Market Conditions

While we found it modestly comedic (and certainly ironic) that CNBC's crack team celebrated the recovery from the initial knee-jerk drop in stocks after the FOMC by top-ticking that suspension of reality; we suspect the following post-mortem from Goldman on the minutes is what confirmed concerns across the street... "Minutes from the July 30-31 FOMC meeting were generally consistent with our view that tapering of asset purchases is likely to occur at the September meeting, coincident with an enhancement of the forward guidance."

While some read the FOMC statement in July as more 'dovish' than expected - even though the market's performance since suggests otherwise -, it appears the actual conversations from the minutes point in a more 'Taper'-on direction (though clearly uncertainty remains high):

• *A FEW ON FOMC URGED PATIENCE, OTHERS FAVORED QE TAPERING SOON
• *FOMC MINUTES SHOW BROAD SUPPORT FOR BERNANKE TAPERING TIMELINE
• *FOMC PARTICPANTS SAID SEQUESTRATION 'CLOUDED THE OUTLOOK'
• *FOMC PARTICIPANTS PREDICTED GDP TO PICK UP IN 2ND HALF 2013
• *ALMOST ALL FOMC PARTICIPANTS BACKED 'CONTINGENT OUTLOOK' FOR QE
• *FOMC SAID JUNE PAYROLL REPORT SHOWED 'CONTINUED SOLID GAINS'

Pre-minutes: S&P (Fut) 1646, 10Y 2.8125%, USD 81.2, WTI $104.11, Gold $1371

The July FOMC statement was a bit more dovish than expected, including (1) an explicit reference to the risks posed by higher mortgage rates, (2) more dovish language on below-target inflation, and (3) a statement that the Committee "reaffirmed its view" that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends. We will read the minutes from the July meeting with an eye toward any clues on the likelihood of near-term tapering and potential changes to the forward guidance.

How do we protect the mining operation so that it can operate in both good times and bad while at the same time generating profits that grow with the gold price?

If there was one thing the bulls did not want this morning, it was a goldilocks report in the trifecta of economic data, which included CPI, Initial Claims and the Empire Fed. Sadly, Goldilocks is precisely what they got with CPI printing just as expected, up 0.2% from June, and up 2.0% from a year ago (ex food and energy also in line at 0.2%), claims coming modestly better than expected at 320K vs Expectations of 335K, and finally the Empire Fed offsetting the sligh claims beat by printing at 8.24 on expectations of 10.00, down from 9.46 in July. As a reminder, only a big economic shock could have derailed the Fed's September taper intentions. So far it is not coming, which means only the August NFP report is left.

It is perhaps too soon to tell if the market is beginning a topping process or just pausing during the current advance.  The bulls will argue valuations, Fed interventions and low interest rates.  They could be right for a while longer but not for the reasons expressed as much as the continued push of panic buying driven by current price momentum.  However, given the current set of circumstances, most investors fail to realize about the current market environment is that with stocks already stretched to extremes, trading driven by computerized programs and near record levels of leverage - a break in the market could lead to a very fast, unprecedented and unanticipated plunge in asset prices... "Still, we know that the same strenuously overvalued, overbought, over bullish syndrome observed in 1972, 1987, 2000, 2007 and even 1929 (on imputed sentiment data) is already in place here, and that the losses from such extremes have been spectacular."

• JPMorgan Nears Settlement With SEC on London Whale Loss (BBG)
• Without even a wristslap: Iksil to face no U.S. charges in 'Whale' probe (Reuters)
• China’s Credit Expansion Slows as Li Curbs Shadow Banking (BBG)
• China slowdown shows signs of abating (FT), even as...
• Australia central bank Lowers Growth Outlook as Economy Transitions From Mining (BBG)
• SAC Business Plan Goes to Judge, Plan Would Allow Firm to Maintain Business Operations but Restrict Its Ability to Move Assets (WSJ)
• Another buyer of Herbalife? - Norway’s oil fund plans to turn active (FT)
• Mark Carney plays down scepticism over interest rate policy (FT)
• Orders Evaporate for Celebrity Perfumes (WSJ)

From Bill Gross: "Capitalism depends on the successful offering and capture of carry in its multiple forms. If capitalism is faltering (recession) in developed/developing economies and yields are close to the zero bound, then portfolios should have less carry than before. If prospects are mediocre, portfolios should be overweight carry. If prospects are very bright, they should again be underweight bond carry. If we can be mindful of this, and accurately forecast it, we will be successful. This may be the most important conceptual change I have ever written about in an Investment Outlook. Readers who have stuck with this Outlook at least to this point have a scoop, if not a magic feather."

