Introduce a regulation over here, an unintended consequence pops up over there. Then there are more regulations to deal with the unintended consequences. Regulations have added 100 times the volatility to one of the most liquid and ordinary derivatives in the world - the plain-vanilla EFP. Less liquidity, more volatility - welcome to 2015.
Who could have seen that coming? After showing weakness all night (on still-fading oil prices despite Libyan issues and GREXIT concerns), the moment the US equity cash market opened for business, USDJPY was smacked higher and thus stocks went vertical with the S&P 500 pushing back near record highs. The Russell 2000 was the leader as "most shorted" stocks were monkey-hammered yet again...
On July 15th 2014, The Federal Reserve uttered the following warning to exuberant equity investors, "Valuation metrics in some sectors do appear substantially stretched -- particularly those for smaller firms in the social-media and biotechnology industries." 5 months later, Yellen Capital LP is half right...
Trading volumes today are running at the lowest pace since 2006, crude oil prices ae testing back towards fresh 5 year lows, and Treasury yields are all lower... so it should come as absolutely no surprise that the S&P 500, Dow Industrials, and Russell 2000 have all hit fresh intraday record highs today.
Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."
10Y yields are back below 2.20% and 30Y below 2.85% - awkwardly close to the Bullard lows - and stocks appear to be waking up to the massive squeeze-driven decoupling in the last 6 weeks (as USDJPY tests below 118.00). Small Cap Russell 2000 has plunged back into the red year-to-date, and the rest of the equity complex is not "off the lows". Remember, it's all about the fun-durr-mentals.
We doubt anyone will find it one bit surprising that as Bank of America observes in its latest weekly hedge fund monitor, "S&P500 longs increase to six month high" with all equities bought. And alongside that, and confirming that the short squeeze in the Treasury market will continue indefinitely, "10-yr contracts were sold at a strong pace to increase net short positioning to largest in six months." Why? Because that imminent economic recovery which everyone has been betting on since the second half of 2013 is just not coming, seasonally adjusted low-paying temp, retail, teacher and secretary jobs notwithstanding.
B-Dud Explains The Fed’s Economic Coup (Or Why Every Asset Price Influencing Monetary Policy Transmission Is Now Manipulated)Submitted by Tyler Durden on 12/03/2014 20:30 -0400
The Fed can do only do two concrete things to influence these income and credit sources of spending - both of which are unsustainable, dangerous and an assault on free market capitalism’s capacity to generate growth and wealth. It can induce households to consume a higher fraction of current income by radically suppressing interest rates on liquid savings. And it can inject reserves into the financial system to induce higher levels of credit creation. But the passage of time soon catches up with both of these parlor tricks.
"The time to liquidate a given position is now seven times as long as in 2008, reflecting much smaller trade sizes in fixed income markets. In part the current liquidity illusion is a product of the risk asymmetries implied by the zero lower bound on interest rates, excess reserves in the system, and perceived central bank reaction functions. However, interest rates in advanced economies won’t remain this low forever. Once the process of normalization begins, or perhaps if market perceptions shift, and it is expected to begin, a re-pricing can be expected. The orderliness of that transition is an open question."
Never in the history of US equity markets has the S&P 500 closed above its 5-day moving average for 28 days in a row... until today. While most indices tracked sideways in a very narrow range today, Trannies outperformed (helped by weaker oil, but even when oil rallied intraday Trannies rallied too). VIX tracked back below 12.5 with an inverted term structure for the 5th day in a row. The USD lost ground for the 2nd day in a row, driven by EUR strength (with notable AUD weakness extending). Silver rallied as gold flatlined and copper tumbled after US GDP beat. However, the two big themes today were the collapse in oil prices (as rumors/news ahead of OPEC sent volatility soaring) to a $73 handle - the lowest close since 2010; and the plunge in Treasury yields (with a very stroing 5Y auction and big block trade in TLT suggesting short-covering). Finally, AAPL broke above a $700 billion market cap briefly today but was unable to hold it.