Israel

Just imagine how high stocks would be if more jets were shot down in Ukraine, more ground operations were unleashed in Gaza, more sanctions were placed on global growth, more European and US macro data disappointed, more job cuts at major firms, and more European banks declared bankruptcy. Today's farcical Friday surge (with the Nasdaq up 2% from its overnight lows and 30 point rip in the S&P) appears 100% based on the squeezing of "most shorted" stocks (best day in over a month) and the ramping of AUDJPY.  Credit markets ignored the idiocy; Treasury markets ignored it; The USD went nowhere (after EUR dumped on Italy downgrade then recovered). Gold, Silver, and Copper all closed down 2-3% on the week (given back yesterday's gains) as Oil surged 2.2%. VIX dropped over 2 vols to close with a 12-handle (but disconnected notably from stocks at the close). It's not all ponies and unicorns though - Biotechs are down 5% from Yellen's comments and the Russell 2000 closed red for the 2nd week in a row (and still -1% year-to-date). Best Dow Friday in 5 months (up 11 in a row).

"Fixed" - well almost. US equity markets have retraced all the losses suffered post-Israel-escalation (why worry?) but remain (for now) below the levels reached before the MH17 crash headlines hit... Of course, AUDJPY is in in charge along with VIX (as it is Friday after all)...

Health officials in Gaza said 28 Palestinians were killed since the Israeli ground offensive began late Thursday, and as WaPo reports, Prime Minister Benjamin Netanyahu said Friday that he has ordered Israel's military to prepare for "a significant expansion" of its ground offensive into the Gaza Strip, declaring that tunnels built by Hamas could not be destroyed solely through airstrikes. As The Guardian reports, according to military analyst Alex Fishman, writing in Yedioth Ahronoth: "The tanks, which serve as the heart of the assault force, received an order to open fire at anything that moved." Hamas warned Israel of the "dreadful consequences" of the conflict's escalation, while the US urged its close ally to restrict itself to a "precise" operation.

For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.

Residents in the northern Gaza Strip said they could hear the sound of tanks entering from Beit Lahiya as we noted earlier and now the Army has confirmed:

*ISRAEL SENDING TANKS INTO GAZA: ARMY

As NY Times reports, the military released a statement saying the goal of the operation was to "establish a reality in which Israeli residents can live in safety and security without continuous indiscriminate terror." Judging by the images and clips below, they are deadly serious. Hamas warns, “The occupation will pay its price expensively, and Hamas is ready for confrontation.”

Despite an initial attempt to rally after the terrible news out of Ukraine hit, stocks were unable to mount any serious BTFD as uncertainty spread. Despite Bullard's best efforts, bond yields crashed lower (over 7bps today) with 10Y at 2.45% near the lowest close in 13 months. Gold prices jumped over $20 (even as the USD Index flatlined - though JPY strengthened notably as risk-off set in). VIX exploded 3.7 vols (its biggest swing - 45% - since Aug 2011). Equity markets cratered into the close as Israel ground invasion news (A White House Lockdown) added to the concerns leaving all US markets red post-payrolls and red post-Yellen. The S&P 500 dropped 1.18% - its biggest drop in 3 months. The Russell 2000 is now down 2.5% year-to-date.

BREAKING NEWS: A large IDF force has just launched a ground operation in the Gaza Strip. A new phase of Operation Protective Edge has begun.

— IDF (@IDFSpokesperson) July 17, 2014

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Primer On Israeli War In Gaza

What’s changed is the perception that the USA has any role to play any longer even in the diplomatic theatrics. The Middle East is disintegrating faster than any polity in historical memory. It appears that, if anything, the USA has only succeeded in accelerating the process wherever we turn our attentions. Since the 1970s, we haven’t felt the ultimate consequence of trouble in that part of the world, which would be an interruption in the oil supply coming out of there. Simply put, it shapes up as a struggle to the death that will not be impeded by reason, the good intentions of others, or sentimentality.

Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.

If one were so inclined, one could imagine that the relentless barrage of domestic scandals plaguing Obama have been orchestrated with a simple reason: to divert attention from the worst US foreign policy in four decades. And sure enough, even a casual glimpse of all the raging international crises, in which the US is currently embroiled, is enough to make one wonder if the next global crisis will be fought not in the capital markets but in the actual battlefield. As the WSJ recounts, "a convergence of security crises is playing out around the globe, from the Palestinian territories and Iraq to Ukraine and the South China Sea, posing a serious challenge to President Barack Obama's foreign policy and reflecting a world in which U.S. global power seems increasingly tenuous. The breadth of global instability now unfolding hasn't been seen since the late 1970s, U.S. security strategists say, when the Soviet Union invaded Afghanistan, revolutionary Islamists took power in Iran, and Southeast Asia was reeling in the wake of the U.S. exit from Vietnam."

Another round of overnight risk on exuberance helped Europe forget all about last week's Banco Espirito Santo worries, which earlier today announced a new CEO and executive team, concurrently with the announcement by the Espirito Santo family of a sale of 4.99% of the company to an unknown party, withe the proceeds used to repay a margin loan, issued during the bank's capital increase in May. This initially sent the stock of BES surging only to see it tumble promptly thereafter even despite the continuation of a short selling bank in BES shares this morning. Far more impotantly to macro risk, it was that 2013 staple, the European open surge in the USDJPY that has reset risk levels higher, while pushing gold lower by over 1% following the usual dump through the entire bid stack in overnight low volume trading. Clearly nothing has been fixed in Portugal, although at least for now, the investing community appears to have convinced itself that the slow motion wreck of Portugal's largest bank even after on Sunday, Portugal’s prime minister said taxpayers would not be called on to bail out failing banks, making clear there would be no state support for BES.