The volatility of recent weeks is but a mere small taste of the volatility in store for all markets in the coming months and years. The global debt crisis is likely to continue for the rest of the decade as politicians and central bankers have merely delayed the day of reckoning. They have ensured that when the day of reckoning comes it will be even more painful and costly then it would have been previously.
While last night's Tankan manufacturing reports met lowered expectations, it seems the reality of the domestic Japanese economy remains as bleak as ever. As Nikkei reports, Japan's domestic sales of new cars, trucks, and buses declined 15.8% for a year earlier in June for the second consecutive month. Even if one argues that Abenomics goal is not just boosting the domestic economy, total Japanese car sales were down almost 11% YoY as Honda saw its sales drop a stunning 40.7%. The latest figures continue this year's downward trend and while some blame the particularly sharp drop on fewer selling days in June, the auto dealer's association also said reflects the "ongoing severe" situation in the domestic market.
Think gold and silver were the worst performing financial asset in June? Think again: that dubious distinction falls to the Bovespa, the Shanghai Composite and the Greek stock market index, all of which tumbled more than the precious metal complex did in the past month. Yet what an odd month for hard assets - on one hand WTI, Corn and Brent were the best performing assets, while gold, silver, copper and wheat tumbled.
Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.
Following South Korea's dip back into contractionary mode (PMI sub-50 for first time in six months - prompting JPY strength and NKY weakness, on implicit KRW weakness retaliation), it appears China's government-sanctioned PMI (printed at 50.1 relative to 50.8 prior and 50.1 expectations) is converging down to the nation's HSBC PMI (whose Flash print was 48.3 - final due at 2145ET). This is the equal lowest print in 9 months but provides just enough cover to the current administration to maintain its tight policy stance - even if it was the biggest MoM drop in 10 months. On a side-note, all PMI sub-indices also fell MoM. The market's response is modest AUD strength and Nikkei weakness which suggests investors were hoping for a little weaker data to push China a litte closer to folding on their bubble-popping position.
Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.
The S&P 500 ended the month with an odd shade of green (called red). This is the worst month in stocks for 8 months and makes only the 5th negative month in the 20 months since the global central bank co-ordinated save in Q4 2011. The week, however, saw the S&P gain around 1.25% on the back of endless repeated bullshit from various Fed heads about how we all got it so wrong... which also saw Treasury yields drop notably (30Y -8bps on the week and 10Y down 16bps from its Monday highs). Equities remain the big year-to-date winners and despite some of the biggest single-day gains in over a year today gold and silver remain at the lower end of the pile. The Nikkei and the S&P lead global DM equities (now what do they have in common?). Then with minutes to go, S&P futures collapsed on massive volume to the lows of the day...
Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.
It's almost as if the manic-depressive market has gotten exhausted with the script of surging overnight volatility, and following a week of breathless global "taper tantrumed" trading, tonight's gentle ramp seems modest by comparison to recent violent swings. With no incremental news out of China, the Shanghai composite ended just modestly lower, the Nikkei rushed higher to catch up to the USDJPY implied value, Europe has been largely muted despite better than expected news out of Germany on the unemployment front. This however was offset by a decline in Europe's May M3 (from 3.2% to 2.9%) while bank lending to NFCs and households simply imploded, confirming that there is no hope for a Keynesian, insolvent Europe in which there isn't any credit creation either by commercial banks or by the central bank (and in fact there is ongoing deleveraging across the board). US futures are rangebound with ES just shy of 1,500. We will need some truly ugly data in today's economic docket which includes claims, personal income/spending and pending home sales to push stocks that next leg higher. To think the S&P could have been higher by triple digits yesterday if the final Q1 GDP has just printed red. Failing that, the Fed's doves jawboning may be sufficient for a 100+ DJIA points today with Dudley, Lockhart and Powell all set to speak later today.
The Japanese stereotype of excessive courtesy is being confirmed by the actions of prime minster Shinzo Abe who is giving the world a free and timely lesson on the dangers of overly accommodative monetary policy. Whether or not we benefit from the tutorial (Japan will surely not) depends on our ability to understand what is currently happening there. This time around investors in the Japanese market were similarly deluded by fairy tales. Leading economists told them that Japan could cheapen its currency to improve trade, use inflation to create real growth, increase prices to encourage spending, and drastically increase inflation without raising interest rates. In short, monetary policy was seen as substitute for an actual economy.
UPDATE: Nikkei 225 -360 from US day-session close
Whether some major fund just got another tap on the shoulder or the liquidity cracks are showing up in all asset classes is unclear but just as we saw last night around the China open, gold and Japanese stocks are taking a tumble... while JGBs are relatively calm and JPY is modestly stronger. Chinese stocks, having read the actual report from the PBOC (as opposed to US media who merely guessed that it meant the stick-save was in), are selling off - though only down around 1% for now. Why? Simply put, if the PBOC promises to selectively save banks, how do you know which ones? So sell them all first... US futures are testing down towards day-session lows but not moving as aggressivley as Japan.
Reuters reports that Japan's public pension fund, the world's largest with a pool of $1.1 trillion, and which until recently was the mystery buyer ex machina that was supposed to buy up the Nikkei past 16,000 and on its way to 20,000, 30,000 and more (a dream that fizzled as quickly as it appeared following our explanation that buying stocks means selling bonds), may start buying real estate to boost returns in a move that could involve tens of billions pouring into cities such as London and Paris. Or New York.
Jean-Claude Trichet, the former head of the European Central Bank, in an interview with CNBC stated that there was only so much that central banks could do to save the economic situation at the present time.
It was shaping up to be another bloodbathed session, with the futures down 10 points around the time Shanghai started crashing for the second night in a row, and threatening to take out key SPX support levels, when the previously noted rumor of an imminent PBOC liquidity injection appeared ex machina and sent the Shanghai composite soaring by 5% to barely unchanged, but more importantly for the all important US wealth effect, the Emini moved nearly 20 points higher from the overnight lows triggering momentum ignition algos that had no idea why they are buying only knowing others are buying. The rumor was promptly squashed when the PBOC did indeed take the mic, but contrary to expectations, announced that liquidity was quite "ample" and no new measures were forthcoming. However, by then the upward momentum was all that mattered and the fact that the underlying catalyst was a lie, was promptly forgotten. End result: futures now at the highs for absolutely no reason.
Things are getting a little out of hand in Asia once again. China's Shanghai Composite is down 3.7% at the break for its biggest 2-day drop in almost 4 years (-8.9%) and Japan's Nikkei 225, after staging a solid come-back has collapsed 450 points from its highs of the early session smashing below the US day-session lows. Chinese repo is very noisy but 7-day is around 160bps higher for now at 9.2% (having traded at 17% at one point - suggesting 'specific' injections have been made). The carry unwinds continue as USDJPY and Nikkei track each other tick for tick. S&P futures are not going unpunished (-4.5 from the close and -12 from after-hours highs). What's Chinese for 'Dallas Fed's Fisher' or Japanese for 'Hilsenrath'?