US equities dipped after the initial ISM data (and construction spending miss) as did USDJPY but soon after things began to levitate in their new normal manner as bad news is clearly pent-up good news in the future. By the time the ISM admitted its error - the US equity markets had recovered back to unchanged from 10ET's initial print. But what was really moving - since in our new normal world, a shift in the butterfly's wings of US ISM (seasonally adjusted) causing a hurricane (or Tsunami) in stock markets across the world, Japan's Nikkei 225 swung from low to high by over 150 points as the carry-trading algo monkeys reacted to every conflicting headline (and broke BATS).
It took a precisely 0.1 beat in the Chinese Manufacturing PMI over the weekend (50.8 vs Exp. 50.7) for the USDJPY and the Nikkei to forget all about last week's abysmal Japanese economic data and to send the Nikkei soaring by 2.1% to its highest print in 5 months. Subsequent overnight weakness from Europe, where the Eurozone Final May Manufacturing PMI dropped again from 52.5 to 52.2, below the 52.5 expected, served simply to push bunds higher back over 147.00, if not do much to US equities which as usual continue their low volume "the music is still playing" melt-up completely dislocated from all newsflow and fundamentals (because just like over the past 5 years, "there is hope").
Even soothsayers and Abenomics spin doctors expected a downdraft after Japan’s consumption tax was jacked up. But not this.
Equity Blow Off Top Takes Brief Overnight Rest, Prepares For Another Session Of Low Volume LevitationSubmitted by Tyler Durden on 05/30/2014 07:03 -0400
Last night's docket of atrocious Japanese economic data inexplicably managed to push the Nikkei lower, not because the data was ugly but because the scorching inflation - the highest since 1991 - mostly driven by import costs, food and energy as a result of a weak yen, and certainly not in wages, has pushed back most banks' estimates of additional QE to late 2014 if not 2015 which is as we predicted would happen over a year ago. As a result the market, addicted to central bank liquidity, has had to make a modest reassessment of just how much disconnected from reality it is willing to push equities relative to expectations of central bank balance sheet growth. However, now that the night crew trading the USDJPY is replaced with the US session algo shift which does a great job of re-levitating the pair, and with it bringing the S&P 500 higher, we expect this brief flicker of red futures currently observable on trading terminals to be promptly replaced with the friendly, well-known and "confidence-boosting" green. The same goes for Treasurys which lately have been tracking every directional move in stocks not in yield but in price.
The complete implosion in volume and vol, not to mention bond yields continues, and appears to have spilled over into events newsflow where overnight virtually nothing happened, or at least such is the algos' complete disregard for any real time headlines that as bond yields dropped to fresh record lows in many countries and the US 10Y sliding to a 2.3% handle, confused US equity futures have recouped almost all their losses from yesterday despite a USDJPY carry trade which has once again dropped to the 101.5 level, and are set for new record highs. Perhaps they are just waiting for today's downward revision in Q1 GDP to a negative print before blasting off on their way to Jeremy Grantham's 2,200 bubble peak after which Bernanke's Frankenstein market will finally, mercifully die.
Given the pre-tax-hike surge, the oh-so-smart economists around the world were expecting some give-back from dragged-forward demand but the 13.7% MoM decline missed expectations by 2 percentage points. This was the largest MoM decline on record. Talking heads are already blaming the tax hike (but they knew all about it?) and year-over-year was just as dismal (and less immediately prone to events) as it fell by the most since the 2011 Tsunami. Bad news (the worst) is good news though right? Well no - USDJPY is down as is Nikkei as remember, Japanese inflation pressures are building and Kuroda has pushed off any actions from the BoJ for now.
It has gotten beyond ridiculous: a few short hours ago the yield on the 10 Year bond tumbled to a fresh low of 2.49% (and currently just off the lows at 2.50%), wiping out all of yesterday's "jump" on better than expected Durables and leading to renewed concerns about the terminal rate, deflation and how slow the US economy will truly grow. Amusingly, this happened just as US equity futures printed overnight highs. Doubly amusing: this also happened roughly at the same time as Spanish 10 Year yields dropped to a record low of 2.827%, or about 30 bps wider than the US (moments after Spain announced that loan creation in the country has once again resumed its downward trajectory and a tumble in retail deposits to levels not seen since 2008). Triply amusing: this also happened just about when Germany had yet another technically uncovered 30 Year Bund issuance, aka failed auction. So yes: nothing makes sense anymore which is precisely what one would expect in broken, rigged and centrally-planned markets (incidentally those scrambling to explain with events in bond world where one appears to buy bonds to hedge long equity exposure, are directed to the minute of the Japanese GPIF pension fund which announced it would buy junk-rated bonds to boost returns - good luck to Japanese pensioners).
