Everywhere you look these days, central planning just can't stop reaping failure after failure. First it was Japan's Q3 GDP rising just 1.1%, well below the 1.9% in the previous quarter and the 1.6% expected, while the Japanese current account posted its first decline since of €128 billion (on expectations of a JPY149 billion increase) since January. What's worse, according to Asahi, Abe's approval rating tumbled to 46% in the current week, down from the low 60s as soon as early 2013, while a former BOJ member and current head of Japan rates and currency research, Tohru Sasaki, said that the high flying days of the USDJPY (and plunging of the JPY respectively) is over, and the USDJPY is likely to slide back to 100 because the BOJ would not be able to expand monetary easing by enough to repeat this year's "success." He definitely uses that last word rather loosely.
While moderate recovery in growth and inflation is BofAML's rates team's base case, there are numerous risks to that forecast. The risk of tapering is already quite well known and they suspect it may not result in the significant market-moving event many expect when it actually happens; however, the following downside and upside risks threaten BofAML's central scenarios for 2014 as well.
Goldman Reveals "Top Trade" Recommendation #2 For 2014: Go Long Of 5 Year EONIA In 5 Year Treasury TermsSubmitted by Tyler Durden on 11/26/2013 07:27 -0500
If yesterday Goldman was pitching going long of the S&P in AUD terms (the world renowned Goldman newsletter may cost $29.95 but is only paid in soft dollars) as its first revealed Top Trade of 2014, today's follow up exposes Top Trade #2: which is to "Go long 5-year EONIA vs. short 5-year US Treasuries." Goldman adds: "The yield differential between these two financial instruments is currently -61bp, and we expect it to reach around -130bp. On the forwards, the differential is priced at around -95bp at the end of 2014 at the time of writing. We have set the stop-loss on the trade at a spread of -35bp. The choice of Treasuries over OIS or LIBOR on the short leg is motivated by the fact that yields on the former could underperform more than they have already in relative space as the Fed scales down its asset purchase program."
The only thing that prevents us from going all in short the S&P following the revelation that Goldman's first revealed top trade of 2014 is to go long the S&P Dec 2014 futures with a target of 2250 and a close below 1855, is that the reco is not from Tom Stolper but his colleague Noah Weisberger whose muppet wipe out record is not quite as prominent. Still, for Goldman clients to buy S&P futs, Goldman has to sell it to them, and as always - do what Goldman does, not what it says.
An overview of recent developments, include the political developments in the US Senate, that may weigh on the dollar in the days ahead.
The following Top Ten Market Themes, represent the broad list of macro themes from Goldman Sachs' economic outlook that they think will dominate markets in 2014.
- Showtime for the US/DM Recovery
- Forward guidance harder in an above-trend world
- Earn the DM equity risk premium, hedge the risk
- Good carry, bad carry
- The race to the exit kicks off
- Decision time for the ‘high-flyers’
- Still not your older brother’s EM...
- ...but EM differentiation to continue
- Commodity downside risks grow
- Stable China may be good enough
They summarize their positive growth expectations: if and when the period of stability will give way to bigger directional moves largely depends on how re-accelerating growth forces the hands of central banks to move ahead of everybody else. And, in practice, that boils down to the question of whether the Fed will be able to prevent the short end from selling off; i.e. it's all about the Fed.
While operating earnings are widely discussed by analysts and the general media; there are many problems with the way in which these earnings are derived due to one time charges, inclusion/exclusion of material events, and outright manipulation to "beat earnings." Therefore, from a historical valuation perspective, reported earnings are much more relevant in determining market over/under valuation levels. In this regard reported earnings increased from $24.87 to $25.04, a 0.6% increase, per share in the third quarter. The ongoing deterioration in earnings is something worth watching closely. The recent improvement in the economic reports is likely more ephemeral due to a very sluggish start of the year that has led to a "restocking" cycle. This puts overly optimistic earnings estimates in jeopardy of be lowered further in the coming months ahead as stock buybacks slow and corporate cost cutting becomes less effective.
'Another week, another high for equities' is the resigned way JPMorgan's Jan Loeys begins his discussion of "bubbles" this week - the massive gains in equity markets, in a month and a year of lower economic growth and earnings expectations, are raising a warning flag for many investors that easy money and liquidity are creating serious asset bubbles that threaten future growth and investment returns. Simply put, "a bubble view is a view that the Fed will stay easy for too long" and will then have to stamp on the brakes when growth and inflation suddenly react to easy money; and "a sudden spurt in growth is the biggest risk to asset reflation."
How do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world? History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world - at least not yet - but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of youth. Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion..
