Just imagine how high stocks would be if more jets were shot down in Ukraine, more ground operations were unleashed in Gaza, more sanctions were placed on global growth, more European and US macro data disappointed, more job cuts at major firms, and more European banks declared bankruptcy. Today's farcical Friday surge (with the Nasdaq up 2% from its overnight lows and 30 point rip in the S&P) appears 100% based on the squeezing of "most shorted" stocks (best day in over a month) and the ramping of AUDJPY. Credit markets ignored the idiocy; Treasury markets ignored it; The USD went nowhere (after EUR dumped on Italy downgrade then recovered). Gold, Silver, and Copper all closed down 2-3% on the week (given back yesterday's gains) as Oil surged 2.2%. VIX dropped over 2 vols to close with a 12-handle (but disconnected notably from stocks at the close). It's not all ponies and unicorns though - Biotechs are down 5% from Yellen's comments and the Russell 2000 closed red for the 2nd week in a row (and still -1% year-to-date). Best Dow Friday in 5 months (up 11 in a row).
Thanks to the capable carry-induced ramp in AUDJPY (and a helpful OPEX pile-on for VIX), US equity markets are surging this morning (Russell 2000 above yesterday's highs?!) on the heels of the biggest short squeeze in over a month... SSDD...
Fear - or no fear. VIX was monkey-hammered to fresh cycle lows at 10.34 today (still double-digits for now) and OPEX lifted US equity markets (Dow Industrials, Transports, and S&P) to new record highs. Notably European peripheral bond spreads jumped higher (worsened) by their most in 15 months this week. "Most shorted" stocks rose a massive 4.6% this week (surging this afternoon) - the biggest squeeze in 14 months. The USD lost ground (-0.4% on the week) led by EUR strength as JPY closed unch (hardly supportive of the 2% gain in the high-beta honeys this week). Treasuries were nothing like as exuberant as stocks this week (30Y +3bps, 5Y unch) having traded in a 10-11bps range all week. The ubiquitous late-day VIX slam forced stocks to all-time highs. Precious metals had their best week in 4 months closing above $1300 (gold) and $20 (silver) back at 2 and 3 month highs respectively and pushing gold above the S&P year-to-date.
Many market participants are scratching their head as to whether the low VIX levels are an anomaly or some kind of utopian new normal. JPMorgan's Quant Derivatives shop warns the current environment is not similar to the great moderation of 2004-2007 as volatility appears to be disconnected from fundamentals and pressured by structural effects, including central bank intervention, low trading volumes, and pressure from option hedging. Crucially, based on an examination of 'gamma imbalances', the current (low) volatility regime may change significantly after the June expiry.
If you’re sitting in a job which can be outsourced your clock is ticking.
Just out from Bloomberg:
- Deutsche Bank preparing a capital increase, aims to raise EU8 billion through new shares by end of June, Handelsblatt says, citing unidentified people in the finance industry.
- Deutsche Bank likely to get new single investor
- Deutsche Bank new investor may hold 5%-8% of shares
- Deutsche Bank declined to comment: Handelsblatt
And the punchline: Bank’s new shares may be sold with 25%-30% discount. In other words, it is liquidity scramble time, and the bank is willing to give anyone with deep enough pockets a 30% discount to market price just to get some additional short-term funding.
Did Facebook really just buy a company at THESE Valuations?
While The Russell 2000 briefly regained positive territory for 2014 (up 1.5% on the week), the Dow, S&P, and Trannies ended the shortened and low volume week practically unchanged (and the Dow -2.6% YTD). Treasury yields oscillated as bad-news-good-news played out but ended the week practcically unchanged (10Y -1bps, 5Y +1bps). The USD drifted lower today to end the week very modestly positive (+0.1%) as EUR strangeth dominated JPY and CAD weakness). VIX went higher all week (admittedly OPEX-impacted) as underlying stocks remained bid. Credit markets ended the week wider than they opened on Tuesday (despite equity strength). Depsite the USD, commodities rose on the week with Silver and WTI crude up almost 2% and gold up 0.5%. For an options-expiration day, today's volume was very weak. And 2014's best performing S&P 500 sectors... Healthcare and Utilities.
