Rumor Ex Machina Sticksaves Futures

Tyler Durden's picture

It was shaping up to be another bloodbathed session, with the futures down 10 points around the time Shanghai started crashing for the second night in a row, and threatening to take out key SPX support levels, when the previously noted rumor of an imminent PBOC liquidity injection appeared ex machina and sent the Shanghai composite soaring by 5% to barely unchanged, but more importantly for the all important US wealth effect, the Emini moved nearly 20 points higher from the overnight lows triggering momentum ignition algos that had no idea why they are buying only knowing others are buying. The rumor was promptly squashed when the PBOC did indeed take the mic, but contrary to expectations, announced that liquidity was quite "ample" and no new measures were forthcoming. However, by then the upward momentum was all that mattered and the fact that the underlying catalyst was a lie, was promptly forgotten. End result: futures now at the highs for absolutely no reason.

That this rumor emerged just as Korea’s President Park asked ministers to "help stabilize financial markets", is probably a simple coincidence. Elsewhere, in Europe, both Spain and Italy sold short-term debt, however at soaring rates. Spain sold 3 and 9 month bills (EUR3 billion in total), at an average yield of 0.869% and 1.441%. The last time these came to market a month ago, they yielded 0.331% and 0.789%. Sorry Spanish pension fund. Meanwhile in Italy, the Zero Coupon two year bond sold at 2.403%, over double the yield from May 28 when the same issue priced at a tiny 1.113%. So much for the carry trade.

Today's economic calendar is quite full with durable goods orders, FHFA/Case-Shiller house prices, new home sales and
the Conference board’s consumer confidence survey, however now that good economic news is once again bad news for the market, the bulls will be praying for wild, major misses in all categories. More importantly, there is a 2yr US
note auction scheduled today which will show how the most recent repricing of the bond market has impacted short rates. Speaking of which, at least for now the bond market fireworks seen yesterday are missing, and following last night's words of caution by Dick Fisher to the "feral hogs" aka indiscriminate bond sellers, the 10 Year is trading higher at a "stable" 2.52%

DB's Jim Reid recaps what the overnight session looked like, at least until the arrival of the Chinese hence rejected rumor.

The rocky start to the week for markets looks set to continue today. Indeed, after initially seeing some stability in early trading (probably helped by the rally in US treasuries late yesterday), Asian stocks are once again trading lower across the board led by a 4% drop in the Shanghai Composite. In terms of Chinese banks, there has been little to report in the past 24 hours following the PBoC’s statement yesterday but domestic news agency Caixin did write that liquidity in Chinese banks is expected to ease this week and that excess reserve levels will increase into the month-end, citing an unidentified PBoC official. Sentiment in Chinese banks remains soft though, with interbank funding rates still at elevated levels and relatively unchanged on yesterday's fixes. Falls in Chinese stocks are being led by domestic brokers (-7.8%), natural resources (-5%) and insurance (-5%) while Chinese banks are down about 2%. Elsewhere in Asia, the Hang Seng (-1.4%), KOSPI (-1%) and ASX200 (-0.3%) have reversed earlier gains and S&P futures are trading 4pts lower (-0.25%) as we type. We’re also seeing a fairly sharp intraday turnaround in Asian credit with the IG index initially trading 9bp tighter, before gapping out to trade unchanged on the day as we go to print.

In Japan, the Nikkei (-2%) is also seeing losses despite some seemingly dovish comments from the deputy governor of the BoJ yesterday. Kikuo Iwata said that the BoJ still has policy options and remains ready to act if price expectations experience long-term declines. He balanced out the comments by saying that central bank will not be reacting to short term market movements, particularly because it has not harmed the real economy. He also said that if the central bank were to boost asset purchases in the future he would favour government bonds over risky assets, given the large size of the JGB market. Dollar yen is 0.2% lower this morning at 97.6 and 10yr JGB yields are at 0.87%.

While we’re on the subject of yields, its worth reiterating our comments last week about how important US yields are when most of the world is still levering (in other words, issuing more debt relative to economic activity) and hasn't started the deleveraging process yet. From a markets standpoint, the problem we face is that the US tends to set the price of debt everywhere. Indeed treasury yields tend to be the first building block for the price of all assets globally and any increase in yields will likely expose some of the weaker entities. Most of the recent focus has been on EM but Europe's periphery are also being negatively impacted by the Fed.

Since the lows on May 2nd, 10 year Spanish and Italian have both added more than 100bp, including a 20bp move higher yesterday. On a year-to-date basis, Spanish yields are now basically unchanged (5.12%) and Italian yields are 34bp higher (4.83%).

