- Pimco Sees 60% Chance of Global Recession in Five Years (BBG)
- Global Tumult Grips Markets (WSJ)
- NSA Secrecy Prompts a Pushback (WSJ)
- ANA Scraps 787 Dreamliner Flight as Engine Fails to Start (BBG) - one of these days, though, it shall fly
- Kuroda’s April-Was-Enough Message Faces Markets Wanting More (BBG)
- S&P warns top US banks are still ‘too big to fail’ (FT)
- Democracy for $500 per plate (Reuters)
- Iran, the United States and 'the cup of poison' (Reuters)
- Japan grapples with lack of entrepreneurs (FT)
- Greece First Developed Market Cut to Emerging at MSCI (BBG)
- Asia's ticking time bonds; time to cut and run? (Reuters)
- Sony Outduels Microsoft in First PS4-Xbox One Skirmish (BBG)
The lack of a centralized constitutional and monetary union has led to several years of inaction in the process of unification of the Euro-zone. While it was a "grand experiement" to run the Euro-zone under a single currency the underlying structure to make it effective long term was never achieved. There are currently many promises that have been made to the financial system by the ECB. The question is whether or not they can ultimately "cash the check." While we do not have certain answers as to the where, the who or the when - we are fairly confident that it will be sooner than many currently imagine. We do believe that the ECB will be able to skirt by the ratification of the ESM this coming week and get some limited funding into place, however, we still believe the bigger problem comes at the end of summer when the German voters begin to voice their concerns - after all it is their money that is being wasted.
Starting today, and continuing through tomorrow, the German Federal Constitutional Court (FCC) will consider the legality and conformability of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transaction programme (OMT) in particular. What does the press expect will be the outcome of the FCC's deliberations (spoiler alert: nobody will dare to threaten Deutsche Bank's towering mountain of derivatives, all $56 trillion of them, but let's pretend it is exciting). Here is a brief recap via Bruegel Think Tank.
- Citigroup Facing $7 Billion Currency Hit on Dollar, Peabody Says (BBG)
- World has 10 years of shale oil, reports US (FT)
- ECB prepares to defend monetary policy in German court (FT)
- European Stocks Sink to Seven-Week Low as Treasuries Fall (BBG)
- Fitch warns on risks from shadow banking in China (Reuters)
- Obama administration to drop limits on morning-after pill (Reuters)
- ACLU asks spy court to release secret rulings in response to leaks (MSNBC)
- SEC Nets Win in 'Naked Short' Case (WSJ)
- SoftBank Raises Offer for Sprint to $21.6 Billion (WSJ)
- Chinese rocket launch marks giant leap towards space station (FT)
Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.
UPDATE: Nikkei futures now -500 from US day-session highs
In what must be quite a surprise to Goldman (as we discussed here), the BoJ has decided not to give in to the market's demands:
*BOJ REFRAINS FROM EXPANDING J-REIT, ETF PURCHASES (expected lifting of cap)
*BOJ LEAVES FUNDING TERMS UNCHANGED AFTER JGB YIELD VOLATILITY (expected extension from 1Y to 2Y)
The market's angry reaction... NKY -400 from US day-session highs, USDJPY gapped down 80 pips to 98.00, JGB Futs closed, JGBs unch. Full statement to follow:
"A brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed”
S&P Revises U.S. Credit Outlook To "Stable" From Negative
Fed's Bullard Details How QE Can Be Cut
Fed Retreat From Bond Buying Expected By Fourth Quarter - Poll
U.S., Japan Leading Recovery In Major Economies - OECD
While the focus of most of the dreadful employment data in Europe is on the surging youth joblessness, there is another growing shift. The jobless crisis is affecting men more than women, according to the EU labor force survey. As Bloomberg's Niraj Shah notes, the employment rate for men fell 0.3 percentage point to 69.8 percent in 2012, while rising 0.1 percentage point for women to 58.6 percent. What is perhaps even more concerning is the growing divergence between employment rates across the union (remembering all these nations are driven by the same monetary policy) from Holland's 75.1% employment rate to only 51.3% of employable citizens working in Greece. It is perhaps no wonder that Germany is having second thoughts over aiding the 'fourth world' nation.
In a confirmation that the S&P is starting to get worried about the drones surrounding the McGraw Hill building resulting from the ongoing litigation with Eric Holder's Department of Injustice, not to mention a reminder that US downgrades always happen after hours, while upgrades must hit before the market opens, Standard & Poors just upgraded the Standard & Poors 500 the US outlook from Negative to Stable. On what "receding fiscal risks" did the S&P raise its assessment of the US - the fact that the US is now at its debt limit, that there is no imminent resolution to the credit issue, or the 105% and rising debt/GDP - read on to find out. And of course, the countdown until the S&P wristslap settlement with the DOJ is announced begins now, as does the upgrade watch by Buffett's controlled Moody's of the US to AAAA++++.
Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes. erhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar.
Whenever Juncker is lying, or Goldman openly commands the muppets to buy, you know the situation is serious, and Goldman has a lot of unwinding to do. Which is precisely what just happened following the Squid's reco to buy Nikkei September futures (NKU3) ahead of the BOJ meeting. What is Goldman's thesis in a nutshell: hope may be fading in Abenomics, but the "incentives for Governor Kuroda to use the [upcoming BOJ] meeting to signal a firmer and clearer commitment to the easing course, and to highlight the potential to do more, are high and rising." In other words, please bet the farm on more of the same jawboning that lead to a 20% loss for anyone who bought as recently as 2 weeks ago. Oh, and by the way, complete the sentence, whenever a client is buying from a Goldman flow trader, the Goldman flow trader is [____].
Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in the towel to Bernanke's and Kuroda's liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People's Bank of China "decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government's ongoing commitment to its "prudent" monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC's rarely-used short-term liquidity operation (SLO) tool. But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available? Because when China finally does join what is already an historic liquidity tsunami then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world's most populous country.
A dispassionate review of a slew of Chinese economic data. Why the capital inflows are not a result of Qe as much as Chinese investors gaming their own system. Why the lower inflation is not evidence of Japan exporting deflation, as some have claimed. Why the decline in imports may be related to prices and foreign demand, more than Chinese demand itself.
As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.