Equity volumes were abysmal today... (NYSE lowest in 2014) which means only one thing... a VIX-driven levitation. Bonds sold off at the long-end (30Y +4bps) but the short-end remained bid (5Y -1bp) but did get 5s30s back to 5 week steeps. USDJPY bounced off its 200DMA (~101.25) but did not really support stocks higher. Credit markets did not buy the exuberance in stocks either. What today's ramp appears to have been was a gap-fill for VIX from Friday's dislocation on a day with no macro data to upset the algo stop-run procession. Gold and silver (along with all commodities) overnight but once the US day session opened, the selling began and PMs closed unch. The USD ended down 0.1% led by modest EUR strength (despite ECB jawboning) and AUD weakness (rumors of downgrades). "Most shorted" stocks rallied almost 3% from Friday's lows (when S&P bounced off its 50DMA) as once again a squeeze manufactures broad index pick-ups.
Yesterday we mocked China for being desperate enough to push its tumbling housing market (which directly and indirectly accounts for some 80% of Chinese GDP per SocGen estimates) no matter the cost, that at least 20 developers were offering the kinds of mortgages that resulted in the first credit bubble crack up boom and collapse, namely "Zero money down." Little did we know that the US, never one to lag in the financial innovation department had once again one-upped China, by bringing back from the dead the company that according to Housing Wire was "once a poster child for pre-crash subprime lending" - Ditech Mortgage Corp. But best of all, ditech was known as a leader in subprime. The bulk of the mortgages were interest-only, low-documentation subprimes, and ditech was a pioneer in offering 125% loans allowing the borrower to borrow more than the sale price.
We went down the 'golden' rabbit hole and we were stunned by some of the things we found...
"...Since March, 20 property developers in Guangzhou have been offering "zero down-payments" to attract buyers, in addition to large discounts and tax refund, the National Business Daily reported Monday."
"New starts contracted 15% yoy (vs. -21.9% yoy in March); property sales fell 14.3% yoy (vs. -7.5% yoy); and land sales (by area) plunged 20.5% yoy (vs. -16.9% yoy previously). ... the housing market situation has undoubtedly turned quite gloomy. There has been a constant news stream of falling property prices everywhere, even in the 1-tier cities. A number of local governments, as we expected, have started to ease policy locally, especially relaxation of the home-purchase restrictions." - Soc Gen
Everyone knows that when it comes to apologists and scapegoats, Q1 was all about weather excuses, and as SocGen already showed earlier today when it took a $730 million charge on its Russian subsidiary, Q2 misses will all be Ukraine's fault, which is ironic because as recently as a month ago experts were screaming over each other how little Ukraine matters for the global economy, how meaningless Russian exposure is to western banks and so on. But while one can at least superficially justify a bank provisioning against deposit flight and the accumulation of bad debt in a country in which paying one's debt is the last thing on the population's mind, a new and quite different victim of the Ukraine crisis was revealed earlier today when beer titan Carlsberg swung to a net loss and issued a profit warning: beer.
When Obama repeatedly chanted "costs" should the Kremlin continue to ignore him, it appears he was referring to western corporations, because overnight we got the first batch of companies scapegoating no longer snow in the winter but - what else - the Ukraine. Leading this morning's scapegoat parade is SocGen, which following in Barclays' footsteps reported a 13% tumble in its Q1 profit, plunging to €315 million from €364 million. The reason for this huge hit to profits apparently was a €525 million ($731.26 million) write-down at its Russian bank - the same bank which, as recently as April 11, saw SocGen "increase its stake in Russian subsidiary Rosbank which it said was part of a long-term commitment to Russia. The deal comes as Russia's economy is under pressure partly as a result of sanctions imposed by the United States and Europe to protest against Moscow's annexation of Crimea." So SocGen was dumping money into a Russian subsidiary well after the Ukraine conflict had begun, knowing quite well it would be "forced" to take a Rosbank charge mere weeks later! Why yes, of course.
Perhaps the most important "news" of the day is that it is non-Tuesday. Yes, there was actual news news, like German factory orders dropping -2.8% on expectations of a 0.3% increase, French industrial production down -0.7% on expectations of a 0.3% increase (both misses driven by a soaring Euro which is now spitting distance away from the 1.40 ECB "redline"), the Nikkei tumbling 2.9% to just above 14000, the Shanghai Composite down 0.9%, SocGen Q1 profit plunging 13% and conveniently blaming it on Russia, speaking of Russia things continue to deteriorate even though Interfax reported that the country has received the first part, some $3.2 billion, of the promised IMF bailout - money which will be used to promptly pay Gazprom... and buy gold, a sudden conflict between China and Vietnam escalating over the placement of an offshore oil rig and so forth, but in the new normal, none of this matters.
