Same overnight pattern, different day. After a late day ramp in the US market, followed by a selloff in the futures after hours, taking the ES to trading session lows, we get the European trading crew which day after day sends the EURUSD soaring as Europe opens, pushing futures to unchanged or even green and easily negating the key news event of the day, in this case the full grounding of the entire global Boeing fleet which will once again weigh on the stock and DJIA. In the meantime, the big rotation behind the scenes in FX land continues, with the ongoing and very sudden pounding of the Swiss Franc taking the EURCHF to 1.2450, or the highest, since 2011. Same with the USDJPY which after another attempt to fall, rallies on more of the same regurgitated rumors. Not to mention the EURUSD of course, which as mentioned above has surged some 100 pips since the European open. In other words the overnight beating of the USD is enough to push the US stock market high enough in nominal terms, avoiding that there is no incremental cash flow. Then again, who needs cash flow when you have "multiple expansion."
Those who went long Boeing in the last few days on hopes the "smoking battery" issue had been resolved, especially following Ray LaHood comment's he would fly the Dreamliner, which is rapidly becoming the Nightmareliner for Boeing, anytime anywhere, are about to be grounded, as is the entire 787 fleet of All Nippon Airlines and Japan Airlines following yet another incident forcing an emergency Dreamliner landing. This happened after ANA "alarms indicated smoke in the forward area of the plane, which houses batteries and other equipment, the airline said, and there was a "burning-like smell" in the cockpit and parts of the cabin. The plane landed at Takamatsu airport in western Japan, where the 129 passengers were evacuated using the plane's emergency chutes. The plane also carried eight crew members. ANA said that the exact cause was still undetermined. The event was designated as a "serious incident" by Japan's transport ministry, setting off an immediate investigation by the Japan Transport Safety Board, which dispatched a team to the scene." The result - a 4% drop in the stock so far premarket, and if any more airlines are to ground their fleet the implications for the backlog could be devastating, it will only get far worse for both the company and the Dow Jones average, of which it is part.
And so the consequences for Europe of accommodating the US, and the rest of the world, in having the EUR soar following ECB intervention while everyone else's currency is diluted to death, comes to the fore, following today's announcement of German 2012 GDP which came below expectations of 0.8%, printing at 0.7%, with government adding a substantial 1.0% to this number, while plant and machinery investment tumbled by a whopping -4.4%. And while the specific Q4 data was not actually broken out, a subsequent report by the German stat office indicated that Q4 GDP likely shrank by 0.5% in Q4. All that is needed is one more quarter of sub zero GDP, which will almost certainly happen in Q1 absent a massive surge in government spending which however will not happen in tapped out Germany, whose resources are focused on keeping the periphery afloat, and thus the EURUSD high, and Germany's exports weak. Confirming this was a Bild report which stated that the government now sees 2013 GDP growth of a paltry 0.4%, which assumes growth in H2. One wonders just how much longer Germany will opt for a currency regime that punishes its primary GDP-driver: net exports, at the expense of nothing beneficial but making tourist trips to Greece far more expensive than under the Drachma.
We are back to that phase in market euphoria where no news is good news, good news is better, and bad news is best. While there was little news over the weekend, and overnight, what news there was uniformly negative: northern China drowning in smog, the Apple fad bubble bursting, European Industrial production printing below expectations (-0.3%, exp.-0.2%, down from revised -1.0%), and ever louder rumors that the debt ceiling debate may metastasize into an actual government shutdown for at least a few days, which means the first technical default in US history. Yet nothing seems able to faze the risk on mood, still driven by a relentless surge in the EURUSD which touched on 1.34 overnight before retracing, and the EURCHF, which too has soared by over a 100 pips in recent trading action, which according to some is a result of Swatch buying the Harry Winston watch and jewelry brand for $1 billion, and an aggressively selling of CHF into USD by the company. Eventwise, today will be a quiet day in the US, although the action will pick up tomorrow as more companies report earnings as well as the all important retail sales report will put to rest all debate over just how good or bad this holiday shopping season (pre and post seasonal adjustments) truly was.
