Klaus has made a habit of saying things others shy away from saying, but it doesn’t seem to have done him much harm in the popularity stakes. So here is his latest dose of inconvenient truthiness: "those who are not able to understand the difference (between the Soviet Union and Russia) are simply not looking with open eyes... The US/EU propaganda against Russia is really ridiculous." Yet he feels the freedom to hold - and express - ‘unfashionable’ views in the West is now under increasing threat.
Joshua Wong is too young to drive or buy a drink in a bar – let alone vote – yet, as The Guardian reports, has become the face of the pro-democracy protests in Hong Kong and an inspiration to citizens three times his age.
The meaning of events and market signals differ hugely from country to country, tribe to tribe, generation to generation. Ferguson does not mean the same thing as Hong Kong. Hong Kong does not mean the same thing as Tahrir Square or even Tiananmen Square. Monetary policy does not mean the same thing in Beijing as monetary policy means in Washington, which in turn does not mean the same thing as monetary policy in Paris or Rome. But we have an innate tendency to act as if these signals DO mean the same thing, and we can totally wrong-foot our investments as a result. The biggest thing happening in the world today is the growing divergence between US monetary policy and everyone else’s monetary policy with three HUGE implications: one for investment strategy selection, one for global growth, and one for … (gulp!) gold.
On day four of the OccupyCentral protests in Hong Kong, leaders are expecting the crowds to swell to over 300,000 as National Day celebrations begin. The Chinese government appears to be taking two different approaches to the civil disobedience. First, major crackdowns on the mainland, as FirstPost reports, authorities have detained more than a dozen activists across China and questioned as many as 60 others who expressed support for Hong Kong's pro-democracy protests in recent days. However, the government's approach in Hong Kong appears to be "wait-it-out", a tactic that would rely on Hongkongers not taking part in the protests becoming fed up with the inconvenience caused by the demonstrations. Of course, how long that tactic remains in place (post National Day) is anyone's guess especially as student leaders threaten to escalate protests as their deadline for Leung's resignation looms.
- European Bond Yields Go Negative (WSJ)
- Traveler from Liberia is first Ebola patient diagnosed in U.S. (Reuters)
- Hong Kong Protesters Step up Pressure on Leung to Quit (BBG)
- JPMorgan to face U.S. class action in $10 billion MBS case (Reuters)
- Turkey mulls military action against Islamic State (Reuters)
- Singapore Home Prices Fall for Fourth Straight Quarter on Curbs (BBG)
- Italy's Economic Woes Highlight Dilemma for European Central Bank (WSJ)
- Advanced iOS virus targeting Hong Kong protestors (Reuters)
- Fed Scrutiny of Leveraged Loans Grows Along With Bubble Concern (BBG)
- Mosquito Virus That Walloped Caribbean Spreads in U.S. (BBG)
A quick anecdote that should quickly confirm just how broken everything is: earlier today MarkIt reported European manufacturing data that was atrocious, with both German and European PMIs tumbling to levels not seen since mid-2013, and with Europe's growth dynamo now in a contraction phase clearly signalling what has been long overdue: a European triple dip recession. So what happens? Moments later Germany sells €4.1 billion in 10 Year paper at a record low yield below 1%.... even as the Bundesbank had to retain a whopping 17.84% of the auction, the highest since June, with only €4.663 Bn in bids for the €5 Bn target, the first miss since May 21. So hurray for the central banks, boo for the economy, and as for that mythical creature, once known as bond vigilantes, our condolences: good luck figuring out what the hell just happened, and good luck recalling what a free market is.