Market Sentiment

While none of the following analysis suggests that a market crash is imminent, it does imply that we are very late in the current market and economic cycle. A market melt up into 2015 would certainly be exciting, but should be used to sell overly priced assets to what will probably be a dwindling supply of "greater fools."

Deny it.  Engage in all kinds of mental gymnastics to dismiss it if you must,  but the fact is the US dollar is rising, and not just because of negative developments abroad, but positive economic developments in the US.  

A look at the price action of the dollar, S&P 500 and US 10-year yields as if analysis matters. 

The key event overnight was the release of European Q3 GDP data, which saw Germany averting a recession by the narrowest of margins when following a -0.2% drop in Q2 economic growth, Germany grew by the smallest amount possible in Q3, or 0.1%, in line with expectations, thus averting two consecutive quarters of decline, the technical definition of a recession. The French economy likewise posted a modest increase in Q3, although one wonders how aggressively the data had to be fudged for a country whose PMIs all indicate a -1% or greater contraction. Italy however was less creative with its use of "hookers and blow", and continued its recession with a 3rd negative print, contracting at -0.1% as expected, while Portugal also missed third quarter growth estimates.

Gold and crude oil have been in a slow motion free fall of late, even as U.S. equities rally but ConvergEx's Nick Colas looks at the value of each asset class relative to the other two and assess their historical relationship.  For example, you currently need 1.72 ounces of gold at $1178 to “Buy” one S&P 500 index at 2032.  That is cheap to the 30-year average of a 1.86x ratio, putting fair value on U.S. stocks 8% higher. Separately, it currently takes 25.1 barrels of crude to buy the S&P 500, versus the 30-year average of 27.8, making stocks look cheap by 11%.  Closing out this analytical triangle: you need 14.5 barrels of oil to buy an ounce of gold, but the 30-year average is 16.6.  Bottom line using these long-term ranges: U.S. stocks look mildly cheap to oil and gold, but drops in those commodities would erase the difference just as easily as a further rally in stocks.  Gold looks cheap relative to oil and should be $170 higher, or oil should trade closer to $71.

Following Friday's sticksave, where the usual 3:30 pm ramp brigade pushed futures just barely green into the close despite a miss in the payrolls report which the spin brigade did everything in its power to make it seem that the hiring a few hundred thousand young female waitresses was bullish for the economy, overnight we have seen a listless session, dominated by more USD-profit taking as increasingly more wonder if the relentless surge higher in the Greenback is massively overdone, especially considering that stocks are screaming "worldwide recession" excluding the US, if only for now, because as Goldman explained soaring USD means plunging Oil, means tumbling E&P capex, means lower GDP, means less growth, means lower corporate profits, and so on. That said, we expect the now trivial Virtu JPY momentum-ignition algos to activate shortly, pushing the USDJPY and its derivative, the S&P500, higher in the coming minutes, and certainly before the US market opens in under 3 hours.

Remember when the Fed (and their Liesman-esque lackies) tried to convince the world that it was all about the 'stock' - and not the 'flow' - of Federal Reserve Assets that kept the world afloat on easy monetary policy (despite even Bullard admitting that was not the case after Goldman exposed the ugly truth). Having first explained to the world that it's all about the flow over 2 years ago, it appears that, as every equity asset manager knows deep down (but is loathed to admit for fear of losing AUM), of course "tapering is tightening" - as the following chart shows, equity markets are waking up abruptly to that reality. So no wonder Bullard is now calling for moar QE - he knows it's all there is to fill the gap between economic reality and market fiction.

If there is a cabal running things, they are not doing a good job.  Maybe they are not really running things.  Here is what next week looks like if we did not know it was all pre-determined.  

Here is why the center will hold.

As if to rub salt into the wounds of Europe's death by a thousand-downgrades, Goldman Sachs followed up Germany's decision to drastically cut its growth outlook for 2014 (+1.2% from +1.8%) and 2015 (+1.3% from +2.0%) by slashing its forecast for Europe in Q3 to a triple-dip recessionary -0.15% GDP growth. This is dramatically below an "over-optimistic" consensus of +0.35% as incoming data is notably weaker than expected. The DAX remains well below the crucial 9,000 level (having plunged early in the European session) and bund yields have collapsed to new record lows.

Global economic growth remains weak and vulnerable and the global financial system remains very fragile. The ebola virus has the potential to be the straw that breaks the proverbial camel’s back. 

Stocks and commodities fell globally today due to concerns about the spread of Ebola and declining economic growth. Precious metals bounced from near multi month lows.

The longer Abe’s policies fail to deliver the hoped-for economic results, the more intensely they will be implemented.

After being solidly ignored for weeks, suddenly the Scottish independence referendum is all anyone can talk about, manifesting itself in a plunge in the GBPUSD which ha slide over 100 pips in the past 24 hours, adding to the slide over the past week, and is now just above 1.61, the lowest since November 2013. In fact, the collapse of the unionist momentum has managed to push back overnight news from Ukraine, major Russian sanction escalations, Japan GDP as well as global trade data on the back burner. Speaking of global trade, with both China and Germany reporting a record trade surplus overnight, with the US trade deficit declining recently, and with not a single country in the past several month reporting of an increase in imports, one wonders just which planet in the solar system (or beyond) the world, which once again finds itself in a magical global trade surplus position, is exporting to?

Even as the NATO summit began hours ago in Wales, conveniently enough (for Obama) at the venue of the 2010 Ryder Cup, so far today geopolitics has taken a backseat to the biggest event of the day - the ECB's much hyped and anticipated announcement. So anticipated in fact that even as it has been priced in for the past month, especially by BlackRock which is already calculating the Christmas bonus on its "consultancy" in implementing the ECB's ABS purchasing program and manifesting itself in record low yields across Europe's bond market, Reuters decided to milk it some more moments ago with the following blast: "Plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros are on the table at Thursday's European Central Bank policy meeting..." The notable being the size of the program, which at €500 billion, is precisely what Deutsche Bank said a week ago the size of the ABS program would be. Almost as if the bank with the world's biggest derivative exposure is helping coordinate the "Private QE"...

Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place. We seem to be close to the endgame.