AAPL stock is currently trading at or just under the $500 "generational bottom" in the premarket session, or nearly a one year low, following news first from Japan's Nikkei that Apple has slashed orders for iPhone 5 components, and then from the WSJ, that demand for the flagship phone was far less than expected, resulting in a cut in orders in the supply chain. Per the WSJ: "Apple's orders for iPhone 5 screens for the January-March quarter, for example, have dropped to roughly half of what the company had previously planned to order, the people said. The Cupertino, Calif., company has also cut orders for components other than screens, according to one of the people. Apple notified the suppliers of the order cut last month, the people said."
It is not often that early sentiment is defined by developments out of Asia but this is precisely what has happened overnight. The Alcoa "hope rally", which saw the company close red on the day of its earnings, but which sent the markets higher on the CEO's announcement that things in China may be improving, seem to be ending following last night's news out of China which saw December CPI jump to 2.5%, substantially more than expected, following a spike in food costs in part from the coldest weather in 28 years, implying any good news may have already been priced in. This renewed fears that speculation of PBOC easing was largely unjustified (it is) leading to the biggest drop in the Shanghai Composite in 2013, pushing it lower by 1.78%. The offset came out of Japan, where the government approved a JPY10.3 trillion ($116 billion) fiscal stimulus package. This together with expectations of a BOJ 2% inflation rate targeting, are the reasons why the Dollar Yen soared to a fresh multi-year high of over 89.30, which has since regained some of the move. At this point virtually all the Japanese hope has been bought, and the actual BOJ announcement coming later this month will launch the "sell the news" mean reversion.
The main macro event today will be the interest rate announcement by the ECB due out at 7:45 am (with the Bank of England reporting earlier on its rate and QE plan, both of which remained unchanged as expected, which will remain the case until Carney comes on board) which is expected to be a continuation of the policy, with no rate cut despite some clamoring by pundits that Draghi should cut rates even more. Overnight, we got Chinese December trade (better than expected) and loan (slightly worse than expected) data, coming in precisely as a country which has a new communist politburo leadership implied they would. Of particular note was that the US has now replaced the EU as the largest Chinese export market: what happens when the euro weakens even further? But at least the net benefit to European GDP as a result of declining imports will, paradoxically, help. Elsewhere, Spain auctioned off more than than the expected €4-5 billion in its first 2013 auctions of 2015, 2018 and 2026 bonds, sending the 10 year SPGB yield to under 5%, or the lowest since 2010, a process driven by expectations of a Spanish bailout. Thus the incredible odyssey of Schrodinger Spain continues, whose interest rates are improving on hopes it is insolvent. Fundamentally, things got better nowhere, with Greek unemployment rising to 26.8% in October from 26.0% previously, while bad loans in Italy soared by 16.7% Y/Y to €121.8 billion, while loans to businesses dropped at the fastest pace ever. And so the scramble to offset the trade and economic collapse of Europe using central bank tools continues.
New Prime Minister Shinzo Abe’s pledge to spur inflation to 2 percent at the end of the yen’s appreciation means Japanese pension funds now have to hedge against rising prices and a currency decline after two decades of stagnation. Japanese pension funds are set to diversify some of their massive holdings, worth nearly $3.4 trillion into gold bullion. Corporate pension funds in Japan will diversify 72 trillion yen in assets after domestic stocks produced little return in the past two decades, according to Daiwa Institute of Research. “Bullion’s role as an inflation hedge, long ignored by Japanese fund operators, has come under the spotlight thanks to Abe’s economic policy,” Toshima, who now works as an adviser to pension-fund operators, said in an interview today in Tokyo. “Gold may be a standard asset-class in the portfolio of Japanese pension funds as Abe’s target is realized.”
