Investor Sentiment

After learning that it snowed in China this winter following the release of the abysmal February Flash HSBC PMI numbers, we found out that there had also been snow in Europe, following misses across virtually all key French, German and composite PMIs with the exception of the German Services PMI which was the sole "beater" out of 6. To wit:

• Eurozone PMI Manufacturing (Feb A) M/M 53.0 vs Exp. 54.0 (Prev. 54.0); Eurozone PMI Services (Feb A) M/M 51.7 vs Exp. 51.9 (Prev. 51.6)
• German Manufacturing PMI (Feb A) M/M 54.7 vs. Exp. 56.3 (Prev. 56.5); German PMI Services (Feb A) M/M 55.4 vs Exp. 53.4 (Prev. 53.1)
• French PMI Manufacturing (Feb P) M/M 48.5 vs. Exp. 49.6 (Prev. 49.3); French PMI Services (Feb P) M/M 46.9 vs. Exp. 49.4 (Prev. 48.9)

Of course, economic data is the last thing that matters in a manipulated market. Instead, all that does matter is what the USDJPY does overnight, and as we forecast yesterday, the USDJPY 102 tractor beam is alive and well and managed to pull equity futures from a -10 drop overnight to nearly unchanged, despite the now traditional pattern of USDJPY selling during the overnight session and buying during the US session.

Crisis was averted. Or was it just put off for another day?

In essence, you need to be selling strength.

But at the end of the day, if your creditors lost faith in your ability to repay it… it’s GAME OVER. This is hitting the emerging market space today.

Asset-gatherers and talking-heads are in full panic mode. Stocks tumbled ince again today and there was very little "off the lows" talk. The "turmoil" panic in the hearts and minds of every Wall Street strategist palpable as the Fed failed to save us from another down day. Trannies, Russell, and the Dow are down around 5.5% from their highs; the S&P down around 4%; and the Nasdaq around 4.5% from its multi-year highs last week. Today's plunge of over 35 points the S&P futures from the "where are all the sellers, EM is fixed" post-Turkey highs at 1801 is a very sizable outside range day. Of course it was all about the ongoing unwind of levered JPY carry trades as 102 becomes crucial to any bounce in stocks. VIX rose 1.7 vols to 17.5%; credit spreads popped notably wider post FOMC; EM FX turmoiled considerably lower and while the USD was stable (there was plenty of puking in AUD and JPY). Treasury yields tumbled to fresh 10 week lows (10Y -8bps at 2.66% at the lows). Gold and silver rallied post-FOMC and recovered yesterday's monkey-hammering losses.

If we break below these... LOOK OUT BELOW.

The "Mixed Signals" from 2 weeks ago, which morphed into last week's clues, must mean something this week as the markets had their worse day in 7 months on Friday.

It's Risk Off time.

Things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, when EM revulsion once again hit participants, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%.  And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?

One of the bigger stories overnight is Hilsenrath's latest communication from the Fed which once again simply paraphrases the status quo opinion, namely which is that the Fed will taper by another $10 billion on January 29, reducing the total monthly flow to $65 billion. "The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments." Of course, should the Fed not do that, as the Hilsenrath turned to Hilsen-wrath after all those Taper rumors in September ended up being one giant dud, one can once and for all completely ignore the WSJ reporter, who will have lost all his Fed sources and is now merely an echo chamber of consensus. What is notable is that the result of the latest mouthpiece effort, the USD is stronger, which means USDJPY is higher, which means US equity futures are flying.... on less QE to be announced. We eagerly await for this particular correlation pair to finally flip. The other big story, of course, is the already noted well-telegraphed in advance PBOC liquidity injection ahead of the Chinese Lunar New Year, and ahead of a potential January 31 Trust default which will certainly shake the foundations of the Chinese shadow banking system to the core. Not helping nerves was last night's announcement by Zhang Ming, a researcher and director of the international investment department at the Chinese Academy of Social Sciences, that "trusts and shadow banking will see defaults this year, and this is a good thing." Let's circle back in 6 months to see just how good it is.

At these levels of bullish sentiment, fewer bulls isn't a contrarian signal but a sign that there are fewer investors willing to push the market higher.

Folks, I wish I had the answers for you this week.

These names can fall farther than investors ever think once the downside momentum kicks in......

We have asked (and answered) this question a number of times in recent weeks. Ignoring for a moment the bubble-trajectory, hope-expectations, and investor sentiment, as ex-Morgan Stanley-ite Gerard Minack notes, equity markets in 2013 appeared to completely ignore macro fundamentals. For 2014, as we warned here, the dream of moar multiple expansion may be over. With the Fed desperate to convince the world that strong language is just as effective as 100s of billions of dollars in liquidity provision, we suspect the 'wedge' between hope and reality will compress (significantly)...

Gold is slightly higher today but lower this week. Investor sentiment remains extremely bearish but physical buyers continue to accumulate at these low prices. The UK Royal Mint has run out of 2014 British gold sovereigns due to unprecedented demand.

That's the conundrum investors must face if they want in to this market now.