It is May Day, which means half the world - the half where welfare contributions to one's standard of living are off the charts - celebrate labor, or rather the lack thereof, by taking a day off. Which means virtually all of Europe is closed, as are Eurex and Euronext futures, and most European markets expect the UK. In light of the non-existent volume, futures are relatively unchanged despite the latest Chinese Mfg PMI disappointment (50.4, below the 50.5, expected but just above the prior print of 50.3), and of course yesterday's US GDP debacle which helped push the DJIA to a record high. The good news is that with volume even more miserable than usual, the few momentum ignition algos that are operating will have a field day with the now standard low-volume levitation that happens like clockwork if the news is bad, and also happens just in case if the news is bad.
Since it's not Tuesday (the only day that matters for stocks, of course), call it opposite, or rather stop hunt take out, day. First, it was the BOJ which, as we warned previously, would disappoint and not boost QE (sorry SocGen which had expected an increase in monetization today, and now expects nothing more from the BOJ until year end), which sent the USDJPY sliding, only to see the pair make up all the BOJ announcement losses and then some; and then it was Europe, where first German retail sales cratered, printing at -1.9%, down from 2.0% and on expectations of a 1.7% print, and then Eurozone inflation once again missed estimates, and while rising from the abysmal 0.5% in March printed at only 0.7% - hardly the runaway inflation stuff Draghi is praying for. What happened then: EURUSD tumbled then promptly rebounded a la the flash crash, and at last check was trading near the high of the day.
Earlier today the EBA published its common methodology and scenario for the 2014 EUwide bank stress test. The adverse scenario covers the period 2014 to 2016 and at least on the surface is generally tougher than the adverse scenarios in previous similar exercises, resulting in a severe negative deviation of EU GDP growth of 7% from its baseline level by 2016. So far so good. But where the whole thing disintegrates into yet another sham spectacle confirming just how insolvent European banking truly is, is one simple observation: not even under the adverse scenario does the ECB contemplate the possibility of deflation!
What else should you do as Russian and Ukraine forces begin a serious un-de-escalation... sell precious metals with both hands and feet of course. The strength in stocks (whether channel-stuffed or not) is enough to make investors believe that we don't need no stinking Fed and that economy must be doing great all on its own. Gold is back below $1275, which SocGen warns could lead to $1233.
The relative calm of the last two weeks as US talking-heads proclaim Ukraine 'fixed', Russia 'under control', and Europe 'recovering' is being obliterated this morning. The storming of various non-Crimean Ukrainian city government buildings suggest round two of the push is beginning and Russia is wasting no time explaining how this will go down. Russian Senator Viktor Ozerov stated that "Russia has no right to [send peacekeepers] unilaterally" to Eastern and Southern Ukraine (unless the UN agrees)... but... "Russia is interested in stability in Ukraine. At the same time, the will of the people must be documented. A referendum is the most democratic way of expressing one's will." In other words, "we can't help you unless you hold a referendum to annex." Stage 2 is beginning... and it seems Ukraine is getting it as they are preparing to issue a state of emergency.
With senior German officials expecting discussions among leaders at the EU Summit to solely focused on a second round of sanctions against Russia (and warnings that they "must avoid a spiral of sanctions"), we thought it worth drilling down on just how mutually-dependent the two regions are. As Acting-Man's Pater Tenebrarum notes, the following infographics suggest tit-for-tat sanctions could be a really big problem for Europe and why the EU's leaders are probably quietly praying for the crisis to simply go away.
Much has been said about Yellen's Freudian slip involving the "6 month" considerable period language, which as we pointed out earlier, is said to have been the catalyst that sent stocks sharply lower just after 3 pm when it was uttered. However, in reality all this statement suggests is a rate hike some time in mid-2015, half a year after when QE is said to have ended, which if one listens to the market experts, is what is supposed to be priced in (of course, what the experts won't tell you is that the market wants its cake and endless liquidity injections by the Fed too). However, one thing that was far more unexpected and certainly remained unexplained by Yellen, is the curious case of the Fed dots, or the estimations by the individual committee members, of where they see rates at the end of 2016. What was surprising here was the sharp upward jump from 1.75% as of December to 2.25% currently.What is even more inexplicable, is that the Fed hiked its rate forecast even as it lowered its GDP projections for the next two years. Why? Not even Janet Yellen could answer that.