Price Action

"Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

European shares remain lower, close to intraday lows, with the banks and autos sectors underperforming and food & beverage, retail outperforming. Tsipras hardens Greek stance after collapse of bailout talks. The Italian and Swedish markets are the worst-performing larger bourses, the U.K. the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; Spanish yields increase. Commodities decline, with copper, nickel underperforming and natural gas outperforming. U.S. Empire manufacturing, net TIC flows, NAHB housing market index, industrial production, capacity  utilization due later.

For a sense of what is driving sentiment this morning look no further than the Athens stock market which exploded higher yesterday on a Bloomberg story based on "two sources" that Germany was willing to compromise, only to close just as the IMF pulled a classis bad cop and announced it was halting work on Greece, and before further news from Bild that Germany was preparing for a Greek default while Europe had given Greece 24 hours to submit a final, workable proposal. As a result, it tumbled promptly at the open even as optimism persists and since the opening plunge, Greek stocks have continued to climb and are now back to yesterday's euphoric opening levels.

Gold bugs weren’t wrong - just super early. If central banks ever got religion and pulled a Volcker and hiked rates to the moon, it would be a remarkably bad time to hold gold. However, throughout history, there have been times where people were very sad that they didn’t own gold. We talk about one of them here. It’s very real, and the history of fiat currencies is also quite sad.

After a Chinese session which following the MSCI failure to include Chinese stocks in its EM index, if only for the time being, was largely a dud with Shanghai stocks actually dropping by 0.1% after a late day selloff, eyes turned to Europe, which once again did not disappoint and where the bond rout continued apace, with the 10Y Bund yield spiking just after the European open, and rising above 1.05%, the widest level since September 19, before recouping some losses and trading just around 1.00% at last check.

After a quiet Asian session, where not even the latest Chinese CPI miss was enough to push the SHCOMP to new multi-year highs, all eyes were on Europe where a few hours ago the European Commission announced it had received not one but two new proposals from Greece with the Greek government adding that it considers proposals submitted last week as remain basis for political negotiations. However, barely had Europe received the Greek addenda when it nein'ed all over them, with BBG citing an international official directly involved in talks saying that the "Greek government's revised proposal to unlock bailout funds is vague rehash of earlier plans, not considered credible."

"Do investors want to own bonds at 1% or 1-2bp yield per bp of realized vol, if risk is exploding? The EGB market is at historical highs in terms of total market risk!"

One (perhaps the only) bright spot in the past few year’s gold market has been Chinese and Indian demand for the metal. But physical bullion is only part of the story, and may not be the biggest one going forward. Speculation has been circulating for years that China’s miners, flush with cash from selling their low-cost output to the government, would soon start buying up the world’s in-ground gold reserves... and now, finally, the China-buying-all-the-gold-mines scenario has begun to solidify.

For once Mario Draghi was right. A day after the European central bank head warned of a spike in volatility, volatility did just that, with markets everywhere from China to Europe seeing volatility explode.

With the Greek IMF payment just 48 hours away, and Europe having submitted its best and final offer to Greece in a battle of "deal proposals", today Greek PM Tsipras will meet with European Commission President Juncker to discuss the recently submitted reform proposals by the Greek premier. However, a Greek government spokesman says that Greek PM Tsipras will not meet Eurogroup's Dijsselbloem despite several reports suggesting that they would do so later today. Last night it was reported that the EU, ECB, IMF agreed on terms for a cash-for-reform plan to be presented to Greece. However, a senior EU official has said that they are concerned that the stringent measures of the proposal could be met with rejection by Greece.

If U.S. equities feel brittle, they should. Yes, central bank liquidity from Japan and Europe may well push global equity markets higher.  But what we really need is a pullback – that classic 10% correction that flushes out weak hands, reestablishes the discipline of “Risk” in the “Risk-Return” equation, and shows capital markets how to do more than just follow central bank liquidity.  So watch June’s price action in U.S. stocks very carefully, because this process needs to start now.  The bull market that began in March 2009 is now an ancient bovine indeed.  After all, better 10% now than 20% or more later in the year.  The first is inconvenient.  The second is unwelcomed.

Remember China's 6% crash last week? It is now a distant memory made even more remote thanks to the latest batch of ugly data out of China, coupled with hints of even more liquidity injections, which led to the latest surge in the Shcomp, an index that has put most pennystocks to shame. In Europe, the big story remains Greece, and as everyone expected, the doomed country and its creditors failed to make a deal on Sunday. This is after Greek Officials were said to have prepared a draft agreement, which was expected to be announced on Sunday. Not helping things, Greek PM Tsipras came out in fully defiant mode and accused bailout monitors of making “absurd” demands and seeking to impose “harsh punishment” on Athens. A bunch of final PMI number showed a modest improvement in the periphery at the expense of Germany whose deterioration is starting to be a concern.

The highlight of the overnight newsflow may have been the BOJ's preannounced statement that it is keeping its QE unchanged (which comes as no surprise after a few weeks ago the BOJ adimitted it would be unable to keep inflation "stable" at the 2% in the required timeframe), but the highlight of overnight markets was certainly China, where the Banzai Buyers have reemerged, leading to another whopping +2.8% session for the Shanghai Composite which has now risen to a fresh 7 years high.

The big news overnight was neither the Chinese manufacturing PMI miss nor the just as unpleasant (and important) German manufacturing and service PMI misses, but that speculation about a rate hike continues to grow louder despite the abysmal economic data lately, with the latest vote of support of a 25 bps rate increase coming from Goldman which overnight updated its "Fed staff model" and found surprisingly little slack in the economy suggesting that the recent push to blame reality for not complying with economist models (and hence the need for double seasonal adjustments) is gaining steam, and as we first suggested earlier this week, it may just happen that the Fed completely ignores recent data, and pushes on to tighten conditions, if only to rerun the great Trichet experiment of the summer of 2011 when the smallest of rate hikes resulted in a double dip recession.