Nearly exactly five years after Hank Paulson appeared before Congress dangling a 3 page term sheet ultimatum warning it was his way or the apocalypse, it is time for the sequel. Since we all love the smell of a good Mutually Assured Destruction spectacle in the morning. Which is why we can't wait for Treasury Secretary Jack Lew's presentation before the Senate Finance Committee discussing the Debt Limit, in which he will rain fire and brimstone on anyone who suggests that the Treasury can enter the X-Date without a debt ceiling deal in place, and will most certainly seek to crucify anyone who points out the logical, namely that payments can be prioritized and interest expense is a fraction the revenue the Treasury brings in, and that the end of the world would be nigh should the US actually be forced to live within its means.
As reported previously, the latest meme surrounding the D.C. impasse is that Obama is suddenly willing to compromise on a short-term, supposedly six-week funding and debt ceiling extension, on the verge of his latest talks with republicans at the White House scheduled for this morning, as previously floated by the GOP. Throw some additional headlines such as "Ryan steps up to shape a deal" (in line with what we predicted yesterday) and "The ice breaks; fiscal talks set", by The Hill, and "GOP quietly backing away from Obamacare" from Politico, and one can see why futures are in breakneck soaring mode this morning, driven as usual by the two main JPY cross (USD and AUD), the first of which is less than 100 pips now away from being Stolpered out. So will a compromise deal finally emerge 7 days ahead of the first X-Date, or will a last minute snag once again derail the (non)-negotiations? We will know quite soon.
It is seriously 1999 all over again here in the Silicon Valley. There's the revival of Kozmo (OK, that's in New York, but still.......), the comic run-up of TWTRQ yesterday, and now, right across the street from where I am sitting, there is Draper University.
- Mounting Wall Street fears of US default (FT)
- This is what the US government does when it is "shut down" - CIA ramping up covert training program for moderate Syrian rebels (WaPo)
- SEC Weighs Overhaul of Exchanges’ Self-Regulatory System (WSJ) - just let Goldman and JPM do all the policing; not like anyone cares anymore
- Reid Sets Tone for Democrats in Shutdown Fight (WSJ)
- No Movement in Shutdown Standoff (WSJ)
- Shutdown will not slow Fed nomination, says Obama (FT)
- Syrian Regime Chokes Off Food to Town That Was Gassed (WSJ)
- Tesla Says Car Fire Began in Battery (AP)
- China Services Index Increases in Sign of Sustained Rebound (BBG) or sustained data manipulation
- JPMorgan eyes $4bn ‘pay for peace’ deal (FT)
- Prosecutors Pursue Big SAC Settlement (WSJ) - in the US if you are rich enough, no crime is bad enough
- Cruz's Defiant Stand Is Also a Lonely One (WSJ); Texas senator speaks for more than 14 hours (FT)
- Iran Applies Brakes to U.S. Mideast Plans (WSJ)
- Americans in Poll Doubt Economy Rebound in Defiance of Forecasts (BBG)
- Big Banks Cut Basel III Shortfall by $112 Billion at End of 2012 (BBG) - the equivalent of 10 bridges to the Kalahari desert
- Obama’s Jabs at Russia on Syria Shows Diplomacy Tensions (BBG)
- ICAP Staff Face Criminal Charges Tied to Libor (WSJ)
- Alibaba Is Said to Shift Target for I.P.O. to U.S. From Hong Kong (NYT)
- Home gold rush is over (Reuters)
- Conoco in landmark Alaska drone flight (FT)
With bonds and stocks rallying (and the USD dropping) notably in the last few days, one could be forgiven for believing the Taper is off but Goldman's baseline forecast remains for a $10bn reduction in asset purchases - probably all in Treasuries - and $15bn is possible (though recently mixed labor data may choke that a little) and a strengthening of forward-guidance. As they note, the current redction in uncertainty (or rise in complacency some might say) has the potential to offset the tightening in financial conditions, barring another major outbreak of DC strife in the run up to the debt ceiling in late October/early November. However, what is most notable is Goldman's expectation that the Fed will start walking-back its unemployment-rate threshold as it has been clearly shown not to be a good catch-all indicator of broad economic and labor market performance. So it's data-dependent - but the data is unreliable at best and false at worst.
"Not only was it a civil war, an effort by a people who had for years been seeking their liberation from any colonial influence whatsoever, but also we found that the Vietnamese whom we had enthusiastically molded after our own image were hard put to take up the fight against the threat we were supposedly saving them from. We found most people didn't even know the difference between communism and democracy. They only wanted to work in rice paddies without helicopters strafing them and bombs with napalm burning their villages and tearing their country apart. They wanted everything to do with the war, particularly with this foreign presence of the United States of America, to leave them alone in peace..."
"What's more fun than a Barrel of Monkeys? Nothing!" What could be better than assembling a long chain of tangled monkeys, each reliant on those either side of it for purchase, with just the one person holding onto a single monkey's arm at the top end of the chain, responsible for all those monkeys dangling from his fingers. Of course, with great power comes great responsibility; and that lone hand at the top of the chain of monkeys has to be careful - any slight mistake and the monkeys will tumble, and that, we are afraid, is the end of your turn. You don't get to go again because you screwed it up and the monkeys came crashing down. On May 22nd of this year, Ben Bernanke's game of Barrel of Monkeys was in full swing. It had been his turn for several years, and he looked as though he'd be picking up monkeys for a long time to come. The chain of monkeys hanging from his hand was so long that he had no real idea where it ended... indeed, "
If the Fed really thinks that the rest of the world will have to "adjust to us" as it insists on draining global liquidity come what may, it may have a very rude surprise, yet again." One false move and all the monkeys may end up in a heap on the floor.