With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.
The biggest highlight of the day is the launch of Q4 earnings season with Alcoa after the close. The question is by how much will the ES/SPY correlation have dragged individual stock prices higher from far lower cash flow implied valuations - we will get a glimpse this week, as well as get a sense of how Q1 is shaping up, this week but mostly next week as earnings reports start coming in earnest. There was the usual non-event newsflow out of Europe, which has no impact on risk levels, now driven solely by every twitch of Mario Draghi's face, and best summarized by this from SocGen: "In the wake of September's 3 point VAT increase in Spain, which saw a significant bringing forward of consumption to beat the tax hike, euro area activity in Q4 has been genuinely awful."
In the last two weeks we have pointed out that not only are equity futures traders the most net long in six years but NYSE Margin Debt is also near four year highs. Add to this the fact that VIX futures are the most net short they have ever been - crushed by an all too visible hand - and it appears that equity market participants were critically unafraid of the fiscal cliff uncertainty. What is even more concerning, at least for those who care to be modestly contrarian that is, is that the market appears to be running out of greater fools in every asset class as JPMorgan's speculative position indicator - which combines net positioning across 8 'risky' and 7'safe' assets - is at its most risk-on since just before the crash began in Q3 2007. So, for all those taking heads who expect a flood of new money, who still believe there is money on the sidelines that wants to be put to work, the fact is in the last decade we have been more speculatively positioned long only once - and that marked the top in stocks (and risk-assets everywhere).
D-day - the real D-Day: the day after which the US government will have to start shutting down - is now 52 days away, but with the Pyrrhic victory on the Fiscal Cliff, which once more, did nothing to resolve the Fiscal Cliff issue but merely hiked payroll taxes for some, general income taxes for others, even as drunken sailor spending has persisted, it is virtually a guarantee that nothing will happen in D.C. for at least 3-4 more weeks until the posturing and jawboning soars in earnest. Only this time the can kicking won't be nearly as easy. In other news, for the first time in maybe 2 months, the algos are neither gripped by headlines about Washington, or macro events, but micro, as the fourth quarter earnings season kicks off, with Alcoa reporting on Tuesday, Wells on Friday and a true launch of Q4 earnings season next week. And since revenues are set to continue deteriorating despite estimates of a Y/Y increase in top lines following a disastrous Q3, and let's not even mention cash flow, operating earnings and capital reinvestment, once again it will all be about EPS rejiggering and accounting games.
The ascent of the Democratic Party of Japan marked the end of Japan's one-party state, dominated by the Liberal Democratic Party since the 1955. However, the DPJ was unable to address the challenges Japan faced, was internally unstable, as illustrated by the revolving door in the prime minister's office, and spent scarce political clout to support a controversial retail sales tax increase.
The LDP has returned to power. Its ascent is a victory for the old elite. Reports suggest that half of the cabinet positions were given to members of parliament who had inherited their Diet seats from their families. The LDP's program, or Abenomics as it has been dubbed, seeks to strengthen the domestic economy and enhance Japan's ability to project its power internationally.
US dollar gains have been extended for the third session. The euro has been sold down to almost $.1.30 after testing $1.33 on Wed. More stale longs may be forced out on a break of $1.2985, which corresponds to a 50% retracement of the advance from the mid-Nov low near $1.2660 and the 50-day moving average. Sterling's decline is even more dramatic. It has come off hard since setting a 17-month high on Wed near $1.6380. It has now been pushed below $1.6040, which the 61.8% retracement of its rally from mid-Nov low near $1.5830. Sterling has also slipped below the 50 and 100-day moving averages for the first time in seven weeks.
FX markets and precious metals are continuing to trade weaker after hours along with Treasury yields (in some very gappy and unhappy ways) - but the S&P 500 futures are flatlining for now (as NKY futures push higher - merely playing catch up to ES since New Year's Eve). Odder and odderer...