She came, she spoke, and she sent stocks to a new all time high. That is perhaps the simplest summary of what Janet Yellen did yesterday when, as a result of her droning monotone, she managed to put the VIX literally to sleep, which closed at the lowest since 2007 and the resulting surge in the S&P was a fresh record high, because despite the "concerns" Fed member have about record high complacency, all they are doing is adding to it. And now that apparently the Fed has a market "valuation" department, and Yellen can issue fairness opinions on whether the S&P is overvalued, the only question is whether today, as a follow through to yesterday's "buy everything, preferably on leverage, sincerely - the Fed" ramp, the VIX will drop to single digits today.
it is suddenly not fun being a Fed president (or Chairmanwoman) these days: with yesterday's 2.1% CPI print, the YoY rate has now increased for four consecutive months and is above the Fed's target. Concurrently, the unemployment rate has also dipped well below the Fed’s previous 6.5% threshold guidance, in other words the Fed has now met both its mandates as set down previously. There have also been fairly unambiguous comments from the Fed’s Bullard suggesting that this is the closest the Fed has been to fulfilling its mandates in many years. Finally, adding to the "concerns" that the Fed may surprise everyone were BOE Carney’s comments last week that a hike “could happen sooner than the market currently expect." In short: continued QE here, without a taper acceleration, merely affirms that all the Fed is after is reflating the stock market, and such trivial considerations as employment and inflation are merely secondary to the Fed. Which, of course, we know - all is secondary to the wealth effect, i.e., making the rich, richer. But it is one thing for tinfoil hat sites to expose the truth, it is something else entirely when it is revealed to the entire world.
Straightforward dispassionate overview of the investment climate
More and more investors are struggling...
With another day of little otherwise completely irrelevant macro news (because following last night's abysmal Australian jobs data one would think the AUD would be weaker; one would be wrong), market participants - all 3 of them - and algos (which have finally uncovered where Iraq is on google maps) are finally turning their attention to the latest conflict in Iraq (because they obviously no longer care about the martial law in Thailand or the civil war in Ukraine), where the Al Qaeda spin off ISIS overnight seized at least 310K B/D in refinery capacity in northern Iraq according to the Police, and what is more concerning, is now less than a 100 kilometers away from Baghdad. Will ISIS dare to venture further south? Keep an eye on crude for the answer.
Yesterday's market action was perfectly predictable, and as we forecast, it followed the move of the USDJPY almost to a tick, which with the help of a last minute VIX smash (just when will the CFTC finally look at the "banging the close" in the VIX by the NY Fed?) pushed the DJIA to a new record high, courtesy of the overnight USDJPY selling which in turn allowed all day buying of the key carry pair. Fast forward to today when once again we have a replica of the set up: a big overnight dump in USDJPY has sent the dollar-yen to just over 102.000. And since Nomura has a green light by the BOJ to lift every USDJPY offer south of 102.000 we expect the USDJPY to once again rebound and push what right now is a weak equity futures session (-8) well above current levels. Unless, of course, central banks finally are starting to shift their policy, realizing that they may have lost control to the upside since algos no longer care about warnings that "volatility is too low", knowing full well the same Fed will come and bail them out on even the tiniest downtick. Which begs the question: is a big Fed-mandated shakeout coming? Could the coming FOMC announcement be just the right time and place for the Fed to surprise the market out of its "complacency" and whip out an unexpected hawk out of its sleeve?
If predicting yesterday's EURUSD (and market) reaction to the ECB announcement was easy enough, today's reaction to the latest "most important ever" nonfarm payrolls number (because remember: with the Fed getting out of market manipulation, if only for now, it is imperative that the economy show it can self-sustain growth on its own even without $85 billion in flow per month, which is why just like the ISM data earlier this week, the degree of "seasonal adjustments" are about to blow everyone away) should be just as obvious: since both bad news and good news remain "risk-on catalysts", and since courtesy of Draghi's latest green light to abuse any and every carry trade all risk assets will the bought the second there is a dip, the "BTFATH mentality" will be alive in well. It certainly was overnight, when the S&P500 rose to new all time highs despite another 0.5% drop in the Shcomp (now barely holding on above 2000), and a slight decline in the Nikkei (holding on just over 15,000).
The initial exuberance over Draghi's actions (and promises) faded quickly with Treasury yields falling and the EUR surging back higher (to close at 10-day highs)... but thanks to sterling work by AUDJPY and some well chosen 'I'm not scared anymore' comments from David Tepper, US equities soared in a world of their own (as VIX dropped). Volume was also heavy (but the siz came on the downswing after the initial jerk higher from the ECB). The Russell 2000 soared ~2% (best day in 3 months), Treasury yields closed lower, the USD closed lower (as EUR surged) and unchanged on the week, and gold and silver jumped. VIX also helped to support stocks at it dropped modestly (but remains notably disconnected from the equity exuberance). NFP tomorrow... time to sell vol for sure!!
In today's abnormally quiet overnight session one could hear a pin, or the USDJPY, drop: with everyone focusing on the ECB announcement in one hour, not a single algo is willing to make any big moves, or even start some momentum ignition, ahead of Draghi's announcement, which absent launching full scale QE, which it won't, will be a disappointment which means the EUR will ultimatly move higher after a kneejerk lower as the market forces Super Mario to do even more next time. As Bloomberg adds, a cut in refi and deposit rates is fully priced in and latest price action suggests investors brace for disappointment if ECB stops short of signaling asset purchases or other liquidity measures to combat deflation.
Considering that both key overnight news reports: the Chinese HSBC PMI (printing at 49.4, vs 49.7 expected) and the Eurozone CPI print from a few hours ago (print of 0.5%, down from 0.7% and below the 0.6% expected), we find it odd that futures are red: after all this is precisely that kind of negative data that has pushed the market to record highs over the past five years. And speaking of odd, considering the ongoing non-dis-deflation in Europe, the fact that Bunds and TSYs are being sold off today makes perfect sense in a New Normal bizarro world.
Earlier today, as part of its latest macro markets research roundup, Goldman let a phrase slip, which probably better than anything we have seen in the past few years, captures just how truly broken the "market" is. To wit: "it is important to remember that weak global growth is generally negative for risky assets." That Goldman even had to remind its clients of this dramatic observation, puts to rest any doubts about just how much central banks' central-planning has perverted the cost/benefit analysis of the world.
"Get ready to change your thinking on US Treasuries. The larger bear trend is set to emerge," is the ominous warning from BofAML's MacNeil Curry. As yields keep tumbling lower, he believes, US Treasury yields are either testing or fast approaching levels from which we should see a base and eventual resumption of the larger, long-term bear trend.
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.
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 recent public outcry over high frequency trading is pointless. Solutions exist. Virtually every comparable market in the world uses them already. But, some electronic exchanges may not willingly adopt them. Doing so may disrupt their current business model. The incentives are misaligned, and competitors or regulators may need to force the issue to see change. Luckily, the issue to be forced is far simpler than most think. It’s time to add quality to the matching process.