Poor algos: after they got no love on Monday from the overnight USDJPY selling team which took the all important pair back to the 200 DMA, today, inexplicably (it is a Tuesday after all, and if one can't frontrun a rigged market surging higher on Turbo Tuesday may as well throw in the towel on free money and learn about fundamental analysis) the same overnight USDJPY selling team has pushed the key carry pair to below the 200 DMA, and has dragged US equity futures lower with it for the second day in a row.
Felix Zulauf, James Montier and David Iben: Three legendary investors share their views on financial markets. Everything is pricey ("we will continue to swim in a sea of liquidity; but there might be other events and developments that may not be camouflaged by liquidity which could cause a change of investor expectations.") the European periphery is a bubble ("The Euro crisis is not over...the European economies are not going to change for the better for years to come despite all the cheating and breaking of laws"), Value investors need to venture to Russia ("when you look at today’s opportunity set, you’re left with a set of assets where nothing looks attractive from a valuation point of view") or buy gold mining stocks (" The down cycle could be much bigger than anybody believes if the market realizes that all the actions taken in recent years do not work.") Summing it all up, "there is no question that [sovereigns] lack the fundamental economic base to finally service their debts," trade accordingly.
Lord Overstone said it best. “No warning can save people determined to grow suddenly rich.” Case in point - CYNK Technology Corp, a listed company that as of this morning has a market capitalization in excess of $1 BILLION. According to official filings, the social media development company had one employee, no website, no revenue, no product, and no assets. What has effectively united this company with prudent investors is today’s central banker. Hyper-aggressive monetary policy has side effects. Getting out of this mess is not going to be easy, and it’s going to be messy.
To complete the French triple whammy offensive against the US Dollar this weekend (first, French central banker Noyer suggesting de-dollarisation; second, French oil major Total's CEO "seeing no reason for the Petrodollar"), French finance minister Michel Sapin says "now is the right time to bolster the use of the euro" adding, more ominously for the dollar, "we sell ourselves aircraft in dollars. Is that really necessary? I don’t think so." Careful to avoid upsetting his 'allies' across the pond, Sapin followed up with the slam-dunk diplomacy, "This is not a fight against dollar imperialism," except, of course - that's exactly what it is... just as it was over 40 years ago when the French challenged Nixon.
The selloff last year was a desperate warning about the lack of resilience in credit and funding. That repo markets persist in that is, again, the opposite of the picture Janet Yellen is trying to clumsily fashion. Central banks cannot create that because their intrusion axiomatically alters the state of financial affairs, and they know this. It has always been the idea (“extend and pretend” among others) to do so with the expectation that economic growth would allow enough margin for error to go back and clean up these central bank alterations. That has never happened, and the modifications persist. Resilience is the last word we would use to describe markets right now, with very recent history declaring as much.
"First they ignore you, then they ridicule you, then they fight you, and then you win." Mahatma Gandhi
"It is no crime to be ignorant of economics... but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard
Not even we anticipated this particular "unintended consequence" as a result of the US multi-billion dollar fine on BNP (which France took very much to heart):
- NOYER: BNP CASE WILL ENCOURAGE ‘DIVERSIFICATION’ FROM DOLLAR
And, the biggest irony of all is that in "punishing" France for dealing with Russia, that core country of the Eurasian alliance of Russia and China, the US just accelerated the graviation of France (and all of Europe) precisely toward Eurasia, and away from the greenback.
Is good news about to become the ultimate bad news. JPMorgan's Michael Feroli notes that (for the first time in recent memory) is pulling forward their projected date for Fed tightening and the inevitable end of the free-money cycle. Based on a belief in the committee's limited appetite to wait in inflation and today's report, JPMorgan notes a Q2 tightening seems plausible. Of course, this will be repeated mantra like as evidence of escape velocity and the status quo is back but, as we noted here, while policy economists claim that interest rates can be “normalized” at no cost; a more likely scenario is that policy “normalization” leads us directly into the next bust.
Policy ws left on hold, as the ECB monitors the effect of its earlier initiatives and prepares for the TLTROs and ABS purchases. However, important changes are taking place how it will conduct monetary policy starting next year.
- Obama Decries Big Bonuses at Bank Trading Desks as Risky (BBG)
- India central bank seeks to swap gold to improve reserves quality (Reuters)
- There goes Q3 GDP: Arthur Strengthens to Become First Atlantic Hurricane (BBG)
- Airports Serving U.S. Tighten Checks on Stealth-Bomb Threat (BBG)
- Fear, cash shortages hinder fight against Ebola outbreak (Reuters)
- Brent Declines as Libya Rebels Say Ports Are Open (BBG)
- Shiites Train for Battle in Iraqi Holy City (WSJ)
- Dimon’s Cancer Has 90% Cure Rate With Demanding Therapy (BBG)
- Goldman says client data leaked, wants Google to delete email (Reuters)
- ECB Watchers in the Dark Look to Draghi for Illumination (BBG)
Once again, US equity futures are roughly unchanged (while Treasurys have seen a surprising overnight bid coming out of Asia) ahead of an avalanche of macroeconomic news both in Europe, where the ECB will deliver its monthly message, and in the US where we will shortly get jobless claims, ISM non-manufacturing, trade balance, nonfarm payrolls, unemployment, average earnings, Markit U.S. composite PMI, Markit U.S. services PMI due later. Of course the most important number is the June NFP payrolls and to a lesser extent the unemployment rate, which consensus expects at 215K and 6.3%, although the whisper number is about 30K higher following yesterday's massive ADP outlier. Nonetheless, keep in mind that a) ADP is a horrible predictor of NFP, with a 40K average absolute error rate and b) in December the initial ADP print was 151K higher than the nonfarms. Those watching inflation will be far more focused on hourly earnings, expected to rise 0.2% M/M and 1.9% Y/Y. Should wages continue to stagnate and decline on a real basis, expect to hear the "stagflation" word much more often in the coming weeks.
In a QE dominated world - in the Golden Age of the Central Banker - renminbi strengthening has been an unmitigated disaster. Chinese political stability depends on the actual production of actual things by actual people working in actual factories, and the prospects for that real economic growth are made significantly worse the longer the West persists in favoring financial asset inflation and the ossification of a low-growth status quo. While the West may be able to accept, even celebrate, unlimited private wealth – China cannot. Not if it wants to remain a politically unified Great Power. We think this is just the start of a multi-year weakening of the renminbi, a sea change in Chinese monetary policy that will inevitably create broad political tensions with the US and make Japan’s devaluation/inflation course infinitely more difficult to achieve.
Just when you thought things could not get any worse for Abe and his experimentation in monetary policy alchemy... it does. Between surging inflation and stagnant wage growth, real wages for the Japanese fell by their most since the collapse of Lehman. Even the break of a 23-month streak of base wage drops was dismissed by the government as "expected to be revised lower." As Goldman warns, downside economic risks remain high, the J-curve is 'delayed', and with tumbling cabinet approval ratings and soaring personal disapproval ratings, Abe has a major problem on his hands...
While the Bank of England's chief economist, Andrew Haldane, admitted that reviving investors’ appetite for risk was one of the forgotten goals of central banks, he notes there are concerns that risk is not being "removed" but changing shape and migrating to more liquid markets but that should not be a problem as "monetary policy can on occasions have a role to play in ensuring against these financial stability risks..." i.e. the market put. His biggest concern is the aggregation of derivatives clearing which could be a "problem from hell" but he notes the future will not be the same as the past as "volatility in financial-market asset prices will be somewhat greater," and that interest rates will not 'normalize' to the levels of the past.