Back in October of 2012, Hugh Hendry proposed a very simple investment thesis: '"I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation. And if you are bullish gold why don’t you buy gold ETFs, gold futures or gold bullion." Since then, anyone who listened to Hendry has made a substantial double digit return (yes, one can make double digits returns on gold even when gold is sliding: such is the "magic" of long gold, short GDX pair trades). However, following a massive, 50%+ selloff, there comes a time when even gold miner stocks become attractive to those with deep pockets filled with reserve fiat. For someone like China, that time may be now. The WSJ reports that China's largest gold company, China National Gold Group Corp., has talked to Ivanhoe Mines "about buying a stake in or asset from the company."
For the second day in a row, better than expected Chinese "data" set sentiment across the board when following an improvement in its trade data (even as crude oil imports dropped to an 11 month low), last night China reported a better than expected August Industrial Production print of 10.4%, compared to 9.7% for July, and higher than the 9.9% expected. This was driven by a pick up in Chinese M2, which rose from 14.5% to 14.7% Y/Y, as the PBOC has once again resuming what it does best, injecting liquidity into the system, even if said liquidity no longer makes its way into the proper channels, as new CNY loans missed the expected CNY730bn, rising to 711.3bn for August. Elsewhere, not all was good on the Industrial Production front, following a French miss of -0.6% on expectations of a rebound to +0.5%, as well as a miss in mfg production of -0.7%, down from -0.4% and below the expected 0.7%. This, in parallel with Moscovici once again saying the 2013 deficit will be "slightly higher than 3.7%" means that just like in 2012, and with German economic metrics continuing to contract, as the periphery stages a modest rebound it is the core that threatens Europe's stability once again. Finally, and since in Europe everything is ultimately funded by current account positive Germany either directly or via TARGET2, the recent Italian economic strength, which also means a bounce in imports, meant that Italian TARGET2 liabilities (through which Germany indirectly funds Italy's current account deficit) are once again back at a 4 month high. And so the cycle repeats.
San Francisco Fed head John Williams - known for his extremely dovish views on monetary policy (and support of record accomodation) - appears to have taken some uncomfortable truth serum this morning. In a speech reminiscent of previous "froth" discussions and "irrational exuberance" admissions, Williams explained:
- *WILLIAMS SAYS POLICY MAY YIELD ASSET BUBBLES, UNINTENDED RESULT
- *WILLIAMS: ASSET-PRICE BUBBLES AND CRASHES 'ARE HERE TO STAY'
- *WILLIAMS: ASSET-PRICE BUBBLES ARE 'CONSEQUENCE OF HUMAN NATURE'
His words appear to reflect heavily on the Fed's Advisory Letter (from the banks) from 3 months ago - warning of exactly this "unintended consequence." This, on the heels of Plosser's recent admission that the Fed was responsible for the last housing bubble, suggests with the black-out period before September's FOMC about to begin, the Fed is sending us a message that Taper is coming - as we know they are cornered for four reasons (sentiment, deficits, technicals, and international resentment).
The conflict in Syria is very complex, given the country’s diverse ethnic mix and the influence of foreign powers. This implies a high risk of a further dramatic escalation of the conflict, with negative spillovers into the broader region. Short term, UBS notes that the response of the Assad regime to a potential military strike will be crucial, while a key question for the medium term will be whether state structures can be preserved in Syria, so that contagious chaos can be avoided. UBS sees the impact on the international economy comes mainly via risk appetite and oil prices. Should the conflict be contained, the global economic fallout should be limited. However, the worst-case scenario of a regional spread of hostilities, involving Iran, Israel or the GCC, would be a lot more damaging.
As most know by now, over the past month or so, pressure on the currencies of EM deficit countries has intensified again. Goldman's EM research group, however, remains negative on EM FX, bonds, and even stocks suggesting using any strength, like this week's exuberance to add protection or cover any remaining longs. Central banks in most of these countries have become more active in attempting to stem pressure in the last two weeks. But with a Fed decision on ‘tapering’ looming, investors have also become more cautious and are now focused on the parallels with prior crisis periods. In what follows, Goldman provides some concise answers to the questions on the EM landscape that we encounter most often, confirming their longer-held bearish bias.
The ongoing deterioration in earnings is something worth watching closely. The recent improvement in the economic reports is likely more ephemeral due to a very sluggish start of the year that has led to a "restocking" cycle. The sustainability of the uptick is crucially important if the economy is indeed truly turning a corner toward stronger economic growth. However, with interest rates rising, oil prices surging and the Affordable Care Act about to levy higher taxes on individuals, it is likely that a continuation of a "struggle" through economy is the most likely outcome. This puts overly optimistic earnings estimates in jeopardy of be lowered further in the coming months ahead as stock buybacks slow and corporate cost cutting continues to become less effective.