Headlines will suggest that today's rally was due to the beat in US PMI (a data item that doesn't even rank on Bloomberg's scale of economic importance) and chose to ignore the misses (macro and micro) in everything else (which must be weather-related), the facts are different - it was simply an AUDJPY-inspired almost perfect correlation levitation from the post-China-PMI miss lows - more China QE to come. Having decoupled from USDJPY overnight, today's melt-up in stocks recoupled the all-important fun-durr-mental pair and lifted the Russell 2000 back to unchanged for 2014. With OPEX tomorrow, VIX was noisy and remains bearishly divergent from stocks (though was offered today). Credit markets lifted with stocks. Treasury yields rose back to modestly higher on the week. Gold and silver rose on the day starting from the China PMI miss (as did the USD with most of the majors losing ground against it). US Macro hits fresh 6-month lows.
As we "forecast" this morning (and a month ago - if our extrapolation of the Fed's balance sheet is correct - i.e. no Taper - that the S&P 500 Fed L-A-B-I-A should be around 1800 by year-end), the Fed can be proud that they managed (remember it "costs" $3.25bn in POMO to create 1 S&P 500 point) to get the key US equity index - the S&P 500 - near the critical 1,800 level...
5Y yields rose a stunning 37% this week - the most in the 50 year record of Bloomberg data. The 38bps increase in yields is also among the worst absolute shifts over that period but off such low levels it is quite a shock. Credit markets saw hedge protection bought early on in the week and then covered as real money started to sell their bonds on the back of redemptions in the last two days. The high-yield bond ETF had its biggest weekly loss in 13 months (notably clinging to the Lehman ledge levels). Equity markets suffered too (down 3.5 to 4.0% from the FOMC) with the S&P's worst week of the year (even as it bounced off its 100DMA). Most sectors hung around the 3-4% drop but homebuilders are down over 8% since the FOMC. The USD surged over 2.1% on the week with JPY's worst week in 43 months. VIX ended the day down 1.7 vols at 18.8% but beware as OPEX and hedge unwinds into underlying covers seems prevalent. Gold's worst week in 21 months left it back under $1300.
Bond markets were slow to react to the Hilsenramp - forced by equities it seems in the short-range - but have now reversed their gains. Credit markets stopped believing about 30 minutes ago. Are equity markets, having trod water around VWAP for a while, now ready to revert back to a world absent the WSJ reporter... or primed for a melt-up into OPEX?
Given the dramatic drops in gold and oil prices over the past few trading sessions, we thought it worth examining which miners and oil producers were most 'at risk' of generating negative cash flows at current and long-term prices. Goldman Sachs looks at 40 oil producers and 25 gold mines to create a complete 'cost curve' in terms of the best indication of what it actually costs to keep operations running. It is quite apparent that ~$85 Crude and ~$1150 Gold are key to the ongoing support for these industries.
Following Europe's worst day in months, the US stock markets saw the biggest drop of 2013 today. For those shunning the brief period, aside from 12/28 swings, this is the worst drop in the S&P 500 futures since early November on a relatively high volume day. EUR's weakness was a major driver (just as it was on the way up) jawboned by various CEOs and leaders and pressured down to almost a 1.34 handle (down over 1% against the USD as JPY gained 0.6% against the USD). Treasury yields clattered lower - to Friday's lows - and credit markets remained much less exuberant (as stocks played catch-down). Gold was relatively bid even as the USD gained, testing up to $1675. Homebuilders continue to slip lower and with AAPL's ongoing demise, there was no OPEX/month-end pump to save Tech and implicitly the rest of the market. HY Bond ETFs and synthetics remain weak but selling is thin in bond-land - it seems everyone knows that the cash market can't stand a herd heading for the exit all at once. VIX jumped a considerable 1.75 vols to 14.65% - its highest close of the year.
Equities closed the day-session near the highs of the day as OPEX shenanigans were evident everywhere. Early and ugly macro data was swept under the proverbial carpet (as it is transitory Sandy effects?), the ubiquitous European-close trend reversal started us higher, and then platitudes from D.C., and a late-day Fed-Head jawbone did the rest on a day when AAPL saw its largest volume in 8 months and pinned between 520 and 530 VWAPs. Risk assets did not follow the path of most exuberance that stocks did on the day (surprise). Credit tracked with stocks today in general but remains an underperformer on the week. Oil was the week's big beta winner with the USD (despite underlying dispersion in EUR and JPY) and Treasuries rather dull. Gold sagged but by the close today the S&P 500 had recoupled with the barbarous relic on a beta basis. VIX compressed (exciting some that are incapable of comprehending a term structure) as put overlays were unwound into OPEX (and given the VWAP/volume moves it would seem AAPL saw hedges taken down and exposure reduced). Red week as stocks continue to catch down to bond's new normal.