It's almost as if the manic-depressive market has gotten exhausted with the script of surging overnight volatility, and following a week of breathless global "taper tantrumed" trading, tonight's gentle ramp seems modest by comparison to recent violent swings. With no incremental news out of China, the Shanghai composite ended just modestly lower, the Nikkei rushed higher to catch up to the USDJPY implied value, Europe has been largely muted despite better than expected news out of Germany on the unemployment front. This however was offset by a decline in Europe's May M3 (from 3.2% to 2.9%) while bank lending to NFCs and households simply imploded, confirming that there is no hope for a Keynesian, insolvent Europe in which there isn't any credit creation either by commercial banks or by the central bank (and in fact there is ongoing deleveraging across the board). US futures are rangebound with ES just shy of 1,500. We will need some truly ugly data in today's economic docket which includes claims, personal income/spending and pending home sales to push stocks that next leg higher. To think the S&P could have been higher by triple digits yesterday if the final Q1 GDP has just printed red. Failing that, the Fed's doves jawboning may be sufficient for a 100+ DJIA points today with Dudley, Lockhart and Powell all set to speak later today.
Year-over-year inflation in Venezuela accelerated to 35.2% - up from 20.1% YoY in December. Goldman is concerned as the 6.1% MoM (the highest on record) in May means inflation is now endemic and the economy could easily veer from the current stagflation equilibrium into the dangerous and slippery road to hyperinflation. In a sentence that rings all to close to home, they sum up: All in all, we are increasingly concerned with the inflation and monetary dynamics in Venezuela as the classical Sargent and Wallace (1981) “unpleasant monetarist arithmetic” of severe fiscal dominance brought about by growing monetization of fiscal deficits and very weak policy credibility could easily degenerate in a recessionary hyper-inflationary spiral. That must mean it is time to buy the Caracas Stock Index (+72% YTD, +600% since Jan 2012)?
One look at the 5%+ plunge in the Nikkei overnight and one would be allowed to wonder if this was it for Abenomics: with a 15% drop from recent highs, and the TOPIX Real Estate index down by more than 20%+ since mid-April, entering a bear market, what's worse is that even the "wealth effect" Mrs Watanabe fanatics would be excused from having much hope going forward. The problem, however, is that in a world in which only the USDJPY matters as a risk signal, and only the stock market remains as a last bastion of "hope", the overnight weakness pushing the dollar yen to just 50 pips above 100 threatened to crush the manipulated rally and force everyone to doubt the sustainability of central planning. So, sure enough, literally seconds we got the much needed stick save without which everything could have come tumbling down, namely based on an unsourced article out of Reuters that Japan's Public Pension Fund is considering a change to its portfolio strategy that could allow domestic equity share of investments to rise in rallying market. The immediate result was an instantaneous surge in the USDJPY which in turn dragged global risk higher across the board, simply due to what algos deemed as yet another procyclical last minute rescue. More importantly this was nothing but a squeeze catalyst coming at just the right time before market open to prevent a rout in global equities. Ironically, that we are back to the Reuters "sticksave" unsourced article, indicates just how weak the reality behind the scenes must be.
There is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.
EU Extends Deficit Deadlines For Most European Countries, Admits Structural Adjustment Failure, Kills AusteritySubmitted by Tyler Durden on 05/29/2013 08:22 -0400
Moments ago, the following European Commission website hit the interwebs, which can be summarized as follows:
- EU EXTENDS DEFICIT DEADLINE FOR PORTUGAL TO 2015
- EU EXTENDS DEFICIT DEADLINE FOR NETHERLANDS TO 2014
- EU EXTENDS DEFICIT DEADLINE FOR SPAIN UNTIL 2016
- EU RECOMMENDS LIFTING EXCESSIVE-DEFICIT REGIME FOR ITALY
- EU SAYS 20 STATES CURRENTLY UNDER EXCESSIVE-DEFICIT PROCEDURES
Translation: the theatrical spectacle of Europe's austerity, which never really took place, is finally over. Going forward political incompetence will henceforth be known as just that: incompetence, and elected rulers will not be able to pass the buck to evil, evil, "austerity." More importantly, Europe has also proven without a doubt, that any "structural adjustments" on the continent are impossible, and that governments are locked in a spend till you drop mode.
Following yesterday's blow out in US bond yields, which have continued to leak wider and are now at 2.20% after touching 2.23%, the overnight Japanese trading session was relatively tame, with the 10Y JGB closing just modestly wider at 0.93%, following the market stabilization due to a substantial JPY1 trillion JOMO operation which also meant barely any change to the NKY225, while the USDJPY slipped in overnight trading below the 102 support line and was trading in the mid 101s as of this moment, pulling all risk classes lower with it. There was no immediate catalyst for the sharp slide around 3am Eastern, although there was the usual plethora of weak economic data.
“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.”
With China and Japan markets closed overnight, activity has been just above zero especially in the critical USDJPY carry, so it was up to Europe to provide this morning's opening salvo. Which naturally meant to ignore the traditionally ugly European economic news such as the April Eurozone Economic Confidence which tumbled from a revised 90.1 to 88.6, missing expectations of 89.3, coupled with a miss in the Business Climate Indicator (-0.93, vs Exp. -0.91), Industrial Confidence (-13.8, Exp. -13.5), and Services Confidence (-11.1, Exp. -7.1), or that the Euroarea household savings rates dropped to a record low 12.2%, as Europeans and Americans race who can be completely savings free first, and focus on what has already been largely priced in such as the new pseudo-technocrat coalition government led by Letta. The result of the latter was a €6 billion 5 and 10 year bond auction in Italy, pricing at 2.84% and 3.94% respectively, both coming in the lowest since October 2010. More frightening is that the Italian 10 year is now just 60 bps away from its all time lows as the ongoing central bank liquidity tsunami lifts all yielding pieces of paper, and the global carry trade goes more ballistic than ever.