First it was the TBAC's May presentation "Availability of High Quality Collateral" piggybacking on reasoning presented previously by Credit Suisse. Then JPM's resident "flow and liquidity" expert Nikolaos Panigirtzoglou rang the bell on regulatory changes to shadow banking and how they would impact the repo market and collateral availability (and transformation) in an adverse fashion. Now, it is the turn of Barclays' own repo chief Joseph Abate to highlight a topic we have discussed since 2009: the ongoing contraction in quality collateral as a result of transformations in shadow banking and the Fed's extraction of quality collateral from traditional liquidity conduits (i.e., QE's monetization of bonds). To wit: "Several recent regulatory proposals will increase the pressure on banks to reduce assets that carry low risk weights. Repurchase agreements are a large source of banks’ low-risk assets, and we expect banks to reduce their matched book operations in response to these proposals."

Compared to last week's macro-event juggernaut, this week will be an absolute bore, although with a bevy of Fed speakers on deck - both good and bad cops - there will be more than enough catalysts to preserve the "upward channel" scramble in the S&P and the zero volume levitation to new all time daily highs despite the lack of daily bad news. Speaking of Fed speakers, we have Fisher today, Evans’ tomorrow followed by both Plosser and Pianalto on Wednesday.  The key overnight data point was the continuation of July PMIs out of Europe, this time focusing on the service industry. As Goldman summarizes, the Final Euro area Composite PMI for July came in at 50.5, marginally above the Flash reading and consensus expectations (50.4). Relative to the June final reading, this was a sold 1.8pt increase, and building on consecutive increases in the past three months, the July Euro area PMI stands 4.0pts above the March print. Solid increases were observed across all of the EMU4 in July, most notably Italy. The July reading is the highest Euro area PMI level observed since July 2011.

One year on from the "whatever it takes" speech and all appearances suggest Draghi's all-in move with the imaginary OMT 'worked. European sovereign spreads have compressed dramatically, European stock indices are near their highs, European financials are doing great. Of course, record unemployment rates, record loan delinquencies, record drops in house prices, and record deposit outflows can all be ignored because no matter what, Draghi will do "whatever it takes." Except, as JPMorgan notes, the excess cash in the Euro area banking system continues to decline reaching EUR230bn, closer to the so-called inflection point at which money market rates, i.e. EONIA and repo rates, are responding more pronouncedly to changes in the excess cash. Bank funding is becoming increasingly volatile since the 2nd LTRO repayment and the trend shows no sign of abating. We suggest Mrs. Merkel will be on the phone telling Mr. Draghi to "get back to work," - at least until September 23rd anyway.

• The Citadel-SAC connection (BBG) - just wait until the Citadel-FRBNY connection emerges
• Letter backs Yellen for Federal Reserve role (FT) - or said otherwise, the Democrats would like the Fed to rule (and monetize deficits) for ever
• Obama, Republicans gear up for bruising U.S. budget fight (Reuters)
• Up for Debate at Fed: A Sharper Easy-Money Message (WSJ)
• UBS to Pay $885 Million to Settle U.S. Mortgage Suit (BBG), Banks shiver as UBS swallows $885 million U.S. fine (Reuters)
• Japan finmin Aso: CPI shows gradual shift to inflation from deflation (Reuters)
• Japan's PM calls for high-level talks with China (Reuters)
• Holder Targets Texas in New Voting-Rights Push (WSJ)
• Another Nightmareliner incident: Probe opened as Air India Boeing Dreamliner oven overheats midair (Reuters)
• Samsung Boosts Capital Spending as High-End Phone Demand Slows (BBG)

How far has the global economy come in its recovery from the financial crisis? Citi's ten-chart tour highlights that even now, six years after the financial crisis first erupted, the global recovery continues to face some very powerful headwinds. Among the most notable are drag associated with ongoing efforts to consolidate private-sector balance sheets, challenges with managing high levels of public debt and the eventual unwinding of central bank balance sheets, the still-incomplete pattern of adjustment in Europe, and deteriorating demographics across the advanced economies. We see these challenges as being mainly lodged in the advanced economies, where the global financial crisis raged most intensively. But the resulting softness of advanced-economy demand has become an increasing obstacle for growth in the emerging markets. The bottom line is that investors, central planners, and politicians alike are frustrated by the slow pace of global recovery.

In Portugal, it seems the compromise deal between the ruling party and its junior partner is back on track following the failure of all-party talks last week. As Citi notes, PM Coelho is on the wires saying he will once again reshuffle his cabinet, with Paulo Portas likely to become deputy PM in charge of negotiating with the Troika. Portas has made it clear he wants to discuss a softening of the terms of the country’s bailout program which obviously will make for a bumpy road ahead in terms of relations with the Troika, but is probably necessary if the ruling coalition is to hold on to power amid growing popular unrest. While debt restructuring remains a tough proposition (given the contagion and precedent - Portugal debt-to-GDP is lower than Italy's for instance), the likelihood of a further substantial bailout (up to EUR76bn) remains high.

When we reported on the Initial Claims print we said that "we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs." Well, we just got the all time highs, first in the DJIA for moments ago in the S&P cash as well, following news that the Philly Fed soared from 12.5 to 19.8, slamming expectations of a modest decline to 8.0, and despite a drop in New Orders from 16.6 to 10.2, and a crash in Inventories from -6.6 to -21.6, the headline print coming at the highest since March 2011.