Of the economic reports and events in the week ahead, we identify four potential drivers and emphasize one--the ECB meeting.
The early session risk on trade, which materialized after the Pfizer confirmation it was seeking to buy AstraZeneca, and which sent the GBPUSD to its highest level since 2009, and also sent the EURUSD and EURJPY soaring in the process lifting US equity futures, has started to fizzle on the most recent news out of Ukraine, where the pro-Russian mayor of Ukraine's second largest city of Kharkiv was shot in the back in an apparent assassination attempt, which happened hours before the US is set to announce more sanctions against the Kremlin and its closest financial oligarchs. As a result, futures have pared gaisn modestly, especially since AstraZeneca made it clear with its initial reponse it has no interest in Pfizer's offer in its current format.
Furious Russia, Downgraded To Just Above Junk By S&P, Proposes "Scorched Earth" Retaliation Against NATO CountriesSubmitted by Tyler Durden on 04/25/2014 16:05 -0400
- Russia should withdraw all assets, accounts in dollars, euros from NATO countries to neutral ones
- Russia should start selling NATO member sovereign bonds before Russia’s foreign-currency accounts are frozen
- Central bank should reduce dollar assets, sell sovereign bonds of countries that support sanctions
- Russia should limit commercial banks’ FX assets to prevent speculation on ruble, capital outflows
- Central bank should increase money supply so that state cos., banks may refinance foreign loans
- Russia should use national currencies in trade with customs Union members, other non-dollar, non-euro partners
"While the music is playing, you keep dancing," seems the only possible explanation for the fanatical demand for peripheral European bonds as everyone and their pet rabbit front-runs the ECB (or merely rushes to the 'yieldiest' thing given Draghi's implicit guarantee). At 3.1%, it beggars belief how 'risk' is mispriced in these sovereigns should any capital regulations ever mark sovereign debt as anything but riskless. Remember what happened the last time Draghi did any bond-buying (the SMP) - we saw bonds sell off into the actual actions of the central bank... so it seems the market continues to trade on the promise (and yet hope it never comes true)...
It took Virtu's idiot algos some time to process that the lack of BOJ stimulus is not bullish for more BOJ stimulus - something that has been priced in since October and which sent the USDJPY up from 97.000 to 105.000 in a few months, but it finally sank in when BOJ head Kuroda explicitly stated overnight that there is "no need to add stimulus now." That, and the disappointing news from China that the middle kingdom too has no plans for a major stimulus, as we reported last night, were the final straws that forced the USDJPY to lose the tractor-beamed 103.000 "fundamental level", tripping the countless sell stops just below it, and slid 50 pips lower as of this moment to overnight lows at the 102.500 level, in turn dragging US but mostly European equity futures with it, and the Dax was last seen tripping stops below 9400.
With another session in which US futures levitate into the open, despite a modest drop in the Nikkei225 (to be expected after the president of Japan’s Government Pension Investment Fund, the world’s largest pension fund, said that a review of asset allocations into stocks is not aimed at supporting domestic share prices) and an unchanged Shanghai Composite while the currency pair du jour, the USDCNY, closes higher despite tumbling in early trade (which also was to be expected after a former adviser to the People’s Bank of China said China is headed for a “mini crisis” in its local- government debt market as economic reforms lead to the first defaults) everyone is asking: will it be deja vu all over again, and after a solid ramp into 9:30 am, facilitated without doubt by the traditional Yen carry trade, will stocks roll over as first biotech and then all other bubble stocks are whacked? We will find out in just over two hours.
In the early hours of yesterday morning European Union politicians struck a deal on legislation to create a single agency to handle failing banks and bail-ins in the Eurozone. It is important to realise that not just the EU but also the UK, the U.S., Canada, Australia, New Zealand and most G20 nations all have plans for bail-ins. Prepare accordingly ...