Earlier in the week we discussed the dismal downward spiral that bank lending was implying for the euro-zone. Today, we get further confirmation that the credit creation business in Europe, the very life-blood of the pump-at-all-costs Keynesian economic world in which our super-inflated debt economies now live, is dead in the water. Not only did M3 come out well below expectations at 2.6% YoY (vs 3% Exp.) but loans to the private sector remain drastically in the red. The fragmentation across the individual nations is dramatic, indicating that even if Draghi were to cut rates next week it will be largely ineffective - given overnight rates are already close to zero and demand appears absolutely non-existent (due to balance sheet destruction). Of course, that is the entire point of the central bank, to lower the cost of funding to a point where it's impossible to refuse (force feed supply) but with the LTRO repayments an explicit tightening, banks delevering, and collateralizable assets in very short supply, Draghi will have to look long and hard to find an extraordinary measure to solve this vicious spiral.
While the main, if completely irrelevant, macroeconomic news of the day will be the first estimate of US Q1 GDP due out later today, perhaps the best testament of just how meaningless fundamental data has become was the scheduled BOJ announcement overnight in which Kuroda's merry men simply stated what was expected by everyone: the Japanese central bank merely repeated its pledge to double the monetary base in two years. The lack of any incremental easing, is what pushed both the USDJPY as low as 98.20 overnight (98.60 at last check), over 100 pips from the highs, and has pressured the Nikkei into its first red close in days, and shows just how habituated with the constant cranking up of the liqudity spigot the G-7 market has truly become.
The week ahead brings key leading indicators of global activity. The flash PMI's in China and Euro area will be published on Tuesday. Bloomberg consensus expects the China flash to be slightly lower than the previous reading and that the Euro area flash releases for manufacturing and service activity will rise slightly. In addition, Korean 20-day export data for April will provide a good guide to both the external sector in Korea and the likely momentum of Asian exports more broadly. For the same reasons, Taiwan export orders are worth a look as well. The week ahead also provides Q1 GDP prints in US, UK, and Korea. Goldman expects US GDP to rise by 3.2%. The Australia CPI print may open the door to an RBA rate cut as soon as May and Japanese CPI is likely to underscore why the BoJ policy has shifted aggressively. Friday also brings an update of the BoJ's outlook, along with the next BoJ meeting (unchanged policy expected).
After leaving rates unchanged and following Kuroda's efforts overnight, it appears Draghi had to do something in his press conference. Despite Barroso's assurances that the worst of the crisis is over, ECB's Draghi admits:
*DRAGHI SAYS ECONOMIC WEAKNESS EXTENDED INTO BEGINNING OF YEAR
*DRAGHI SAYS RISKS TO ECONOMIC OUTLOOK ARE ON DOWNSIDE
*DRAGHI SAYS RECOVERY IN 2H IS SUBJECT TO 'DOWNSIDE RISKS'
*DRAGHI: WEAKNESS IS EXTENDING TO COUNTRIES W/OUT FRAGMENTATION
*DRAGHI SAYS ECB WILL ASSESS DATA AND STANDS READY TO ACT
This 'negativity' jawboning, which is really nothing new to anyone who looks at real data, has battered EURUSD 80 pips lower and implicitly smacked S&P 500 futures down 5-6 points as the verbal currency wars continue.
Those who were transfixed by whether Cypriots would rumble and unleash their anger at the €300/day dispensing ATMs formerly known as bank branches this morning, may have missed what probably was the most important monthly chart coming out of Europe - that showing aggregate money (M3) growth and, far more importantly, loan creation. Those who did pay attention will know that in February M3 grew quite obediently in a Eurozone flush with cash, this time by a respectable €15 billion, or 3.1% y/y, after €37 billion in January (of which, however a whopping €47 billion was M1 so the balance actually declined). Of course, this was the easy part: creating money via various central bank conduits has never been the issue: the concern has always been getting that money into private consumer hands through loan creation. And it is here that things just keep on getting worse by the day. Because in a continent in which there is no confidence whatsoever: no confidence in the banks, no confidence in the financial system, no confidence in end demand, no confidence in any reported data, no confidence that one's deposits won't be confiscated tomorrow, and last but not least no confidence that a sovereign nation won't just hand over its sovereignty to the Troika tomorrow, nobody is willing to take on additional loans and obligations. This can be seen in the dramatic divergence between European money creation (blue line), and the bank lending to the private sector (brown), which is at or near an all time record year over year low. So much for restoring confidence in Europe.
While the news flow is dominated by Cyprus, it will be important to not lose sight of the developments in Italy, where we will watch the steps taken towards forming a government. The key release this week is likely to be US consumer confidence. Keep a watchful eye on the health of the consumer in the US after the tax rises in January. So far, household optimism and demand has held up better than expected. The IP data from Taiwan, Singapore, Korea, Thailand, Japan will provide a useful gauge on activity in the region and what it reflects about global activity, however Chinese New Year effects will need to be accounted for in the process.
All eyes should remain focused on Cyprus today, especially since there is no data being reported elsewhere. Financial markets closed Friday on a positive note, as an agreement on Cyprus appeared to be taking shape and a minor relief rally across most asset classes overnight vindicated hopes of a positive outcome as details of the detail were announced overnight. More clarity is still required on some aspects of the agreement (deposit and bondholders) but the fact that the national parliament does not need to vote again should stop the deal from unravelling as it did last week. Whether this is enough to restore confidence and prevent a possible cautionary deposit flight from Cyprus remains to be seen.