Volatility

The problem of suggesting that we have once again evolved into a "Goldilocks economy" is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations. Such a backdrop becomes particularly problematic when the Federal Reserve begins to raise interest rates which removes one of the fundamental underpinnings of an overvalued market which was low interest rates. Ultimately, higher interest rates, particulalry in an economy with a deteriorating economic backdrop, becomes the pin that "pops the bubble."  It is true that the bears didn't eat Goldilocks at the end of the story...but then again, there never was a sequel either.

When oil prices were spiking in 2008 and some commentators were predicting prices of $200 a barrel, many pundits and politicians turned to blame speculators and hedge funds for pushing prices upwards. That period of high prices passed and speculators avoided any tough new regulations in part due to mix empirical evidence surrounding the causes of price volatility. Now though, the opposite case is being made; hedge funds shorting oil may be behind recent volatility and the current low price of oil.

Long term risk has increased quite a bit, no matter which data points one happens to consider. Whether one looks at valuations, market internals, leverage or positioning, there are now more warning signs than ever. With the support provided by strong money supply growth declining as well, it becomes ever more likely that these potential dangers will actually materialize. It is an accident waiting to happen.

There was something for everyone in last night's much anticipated Chinese PMI data, with the official number sliding to the lowest in over 3 years, suggesting the PBOC will need to do more stimulus and is thus bullish, while the unoffocial Caixin print rising to the highest since June, suggesting whatever the PBOC is doing is working, and is also bullish. Not unexpectedly, global stocks decided to take the bullish way out, and have risen across the globe led by Asia, where stocks rose as much as 1.8%, Europe also green and US equity futures up 10 points as of this writing.

"... As the tide of leverage goes out, the full extent of irresponsible lending becomes apparent. The previously virtuous cycle between risk spreads and fundamentals goes into reverse, with lower prices, defaults, and downgrades forcing leveraged investors to sell, leading to even lower prices."

"Tengram has instructed its broker that it will not permit borrowing of any of its shares by short sellers who are only interested in reducing the value of the Company’s stock price for their short-term gain.  We urge each of you to contact your broker today and inform them that your shares may not be made available to be borrowed by short sellers.”

While the storm clouds continue to build above Trafigura, we now know the fate of Galena and why its CEO Letchford departed the company in a hurry last week: according to a follow up from Bloomberg, Trafigura has decided to close the flagship Galena Metals Fund, the latest hedge fund victim of the rout in raw materials markets from oil to copper.

The IMF’s Executive Board decision today means that the yuan will be included in the SDR basket from Oct. 1, 2016, effectively anointing the yuan as a major reserve currency and represents recognition that the yuan’s status is rising along with China’s place in global finance. The weight in the basket will be 10.92%, larger than JPY and GBP. However, as politically-motivated as this decision may have been, now comes the hard part for China.

While gold prices continue to languish in the doldrums and are on course for their worst month since 2013, global demand and especially Chinese retail, investor and official demand continues to remain very robust. Indeed, China looks likely to see a new record demand for gold annually again in 2015.

"We think that the equities risk-reward will be less attractive than it was in the past few years. We reduce our equities OW in a balanced portfolio to a minimal one, at 5% vs benchmark, the lowest we have had since the current upcycle started. The long period of indiscriminately buying any dip might be coming to an end."

Late last year, Japanese PM Shinzo Abe effectively forced the $1.1 trillion Government Pension Investment Fund to double its domestic equity allocation. With Kuroda providing perpetual Nikkei plunge protection, and with Abenomics set to bring about an economic renaissance, what could possibly go wrong?...

Without a rerun of last Friday's Chinese stock market rout, European traders could focus on what "really matters", namely how much of the ECB's upcoming 20 bps rate cut and €20 billion QE expansion (with Commerzbank saying Draghi may even hint at Europe's QE3) is priced in, and whether the ECB's actions are just modestly priced in, or more than fully, and just how big the "sell the news" event will be.The result: the Euro falls to a new 7 month low, the dollar spot index hits a new all time high, and European stocks and US futures stage another remarkable overnight comeback on the usual low volume levitation and central bank intervention.

Update - Chinese stocks continue to plunge... Offshore Yuan surges on intervention.

Aside from 3 very small adjustments, The PBOC has fixed the Yuan weaker for the last 20 days, driving the mid-line to 6.3962 - the weakest since August 28th. After Chinese stocks collapsed on Friday, they are holding the losses for now as the biggest question remains just what the weighting will be for Yuan inclusion in The IMF's SDR basket (which looks set to be announced tomorrow - US time). Metals are tumbling (with Iron ore down 3.7%) and broad AsiaPac stocks are down around 1% as brokerages in China are plunging (Haitong -9.2%),