The key events this week are have non-farm payrolls (consensus 181K) and unemployment rate (consensus 6.7%). There is also going to be a number of speeches given by Fed policymakers. Production surveys from the US (ISM) and other parts of the world are due Monday. We also get trade balance updates from the English-speaking economies - US, UK, Australia and Canada. Finally, keep track on inflation data from Italy and Turkey: the latter is important to track given current high correlation among 'fragile' EM currencies.
Over the past week we took our fair share of jabs at SocGen EM FX analyst Benoit Anne (the one who said "Governor Basci, You Have Avoided A Domino Crisis In EM"... er, oops?) . They were all in good humor - after all when it comes to sheer contrarian cluelessness nobody, and we mean nobody in the known world, can even reach Tom Stolper's toe nail, whose fades have resulted in over +12,000 pips on these pages alone over the past 5 years. Which is why we follow up the comedy with something more serious: now that the honeymoon is over, Anne has put together a solid compendium on how to trade the EM meltdown, with an emphasis on defensive strategies. Considering the tapering will continue for a long time, and as GaveKal explained yesterday, someone will have to lose (big) before EM normalcy returns, we urge anyone with EM exposure to read this.
"We take profit on our TRY/ZAR trade recommendation which we entered last night at a level of 4.92. At the time of writing, the level is 4.968 resulting in a gain of 1.0% before carry. The short-lived relief rally in the TRY was swiftly interrupted by a shift in market sentiment, with the updated policy implementation failing to deliver the intended improvements in clarity. On the other hand, an unimpressive 50bp hike from SARB on the heels of CBRT’s punchier response fell short of expectations. Overall, the market continues to trade in a panic mode, notwithstanding the monetary policy responses spreading fast across EM, as real policy rates come increasingly under scrutiny." - SocGen
Yesterday, the moment when the Turkish Central Bank intervention was jinxed was clearly marked by SocGen's fawning Benoit Anne, who said "In any case, I definitely feel much better about the TRY, at least on a tactical basis. Hence we just entered a long TRY/ZAR targeting a tactical move to 5.10. The TRY crisis is over." To which we responded: "As for the "TRY crisis being over" let's wait to see what the "popular" response is to this epic rate hike first thing tomorrow when Turkey awakes, shall we, and let's revisit the TRY crisis in 2-3 weeks when the country's housing market crumbles, when the economy grinds to a halt and the political crisis goes from worse to worse-est." We didn't have to wait more than 12 hours. As of this moment, the entire Central Bank move has been faded.
Judging by the reaction from SocGen and JPY crosses (and thus global equity markets), the Turkish Central Bank's decision - to tighten aka ubertaper -has solved all the tapering, tantruming, turmoiling problems in markets. TRY obviously dumped on the news (now at 2.18 -2100 from highs). JPY crosses instantly exploded higher, automatically lifting US (Dow +60) and Japanese (NKY +110) stock futures markets before they closed. Gold fell very modestly ($1). JPY continued to weaken and when markets re-opened, gold dropped a little more but no sustained pressure; Dow is now +110 from pre-Turkey, NKY +175pts; S&P futures are up 10points on the news as stops are run to 1800 but the EEM ETF rallied around 1% (only).
SocGen's Exuberant Response To The Turkish Action: "Governor Basci, You Have Avoided A Domino Crisis In EM"Submitted by Tyler Durden on 01/28/2014 18:49 -0400
"Governor Basci, you have avoided a domino crisis in EM.... I definitely feel much better about the TRY, at least on a tactical basis. The TRY crisis is over." - SocGen
"US profits are growing, companies have underinvested and have no choice but to spend more on CapEx, and corporations have much less debt than they did during the crisis thanks to a massive cash build up."
These are the generic go to explanations by soundbity talking heads for why the US recovery is gaining traction with US corporations, if not so much Joe Sixpack, and why companies are still cheap. There is one problem: they are all wrong. As SocGen's Andrew Lapthorne shows conclusively, "US profits are not growing, companies are over not underinvesting (they may in fact have overinvested), and corporates are carrying more (not less) net debt than they were in 2009. It would appear that many believe the opposite to be true, yet corporate report and accounts data seems to say otherwise.""
Corporations Have Record Cash: They Also Have Record-er Debt, As Net Leverage Soars 15% Above Its 2008 PeakSubmitted by Tyler Durden on 01/16/2014 16:42 -0400
There is a reason why activism was the best performing hedge fund "strategy" of 2013: as we wrote and predicted back in November 2012 in "Where The Levered Corporate "Cash On The Sidelines" Is Truly Going", US corporations - susceptible to soothing and not so soothing (ahem Icahn) suggestions by major shareholders - would lever to the hilt with cheap debt and use it all not for CapEx and growth, but for short-term shareholder gratification such as buybacks and dividends. A year later we found just how accurate this prediction would be when as we reported ten days ago US corporations invested a whopping half a trillion in buying back their stock, incidentally at all time high prices. Putting aside the stupidity of this action for corporate IRRs, if not for activist hedge fund P&Ls, another finding has emerged, one that was also predicted back in 2012. Because in addition to still soaring mountains of cash, corporations have quietly amassed even greater mountains... of debt. In fact, as SocGen reveals, net debt, or total debt less cash, has risen to a new all time high, and is now 15% higher than it was at its prior peak just before the financial crisis!
