Price Action

To say that China, which a few days ago reported GDP of 6.9% which "beat" expectations and which a few hours ago reported Chinese home prices rose in more than half of tracked cities for the first time in 17 months, stunned everyone with its rate cut on Friday night, meant clearly for the benefit of US stocks, as well as the global commodity market, is an understatement: nobody expected this. As a result strategists have been scrambling to put China's 6th rate cut in the past year (one taking place just ahead of this weekend's Fifth plenum) in context. Here are the first responses we have seen this morning.

Yesterday morning, when previewing the day's tumultuous events, we said that "Futures Are Firm On Hope Draghi Will Give Green Light To BTFD." And boy did Draghi give a green light, that and then some, when his press conference unleashed one of the biggest one-day US equity rallies in 2015. This morning it has been more of the same, with global market momentum on the heels of Draghi's confirmation that Europe's economy is again backsliding (it's a good thing, if only for stocks), leading to momentum for US equity futures, which together with soaring tech/cloud, earnings if no other, are on their way to take out recent all time highs.

After yesterday's dramatic late day market rout catalyzed by the tumble in the biotech sector in general, and Valeant in particular, and foreseen in its entirety by Gartman who went bullish just hours before, this morning US equity futures and European stocks have recouped some losses on the recursive, and traditional, hope that Mario Draghi will say something to push risk higher when he speaks in 2 hours at the ECB's press conference in Malta. And yet, just like Yellen a month ago, Draghi faces the paradox of reflexivity that after years of being ignored, is the "new thing" in town: how does he intervene and demonstrate he is readier than ever to set up stimulus, without panicking investors over euro area’s health.

As a desperate Saudi Arabia taps the bond market to mitigate the SAMA drawdown while simultaneously attempting to muscle in on Moscow's Eastern European market share, Russian crude sales to China soared 42% in September. The result: for the second time this year, Russia has overtaken Saudi Arabia as the number one crude supplier to Beijing. 

After yesterday's closing ramp "prudently" just ahead of an abysmal IBM earnings report with the lowest revenues since 2002, and the latest rally in capital markets which sent European stocks to their highest level since August on the back of a barrage of global bad data which has unleashed the Pavlovian liquidity dogs screaming for moar central bank bailouts, this morning has seen a modest decline in the Stoxx 600 driven by energy names, while S&P500 futures are set to open lower on IBM's disappointment at least until the latest massive BOJ USDJPY buying spree sends the pair to 120 and the S&P solidly in the green. The biggest political event overnight was the Canadian election, where Trudeau's liberals swept PM Harper from power, capping the biggest political comeback in the country's history; the Canadian dollar is largely unchanged after initially weakening then rising.

The “smart money” and by that we mean the more informed, aware and prudent investors and institutions internationally continue to have an allocation to gold and or add to existing allocations. The less informed continue to not understand or disparage gold and focus almost solely on gold’s short term price action rather than gold’s long term attributes as a hedging instrument and a safe haven asset.

In the four or so weeks after the August 11 China deval, all anyone wanted to talk about was FX reserves. Goldman has endeavored to tally up currency intervention as a percentage of reserve money in Asia during what they’re calling the “China tantrum”. Note the rather scary looking figure for Malaysia.

For the past two weeks, the thinking probably went that if only the biggest short squeeze in history and the most "whiplashy" move since 2009 sends stocks high enough, the global economy will forget it is grinding toward recession with each passing day (and that the Fed are just looking for a 2-handle on the S&P and a 1-handle on the VIX before resuming with the rate hike rhetoric). Unfortunately, that's not how it worked out, and overnight we got abysmal economic data first from China, whose imports imploded, then the UK, which posted its first deflation CPI print since April, and finally from Germany, where the ZEW expectation surve tumbled from 12.1 to barely positive, printing at just 1.9 far below the 6.5 expected.

With the "adult supervision" of US markets gone today as bond markets are closed for Columbus day, and the USDJPY tractor beam also missing with Japan also offline for Health and Sports day, stocks took their cues from China where speculation was rife that in lieu of cutting RRR, the PBOC has unleashed even more incremental QE by expanding its Collateral Asset Refinancing Program (CAR). Specifically, the central bank said this weekend it will expand a program allowing lenders to use loan assets as collateral for borrowing from the central bank, opening it up to nine more cities from the program's test in Shandong province and Guangdong. The new areas for the program include Beijing and Shanghai. According to some estimates released several trillions in liquidity into the market, and not only sent government bond futures to new highs, but pushed the Shanghai Composite up over 3% overnight.

Gains in the foreign currencies appears to be mostly short-covering rather than bottom-picking per se.  In bigger picture the dollar is consolidating its earlier gains.

This past week saw the markets rebound off their lows which has brought the "bulls" rushing back claiming the correction is over. However, is that really the case?

The best headline to summarize what happened in the early part of the overnight session was the following from Bloomberg: "Asian stocks extend global rally on stimulus bets." And following the abysmal data releases from the past three days confirming that the latest centrally-planned attempt to kickstart the global economy has failed, overnight we got even more bad data, first in the form of Australia's trade deficit, and then Germany's factory orders which bombed, and which as Goldman said "seems to reflect genuine weakness in China and emerging markets in general and this will weigh on the German manufacturing sector."

The average retest period following crashes similar to that in August have bottomed an average of 27 days after the crash…that would be Friday .

With China markets closed for holiday until the middle of next week, and little in terms of global macro data overnight (the only notable central banker comment overnight came from Mario Draghi who confidently proclaimed that "economic growth is returning" which on its own is bad for risk assets), it was all about the USDJPY which has seen the usual no-volume levitation overnight, dragging both the Nikkei higher with it, and US equity futures, which as of this moment were at session highs, up 7 points. The calm may be broken, though, as soon as two hours from now when the September "most important ever until the next" payrolls report is released.

How many of us are bored to tears with the Fed’s Hamlet act on raising rates, and yet have been staring at this debate for so long that we have convinced ourselves that we have a meaningful view on what will transpire, even though it’s a decision where we have zero investing edge and unknowable risk/reward odds. The hardest thing in the world for talented people is to avoid turning a low edge and odds opportunity into an unreasonably high conviction bet simply because we want it so badly and have analyzed the situation so smartly. In both poker and investing, we brutally overestimate the edge and odds associated with merely ordinary opportunities once we’ve been forced by circumstances to sit on our hands for a while. Investment discipline suffers under the weight of dullness and low conviction in at least four distinct ways here in the Golden Age of the Central Banker...