Market Sentiment

"According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month. When these fields were each producing 500,000 bpd that legacy decline therefore amounted to 33,000 bpd per month per field. With both fields now producing 1 million bpd the legacy decline is 65,000 bpd per month. Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years."

We are beginning to see signs of a market top.

2013 was a stellar year for stocks, but how will the markets evolve in 2014? Here is our sneak preview... 

The biggest bubble is in investors' belief that there is no risk.

Western central banks have tried to shake off the constraints of gold for a long time, which have created enormous difficulties for them. They have generally succeeded in managing opinion in the developed nations but been demonstrably unsuccessful in the lesser-developed world, particularly in Asia. It is the growing wealth earned by these nations that has fuelled demand for gold since the late 1960s. There is precious little bullion left in the West today to supply rapidly increasing Asian demand, and it is important to understand how little there is and the dangers this poses for financial stability.

If the London Whale trade was JPM selling CDS in tranches and in whole on IG9 and then more, and then even more in an attempt to corner the entire illiquid IG9 market and then crashing and burning spectacularly due to virtually unlimited downside, Goldman's top trade #5 for 2014 is somewhat the opposite (if only for Goldman): the firm is inviting clients to sell CDS on the junior Mezz tranche (3%-7%) of IG21 at 464 bps currently, where Goldman "would apply an initial spread target and stop loss of 395bp and 585bp, respectively. Assuming a one-year investment horizon, the breakeven spread on this trade is roughly 554bp (that is, 90bp wider than where it currently trades)." In other words, Goldman is going long said tranche which in an environment of record credit bubble conditions and all time tights across credit land is once again, the right trade. Do what Goldman does and all that...

An overview of recent developments, include the political developments in the US Senate, that may weigh on the dollar in the days ahead.  

An overview of the near-term US dollar outlook.  Not thinking it is crashing and burning next week simply because it is not backed by gold or because the Fed is engaged in QE.  

The following Top Ten Market Themes, represent the broad list of macro themes from Goldman Sachs' economic outlook that they think will dominate markets in 2014.

1. Showtime for the US/DM Recovery
2. Forward guidance harder in an above-trend world
3. Earn the DM equity risk premium, hedge the risk
4. Good carry, bad carry
5. The race to the exit kicks off
6. Decision time for the ‘high-flyers’
7. Still not your older brother’s EM...
8. ...but EM differentiation to continue
9. Commodity downside risks grow
10. Stable China may be good enough

They summarize their positive growth expectations: if and when the period of stability will give way to bigger directional moves largely depends on how re-accelerating growth forces the hands of central banks to move ahead of everybody else. And, in practice, that boils down to the question of whether the Fed will be able to prevent the short end from selling off; i.e. it's all about the Fed.

While the Dow has quietly added over 200 points in the last 2 days, the potential for Kuroda and Abe to embark on QQQE has sent Japan's Nikkei 225 up a magnificently suitable (given the utterly dismal macro data from yesterday) 700 points in the same period. Somehow this jerk higher to near the big collapse-day highs in May makes sense to someone (as TEPCO announces yet another leak). Meanwhile, across the sea, Chinese money-markets are exploding. The last 2 days have seen a combination of no operations yesterday and a big lift in rates today which spiked overnight repo-rates to 5.32% - the highest in 5 months if it closed there - as clearly smaller banks are desperate for liquidity. FX markets are seeing weakness continue in Indonesia, Thailand, and the Philippines. So, all-in-all, total chaos...

If Obama’s budget projections prove accurate, the National Debt will top $20 trillion in 2016, the final year of his second term. That would mean the National Debt increased by 87%, or $9.34 trillion, during his two terms.

A full summary about the only event the market is focused on today.

It has been a quiet start to Quadruple Witching Friday (expiration of stock index futures, stock index options, stock options and single stock futures) but expect that to change, as erratic price action is a recurring hallmark of Quad Witches, especially with persistent low volume and markets that tend to shut down for no reason. So far stocks have traded steady in Europe this morning, credit spreads widened and Bunds traded in positive territory as market participants positioned for the much-anticipated German elections which are to be held on Sunday, with exit polls to be made available after the close of polling stations at 6pm local time. Ahead of that, and as reported here previously, Germany’s AfD Eurosceptic party could win enough support in the general election on Sunday to gain seats in the German Bundestag, an opinion poll published for a leading newspaper has forecast for the first time. Basic materials and utilities underperformed in Europe, with RWE trading sharply lower in Germany after the company announced plans to cut its dividend by half (and with the Adidas fiasco yesterday, one wonders just how bad things in Europe really are).

Today's morning summary is a carbon copy of yesterday's. Some things happened, China continues to make up data to fit its current policy outlook, things in Europe continue to go bump in the night ever louder as we approach the German election despite reflexive diffusion indices - this time Service PMIs - desperately signalling a surge in confidence, Italy has just reminded everyone it is a big political basket case as Berlusconi is said to consider withdrawing his support for the Letta government and calling for elections this year, and so on, but it is still all about Syria. Last night the Senate Foreign Relations Committee has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any US military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. In other words, a "surgical strike" lasting a minimum of 90 days, and then with indefinite additional extensions tacked on. Yet judging by the modest drop in crude and gold, the market may need more than just fighting words at this point to push to th next level of risk aversion.

The key overnight events were already discussed previously, but here they are again: the wholesale selloff in Asia (which subsequently shifted to Europe), the accelerating outflows from India (moment ago the SEBI website announced a net INR13.7 billion selling in Indian stocks yesterday and the near record collapse in the Indian Rupee to new record lows, and the ongoing uncertainty over Syria and what it will do to crude prices (if SocGen is right, nothing good). In brief: a market conditioned and habituated to a world in which Bernanke promises "to make everything ok" suddenly finds itself in the throes of uncertainty and following 4 years of dumb trend-following,  has no idea what to do.