After last week's economic fireworks, this one will be far more quiet with earnings dominating investors' attention: US financials reporting this week include JPM and Wells Fargo tomorrow, BofA on Wednesday, GS and Citi on Thursday, BoNY and MS on Friday. Industrial bellwethers Intel (Thurs) and General Electric (Fri) are also on this week’s earnings docket. On the macro front, this coming week we have two MPC meetings - both in LatAm. For Brazil consensus expects a 25bps hike in the policy rate. For Chile consensus forecasts monetary policy to remain on hold. Among the data releases, one should point out inflation numbers from the US (CPI and PPI), Eurozone, the UK and India. We also have three important US producer and consumer surveys - Empire Manufacturing, Philadelphia Fed (consensus +8.5), and U. of Michigan (consensus 83.5). Among external trade and capital flow stats, we would emphasize US TIC data, as well as current account balances from Japan and Turkey. Finally, the accumulation of FX reserves in China is interesting to track as it provides an indication of CNY appreciation pressure.
Moments ago shots were fired when a (French) bank broke the unspoken Omerta code among sellside bankers: it downgraded another bank in a time when the S&P is just shy its all time highs (downgrading banks when the market is tumbling is usually a-ok). The note came from SocGen's Andrew Lim, whse thesis is rather simple: "Valuation too expensive in light of regulatory and revenue challenges."
Today the ECB just announced the latest set of undead monetary statistics for November. To nobody's surprise, even though M3 posted the tiniest of possible annual increases, rising from 1.4% to 1.5% (3% below the ECB's 4.5% reference value which it considers consistent with its price stability mandate), loan creation to the private sector declined once again, this time dumping to -2.3% from a revised -2.2%. As the WSJ reports what we have said for the past year, "The deepening decline increases pressure on the central bank to embark on further measures to stimulate lending, analysts said."
Another day, another low volume overnight meltup to record highs in equity futures. Stocks traded higher in Europe this morning, with tech stocks outperforming following reports that Apple has finally secured a deal to bring the iPhone to China Mobile, which has more than 750 million subscribers. As a result, the likes of ARM Holdings and STMicro traded with gains of over 2% and Apple's German listing traded up around 2.5%. At the same time, French CAC index under performed its peers, with Technip among the worst performing stocks after being removed from Goldman's Sustained Focus List. Addtionally, over the weekend, the ECB's Praet said that the ECB is ready to intervene if credit contracts - and since Euro credit is contracting at a record pace, we wonder what he is waiting for. This happened as Fitch affirmed France at AA+, outlook stable. Looking elsewhere, thin trading conditions resulted in an aggressive spike higher in CME US 30y futures this morning after a large clip was traded, which consequently saw the exchange adjust prices lower, but did not bust any trades.
This past week the Federal Reserve began tapering their current large scale asset purchase (LSAP) program, more commonly referred to as Quantitative Easing (QE), by trimming $10 billion in bond purchases from the previous monthly totals. This week's "Things To Ponder" is a diverse set of views on the potential effect of the taper on the financial markets and the impact to investors. Regardless of your personal expectations as to the impact of the reduction of liquidity in the months ahead, it is always a good mental exercise to consider opposing viewpoints to balance your own views by eliminating confirmation bias. Here are 5 disparate views on the effect, and potential outcome, of the Federal Reserve's latest move.
If yesterday's price action in the moments following (and preceding) the FOMC announcement was just a little suspicious, with a seemingly endless supply of VIX selling originating as if from nowhere (or perhaps the 9th floor of Liberty 33) the morning after has so far been a snoozer. Perhaps this is to be expected following the third biggest one-day surge in the stock market in the year (1st = Jan 2nd, 2nd = October 10th), or perhaps the market is finally focusing on Bernanke's tongue in cheek suggestion that the taper may be lowered by $10 billion per month (we disagree as described previously). Or perhaps the creep higher in 10 Year yields, at 2.915% at last check and just shy of the 3.00% psychological level, is finally being noticed. Or perhaps the fact that China, very surprisingly, is also tapering concurrently is finally being appreciated as is the fact that despite all talk of preparedness, developing economies were hardly left unscathed following yesterday's development. Whatever the reason, the euphoria this morning has "tapered."