In an overnight session that had little in terms of macro and news flow, the most notable event was that the Dollar-Renminbi finally crossed above 6.20 which as a reminder is the suggested "max vega" point beyond which even more max pain lies for levered accounts long the Yuan. However, in a world in which nothing is discounted and in which no news matters, the "market" broadly ignored this significant development (which as we explained further yesterday means an accelerated unwind of Chinese Commodity Funding Deals, and a potential drop in global commodity prices), and eagerly awaited today's non-event of an FOMC conference, where nothing new will be announced save for the novelty of it being Yellen's first appearance before the press as the head of the Fed. And of course the Fed will almost certainly scrap the 6.5% employment threshold, as the FOMC scrambles to make the economy appear worse than it is reported to be, in a stark reminder that the biggest optically manipulated tool meant to boost confidence in the recovery was nothing but a number meant to serve political purposes.
With Russia's MICEX down another 2% today back at May 2010 lows (and Russian govt bond yields up to 9.41%), it appears investors are anything but confident that the worst is behind us in Ukraine. Russian stocks are -18% in the last 3 weeks. Perhaps the biggest tell is the German stock market which is now the worst-performing European stock market this year and back to lows seen in mid-December. Even the glorious safety of Portuguese stocks is fading in the last few days. Europe's VIX broke 22% - its highest in 5 weeks; and Europe's high-yield credit markets (which are rumored to be heavily biased long) are squeezing wider playing catch-up to stocks. Peripheral sovereigns don't give a crap in their manipulated illiquid way but Bund yields have sluped to 1.54% (lowest since July) - its tightest to US TSYs since 2006!
Personal sovereignty is a ‘State of Mind’ long before it is a state of being.
The Bitcoin phenomenon has now reached the mainstream media where it met with a reception that ranged from sceptical to outright hostile. The recent volatility in the price of bitcoins and the issues surrounding Bitcoin-exchange Mt. Gox have led to additional negative publicity. It is clear that on a conceptual level, Bitcoin has much more in common with a gold and silver as monetary assets than with state fiat money. The supply of gold, silver and Bitcoin, is not under the control of any issuing authority. It is money of no authority – and this is precisely why such assets were chosen as money for thousands of years. Gold, silver and Bitcoin do not require trust and faith in a powerful and privileged institution, such as a central bank bureaucracy. Under a gold standard you have to trust Mother Nature and the spontaneous market order that employs gold as money. Under Bitcoin you have to trust the algorithm and the spontaneous market order that employs bitcoins as money (if the public so chooses). Under the fiat money system you have to trust Ben Bernanke, Janet Yellen, and their hordes of economics PhDs and statisticians.
Three unlucky attempts in a row to retake the S&P 500 all time high may have been all we get, at least for now, because the fourth one is shaping up to be rather problematic following events out of the Crimean in the past three hours where the Ukraine situation has gone from bad to worse, and have dragged the all important risk indicator, the USDJPY, below 102.000 once again. As a result, global stock futures have fallen from the European open this morning, with the DAX future well below 9600 to mark levels not seen since last Thursday. Escalated tensions in the Ukraine have raised concerns of the spillover effects to Western Europe and Russia, as a Russian flag is lifted by occupying gunmen in the Crimean (Southern Ukrainian peninsula) parliament, prompting an emergency session of Crimean lawmakers to discuss the fate of the region. This, allied with reports of the mobilisation of Russian jets on the Western border has weighed on risk sentiment, sending the German 10yr yield to July 2013 lows.
By accusing someone else of being responsible for my emotional outbursts I am in essence avoiding responsibility for my own actions. By blaming others for my ‘State of Mind’ I’m assigning myself to the ‘role’ of victim status.
As Deutsche Bank revealed in a note overnight, the GCC may have, quite deliberately, opened a Pandora's Box with its decision which according to Europe's largest bank, and the one whose derivatives exposure makes that of JPM pale by comparison, (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) would not consider itself bound by a positive ruling of the European Court of Justice. And while in DB's opinion this action does not have any immediate market consequences, the report's authors think that it "alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil."
The German Constitutional Court’s recent decision to refer the complaint against the European Central Bank’s so-called “outright monetary transactions” to the European Court of Justice (ECJ) leaves the scheme’s fate uncertain. What is clear is that the economics behind OMT is flawed – and so is the politics. The line between audacity and hubris is a fine one. Rather than constituting a great success, OMT may well be remembered as an error born of expediency. Worse, it could undermine the ECB’s hard-won independence and credibility. That is an outcome that the eurozone might not survive.