S&P futures and Asian stocks were little changed while European shares fell as the global bonds sell-off deepened on speculation major central banks are moving closer to reining in stimulus, while stocks retreated after disappointing results from companies including Amazon.com and AB InBev.
The absolute focus overnight / today is “core” macro though, as global developed market rates are being re-priced “risk manager style,” particularly with EGBs under MAJOR pressure as the buyside is caught wrong-footed (as I type, Slovak 10Y +7.2bps, Denmark 30Y +9.4bps, Netherlands 30Y +9.9bps, Finland 30Y +10.1bps, German 30Y +9.9bps, Austria 30Y +9.3bps…and even front-end seeing outsized moves with the Belgian 2Y +2.2bps). That is VaR crushing DV01 destruction at its finest.
European, Asian stocks fell while S&P futures rebounded as investors assessed a mixed batch of earnings reports while the dollar strengthened to 9 month highs versus most of peers on rising confidence that the Fed will raise rates this year, pushing global bond yields higher.
"Policy makers everywhere have somehow convinced themselves that if they engineer higher longer-dated yields, then inflation expectations will rise too,” he explained. “They’re basically saying you can invert causation.” And in today’s new reality, everything’s possible, so why not inverse causation too?
"We cut our S&P 500 earnings estimates for each of the next several years. Our revised operating EPS forecasts now equal $105 (2016), $116 (2017), and $122 (2018) reflecting annual growth of 5%, 10%, and 5%, respectively. Low interest rates and peaking margins constrain profit growth in Information Technology, Financials, and Telecom and drive the reduction in our index-level EPS forecast." - Goldman Sachs
Many ill-informed pundits have taken the recent absence of volatility to mean that it is gone for good. But many smart investors, like Tepper and Gundlach and Druckenmiller, who are paid to protect their clients’ money against large drawdowns are forgoing returns today in order to protect against an anticipated pickup in extreme events in the future.
Global stocks were modestly higher, before the European Central Bank gives its policy update, while investors weigh mixed earnings results. Asian stocks rise, U.S. equity-index futures are little changed. The euro touched its weakest level since July and stocks in the region fell after their first back-to-back gains in two weeks.
US futures were little changed, with European shares lower, and Asian stocks higher as caution returned after last night's Chinese economic data did little to clear up how the world's second largest economy is performing, and provided few positives for investors ahead of the third and final U.S. presidential debate; imminent announcements from both the ECB and the Fed also will keep traders on their toes today.
While expectations are low from Thursday's ECB meeting, it may ultimately boil down to Draghi’s communication about asset purchases. Any hint of QE tapering would spur a large-scale sell-off in the rates market, according to most Wall Street strategists. Here is what else the sellside thinks will happen.
"These distorted markets are increasingly hostage to unfathomable political risk...the real danger in finance is the not one that tends to be discussed: that banks will topple over (as they did in 2008). It is, rather, the threat that investors and investment groups will be wiped out by wild price swings from an unexpected political shock..."
World stocks started the week in the red Monday as the dollar touched a 7-month high and U.S. and European government bond yields climbed to their highest since June following the Friday speeches by Eric Rosengren and Janet Yellen which hinted the Fed's next step could be to pursue a steepening of the TSY yield curve the same as the BOJ.
"If one were concerned about the historically low 10-year Treasury and commercial real estate capitalization rates, perhaps because of potential financial stability concerns, the balance sheet composition could be adjusted to steepen the yield curve." - Boston Fed President Eric Rosengren
The Bank of England’s inept monetary policies under Mark Carney’s governorship seem certain to expose the fragility of fiat sterling to wider public attention and skepticism. If the consequences weren’t so serious, we might thank him for unwittingly toppling the status quo. But the inevitable crisis, many times worse than that faced in 1975, cannot be embraced even by the most extreme financial masochist. This is why people in Britain and America will increasingly find solace in gold.
"...we have the precedent from a much earlier time (the 1930s) when the defection of just one member from a currency union caused the system to unwind rapidly. And we can clearly sense the seeds of another popular political revolt in other member countries; a flurry of upcoming elections and referendums provides an immediate catalyst...We believe we are approaching a dramatic fulcrum point in public opinion in Europe."