More on this morning's unexpected joint Israel-US missile test launch. From Bloomberg:
- Israel missile defense organization, U.S. missile defense agency completed successful flight test of new version of the “sparrow target missile” today, Israeli Defense Ministry says in e-mailed statement.
- Arrow weapon system’s radar successfully detected, tracked target; all elements performed according to configuration
- Main contractor of arrow weapon system is MLM of IAI, in conjunction with Boeing, according to statement
- ISRAEL DEFENSE MINISTER SAYS MISSILE TEST WAS SUCCESSFUL
- ISRAEL'S YA'ALON SAYS NEW DEFENSE TECHNOLOGIES MUST BE TESTED
The conclusions I have come to are somewhat threatening in the short term, but even more disconcerting in the intermediate term, as the developing image is exposing a crystal clear picture of the ominous resource wars looming directly ahead. Equally dismaying, are the "honorable distinguished gentlemen" presiding over this Middle East mayhem, which are showing themselves to be either grossly incompetent cretins or dangerous duplicitous megalomaniacs
Moments ago, Syria relented to the main gating condition that would prevent an all out escalation, and as Russia urged it to, has permitted an inspection of last Wednesday's alleged chemical weapons attack by UN inspectors. The WSJ reports that "Syria would allow United Nations inspectors currently present in Damascus immediate access to areas around the capital where the opposition accused the regime of using chemical weapons against fighters and civilians five days ago. A presenter on Syrian state television reading a statement attributed to an unnamed official at the Syrian Ministry of Foreign Affairs said the agreement was reached after a meeting between Foreign Minister Walid al-Moallem and Angela Kane, the U.N. disarmament chief, who arrived in Damascus on Saturday." Of course, since demand for said inspection was just a strawman as the last time the UN inspected a "certain" chemical weapons attack by Assad it found "rebels may have used sarin" instead, and the US was absolutely certain Syria would not relent to an inspection thus allowing a full scale military attack, the US is now downplaying compliance with this key demand, by saying it is too little too late.
The July FOMC statement was a bit more dovish than expected, including (1) an explicit reference to the risks posed by higher mortgage rates, (2) more dovish language on below-target inflation, and (3) a statement that the Committee "reaffirmed its view" that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends. We will read the minutes from the July meeting with an eye toward any clues on the likelihood of near-term tapering and potential changes to the forward guidance.
More of the same downward drift this overnight trading session, with early Asian outflows coupled with a fresh record low in the Indian currency, driven in part by reports the Fukushima leak severity had been raised from Level 1 to Level 3, which however subsequently reversed following a weakening in the JPY and pushed the Nikkei from a steep early drop to a modest green close. China was unchanged even as Fan Jianping, chief economist at the State Information Center, said that a new reasonable range for China’s growth is 7%-9%, Xinhua said and ongoing liquidity additions by the PBOC. In Europe, newsflow was dominated early on by a Suddeutsche report that the third Greek bailout would be likely financed in part by EU budget as the reality that nothing is fixed in Europe slowly returns and fears that the latent and non-existent OMT will eventually have to be used. US futures have seen a modest risk off bias in part driven by concerns what today's key event, the FOMC minutes due out at 2 pm, would reveal (if anything new). Also on deck are Existing home sales at 10:00 am which expect a slight pick up to 5.15 million from a 5.08 million prior print. Moments ago the latest weekly MBA Mortgage Applications number came out and, to nobody surprise, it posted the last weekly decline, dropping another 4.6% with conventional refis dropping for the 10th consecutive week.
It's all about rates this largely newsless morning, which have continued their march wider all night, and moments ago rose to 2.873% - a fresh 2 year wide and meaning that neither Gross, nor the bond market, is nowhere near tweeted out. As DB confirms, US treasuries are front and center of mind at the moment.... the 10yr UST yield is up another 4bp at a fresh two year high of 2.87% in Tokyo trading, adding to last week’s 20bp selloff. As it currently stands, 10yr yields are up by more than 120bp from the YTD lows in early May and more than 80bp higher since Bernanke’s now infamous JEC testimony. We should also note that the recent US rates selloff has been accompanied by a rapid steepening in the rate curve. Indeed, the 2s/10s curve is at a 2 year high of 250bp and the 2s/30s and 2s/5s are also at close to their highest level in two years.
Starting with the Asian markets this morning, it appear the roller coaster ride for markets continued overnight. Asian equities started the day trading weaker but shortly after the open though, all of Asia bounced off the lows following the previously noted surge in Chinese A-shares soaring more than 5% in a matter of minutes in what was initially described as a potential “fat finger” incident. As DB notes, alternative explanations ranged from a potential restructuring of the government’s holdings in some listed companies, to market buying ahead of a rate cut this coming weekend. All indications point toward a fat finger. The A-share spike has managed to drag other indices along with it though some gains have been pared. Yet for all the drama the Shanghai Composite soared... and then closed red. The region’s underperformer is the Nikkei (-0.75%). Elsewhere, the NZDUSD dropped 0.5% after a magnitude 6.8 earthquake struck the city of Wellington this morning. Looking at the US S&P500 futures are trading modestly higher at 1660. Looking ahead to today there is very little in the way of Tier 1 data to be expected. Housing starts/permits from the US and the preliminary UofM Consumer Sentiment reading for August are the main reports. The moves in rates and perhaps oil will probably offer some markets some directional cues.