It is still all about the Yen carry which overnight tumbled to the lowest level since November, dragging the Nikkei down by 4.8% which halted its plunge at just overf 14,000, only to stage a modest rebound and carry US equity futures with it, even if it hasn't helped the Dax much which moments ago dropped to session lows and broke its 100 DMA, where carmakers are being especially punished following a downgrade by HSBC of the entire sector. Also overnight the Hang Seng entered an official correction phase (following on from the Nikkei 225 doing the same yesterday) amid global growth concerns and has filtered through to European trade with equities mostly red across the board. Markets have shrugged off news that ECB's Draghi is seeking German support in the bond sterilization debate, something which we forecast would happen a few weeks ago when we pointed out the relentless pace of SMP sterilization failures, with analysts playing down the news as the move would only add a nominal amount of almost EUR 180bln to the Euro-Area financial system. Elsewhere, disappointing earnings from KPN (-4.3%) and ARM holdings (-2.5%) are assisting the downward momentum for their respective sectors.
"We've created a global debt monster that's now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber aggressive policy responses. It’s arguably too late to change course now without huge consequences. This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick starting the exponential rise in leverage across the globe. Since then we saw big corporates saved in the early 00s, financials towards the end of the decade and most recently Sovereigns bailed out. It’s been many, many years since free markets decided the fate of debt markets and bail-outs have generally had to get bigger and bigger."
Alarms are going off in assorted plunge protecting offices, now that the USDJPY has breached the 102.000 "fundamental" support level, below which the Yen can comfortably soar to sub 100.000 in perfectly even 100 pip increments. The first trading day of February has brought another weaker session across Asia though some equity indices such as the KOSPI (-1.1%) are in catch-up mode given they were shut towards the back-end of last week. Over the weekend, the Chinese government published its latest official manufacturing PMI which showed a 0.5pt drop to 50.5, a six-month low, and consistent with consensus estimates. DB’s Jun Ma believes there was some element of seasonality affecting this month’s result including the fact that Chinese New Year started at the end of January (vs February last year), anti-pollution measures in the lead up to CNY and efforts to control government consumption around the holiday period. The official service PMI was released overnight (53.4) which printed at the lowest level since at least 2011. The uninspiring Chinese data has not helped market sentiment this morning, with the Nikkei plunging -2% and ASX200 once again under pressure. S&P500 futures have fluctuated around the unchanged line this morning although if support below the USDJPY fail solidly, then watch out below. Markets in Mainland China and Hong Kong remain closed for Lunar New Year.
"As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since."
Nine Event Risks for the week ahead: identified, discussed and assessed.
A classicial economist... and Harvard professor... preaching to the world that one's money is not safe in the US banking system due to Ben Bernanke's actions? And putting his withdrawal slip where his mouth is and pulling $1 million out of Bank America? Say it isn't so...
Despite all the problems discussed here at ZH, the US dollar has is staging a come back. Read about where it may go in the period ahead.
If the stock market were already crashing then it would be simple to blame the dismally sad rash of dead bankers in the last week on that - certainly that was reflected in 1929. However, for the third time in the last week, a senior financial executive has died in what appears to be a suicide. As Bloomberg reports, following the deaths of a JPMorgan senior manager (Tuesday) and a Deutsche Bank executive (Sunday), Russell Investments' Chief Economist (and former Fed economist) Mike Dueker was found dead at the side of a highway in Washington State. Police said the death appeared to be a suicide.
Rothschild has identified four different scenarios that, in their view, are the most likely to occur. The series of scenarios for GDP growth and inflation in the main western economies, Japan and China may guide investor thinking but their somewhat ominous conclusion is worth bearing in mind: "Further monetary 'experiments' are becoming less probable. However, significant imbalances and risks persist. This is the reason why we have left the size (probability) of our depression scenario unchanged," and while they remain exposed to equities they warn "valuation support is limited, exposing equities to a potentially sharp correction."
There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.
The IMF's woeful forecasting record, chronicled extensively before, has just taken yet another hit, following the latest flip flop on emerging markets. Try to spot the common theme of these assessments by the IMF.
The problem, though, is that once you embrace the Narrative of Central Bank Omnipotence to "explain" recent events, you can't compartmentalize it there. If the pattern of post-crisis Emerging Market growth rates is largely explained by US monetary accommodation or lack thereof ... well, the same must be true for pre-crisis Emerging Market growth rates. The inexorable conclusion is that Emerging Market growth rates are a function of Developed Market central bank liquidity measures and monetary policy, and that all Emerging Markets are, to one degree or another, Greece-like in their creation of unsustainable growth rates on the back of 20 years of The Great Moderation (as Bernanke referred to the decline in macroeconomic volatility from accommodative monetary policy) and the last 4 years of ZIRP. It was Barzini all along!
In the past we have discussed at length the inevitable demise of the USD as the world's reserve currency noting that nothing lasts forever. However, when former World Bank chief economist Justin Yifu Lin warns that "the dominance of the greenback is the root cause of global financial and economic crises," we suspect the world will begin to listen (especially the Chinese. Lin, now - notably - an adviser to the Chinese government, concludes that internationalizing the Chinese currency is not the answer (preferring a basket approach) but ominously concludes, "the solution to this is to replace the national currency with a global currency," as it will create more stable global financial system.
The FOMC will probably reduce the pace of its asset purchase program by another $10 billion at its meeting today as it continues to move towards using forward guidance as the primary policy tool. However, as we noted in the case of the Bank of England's Mark Carney, New Fed vice-chair Stan Fischer's skepticism, and even Ben Bernanke, forward guidance is losing its luster (as it works in theory but not in practice). Bloomberg's Joseph Brusuelas warns that given the probable direction of the unemployment rate amid a structurally damaged labor market and disinflation, the Fed faces a dilemma in that the status quo is untenable and may soon be challenged by traders and investors eager to move back toward interest rate and policy normalization. Just as Carney lost his credibility, the Fed risks a lot by reversing its taper today.
"We take profit on our TRY/ZAR trade recommendation which we entered last night at a level of 4.92. At the time of writing, the level is 4.968 resulting in a gain of 1.0% before carry. The short-lived relief rally in the TRY was swiftly interrupted by a shift in market sentiment, with the updated policy implementation failing to deliver the intended improvements in clarity. On the other hand, an unimpressive 50bp hike from SARB on the heels of CBRT’s punchier response fell short of expectations. Overall, the market continues to trade in a panic mode, notwithstanding the monetary policy responses spreading fast across EM, as real policy rates come increasingly under scrutiny." - SocGen