The melt up is accelerating and with the momentum tailwind back, newsflow is once again irrelevant: any news that are even remotely good are trumpeted, and any bad news - such as Europe's right storm rising in the northern states, and left storm surge in the states that demand more handouts from the northern states or China sinking a Vietnamese boat, the most serious bilateral incident since 2007 - are once again (and as usual) nothing more than a catalyst for even more liquidity injections. End result: the S&P futures this morning are 5 points above Goldman's year end target of 1900 and 45 points away from its June 30, 2015 target. Can this breakneck scramble on zero volume continue until Grantham's bubble peak level of 2,200 is hit? Well of course: after all anything goes in the centrally-planned new normal. To be sure, this is an equity only phenomenon: moments ago the Bund future hit its highest level since May 19, while the 10 Year remains unchanged at 2.53% as it continues to price in the new "deflationary" (and Japanese) normal. And as has been the case during all such divergences of late, either bonds or equities are making a horrible mistake: the question remains: who? Since all equities are doing is tracking FX pairs to the pip and have completely forgotten all about fundamentals, we have a pretty good idea what the answer is.
"Words speak louder than actions until words stop working then we promise some actions... or more talk about actions." That appears to be the communication method-of-choice for the world's central bankers and The Bank Of Japan's Kuroda stepped into the breach today with his own demands. As Citi's Steven Englander translates, Kuroda is telling investors not to buy JPY just because the BoJ is being very reticent on policy ease (do as we say, not as we do). However, there is an important second message which is intended to be delivered to the Japanese bureaucracy - "Mr. Kuroda also acknowledged limits to what the BOJ can do to generate long-term growth."
Following the only major overnight econ event, which was the May German IFO Business Climate Index which dropped from 111.2 to 110.4 missing expectations of 110.9, the USDJPY has been on a soaring rampage higher hoping to push equities along with it (because now that gold manipulation is a proven fact, it is only a matter of time before the link between manipulating the USDJPY on thin volume with massive leverage and rigging the equity market is uncovered too), and at last check was just shy of 102.000. For now equity futures have failed to be dragged along although with the S&P all time high just around the horizon, the psychological level of 1900 staring the rigged market in the face, and the weekend just around the corner, it is virtually assured that the S&P will close at an all time high today - after all the people need to be confident when they go shopping at malls with money they don't have (but delighted by paper profits they haven't booked) so they boost the US non-GAAP GDP (at least before like Italy, the BEA too changes the definition of GDP to include cocaine and hookers). Finally, assuring a (record?) low-volume levitation today is the early closure of the bond pit ahead of Memorial Day holiday which also means only a skeleton crew of algos will be frontrunning each other to push the S&P over 1,900.
The key news overnight were global manufacturing PMIs which can be summarized as follows: Japan contraction; China contraction, but less than expected (as reported before); and most recently, Europe which expanded but dropped and missed, at 52.5, down from 53.4 and below the consensus estimate of 53.2. The weakness was fully driven by France which has moved back into a contraction phase in both manufacturing and services, which were 49.3 and 49.2, down from 51.2 and 50.4, respectively (although with the recent surge in train station remodelling, the mfg aspect may soon be boosted). The market soaked up the Chinese numbers with fervor, sending the algo-controlled USDJPY into a buying frenzy which in turn pushed up US equity futures, only to see a gradual fade of the Chinese euphoria when the European data hit.
Another right of perfectly round number supports: while the Shanghai Composite once again dipped below 2000 overnight to as low as 1991 only to close modestly higher, and the Nikkei followed suit, also sliding below the psychological support level of 14,000 to an intraday low of 13,964 only to close just above 14,000 if in the red, it was the USDJPY that has suffered the most technical pain when shortly after 2:30 am eastern time, the USDJPY dropped by nearly 40 pips, hours after the BOJ indicated that not only is it happy with where in the QE process it stands, but hinted there may well be no more QE, and certainly nothing imminent . In the process, the USDJPY fully smashed the 200 DMA, with the next key parallel support being the 200DMA in the EURJPY at 138.08 (which was at 138.34 last). When that too gives way, it is a straight line to double digits in the USDJPY, and the countdown to the end of the Abe regime begins in earnest.
USDJPY has broken below its 200-day moving-average at 101.25 and is trading back to almost 6-month lows this morning ahead of this evening's BoJ meeting (which is largely expected now not to provide the additional QQE that everyone hoped for earlier in the exuberant year). The Nikkei is tumbling right along side it... as are US equities... and US Treasury bond yields...
Not much going on tonight, except for the non-coupy martial law announcement in Thailand where the government is said to still be in charge of everything except for martial law decisions taken by the army of course, which in turn is in charge of everything else apparently including the central bank which intervened so extensively in the market, the Baht was barely changed at one point. There was also news of explosions and clashes in Benghazi but as everyone knows, what difference does Libya make at this, or any other, point. Additionally overnight there were reports that the cities of Slavyansk and Kramatorsk in east Ukraine were being shelled by the Ukraine army but that too barely registered as bullish for the USDJPY (which in now traditional fashion ramped during the US day session then sold off during Asia hours).