The market tone in Asia this morning follows a fairly volatile session yesterday that saw 10yr UST yields oscillate in a 15bp range. Indeed 10yr yields briefly broke through the 2.60% mark to an intraday high of 2.66% at the mid-point of the US session, which also roughly coincided with the wides in credit and the lows in equities. From there, yields rallied by more than 12bp helped by comments from the Minneapolis Fed’s Kocherlakota and the Dallas Fed’s Fisher. Kocherlakota, a non-voter, held a conference call with news reporters to clarify what he saw as a “mis-perception” by markets that the Fed had become more hawkish. He told reporters that he "was concerned about the strong reaction….to the committee's communication" and that the FOMC could clarify future communiations by laying out thresholds to reduce QE. These thresholds include an unemployment rate falling under 7.0%, provided the outlook for inflation remains below 2.5%.

Kocherlakota added that the current rise in yields was not a cause for concern. Those sentiments were echoed by Dallas Fed President Richard Fisher, also a non voter, who said that he thought markets overreacted to the latest policy meeting, and emphasised that all the Fed had announced last week was that it would begin tapering when conditions were firmer. As for yields, he was concerned about a significant spike in yields but added that a gradual rise over time would not be worrying. Elsewhere US equities also had a fairly volatile day, bottoming at -1.8% before erasing most of those losses, and then fading again towards the close (-1.2%).

Turning to the day ahead, amid the market volatility we also have a fairly full US data docket including durable goods orders, FHFA/Case-Shiller house prices, new home sales and the Conference board’s consumer confidence survey. There is a 2yr US note auction scheduled today.

* * *

SocGen's FX outlook of key events is below:

The meltdown in bond markets continued apace yesterday with most still pointing the blame at the post-FOMC dynamics which are giving rise to a reshuffling of portfolios. The de facto safe haven escape route out of stocks, metals and bonds has simply been shut down, as expectations of Fed tapering have pushed yields up at a rate not seen since January 2009. The aversion to stocks - the S&P has lost over 1% in three of the last four sessions - lifted the VIX volatility index above 20% last week to a six-month high, and though Fed voter Dudley (followed by non-voters Fisher and Kocherlakota overnight) tried to soothe markets with his comments (in the margin of the BIS meeting at the weekend), investors continue to rush for the exit contemplating where an exit from stimulus will leave yields over 6-12month timeframe. ‘Market conditions will be considered when making monetary policy' as Dudley stated, expected rhetoric from a dove, but so far this has not brought a pause in the selling.

Meanwhile, funds-tracking company, EPFR, reports that global investors pulled out over $3bn from emerging market equity funds over the past week alone, with China, Brazil, Russia and South Africa in particular seeing outflows accumulating. Inflows into Japan show that most investors still believe that Japanese stocks offer value over the long run, and are happy to see through the short-term ‘noise'. The Nikkei is down 18% from the May high, but it has outperformed US indices since the FOMC last week. The outlook for a weaker JPY should continue to bolster demand and help Japan outperform, with the BoJ's own easing programme firmly in place.

The focus today will be on the bond markets again. Supply from the US, but also Italy and the Netherlands, is due and auction statistics will be watched carefully in the wake of yesterday's sell-off in eurozone core, semi-core and periphery. Do participants hold off and wait to buy at even higher yields? In FX, the NOK and SEK were beaten and bruised badly again yesterday, but the selling may have further to go as USD/NOK flirts with 6.15 and USD/SEK tests 6.80. Data today includes US consumer confidence. ECB president Draghi is slated to speak and the BoE's King will testify for the last time on the Inflation Report to Parliament.

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Manthong's picture

In Algorithms We Trust.

Zgangsta's picture

They're obviously much smarter than we could ever hope to be.

GetZeeGold's picture



Pop another adrenaline shot........hope it holds.


Living on cotton candy and heroin. Health is the least of our concerns at this point....just give us our daily rush.

disabledvet's picture

pretty much. having said that monkey hammering interest rates at the same time makes for an odd "elixir." every dollar collected in taxes just went to an interest rate expense that gas now gone through the roof. hm. go figure. "paying even more people to sit on their butt." don't worry though! .35% on your savings account is right around the corner! I'm sure there's no way the banks can make money from this either thus "I'll be shorting everything as the way forward just like the last 5 years."

JustObserving's picture

Do not search for reasons in a manipulated market. There are none.

BTW, today is George Orwell's birthday.

Ban KKiller's picture

And pass the rat cage to the right.

taraxias's picture

And I have no idea why some on here continue to short a manipulated market. How many times does one have to have their face shred to pieces by some bullshit announcement that this "market" always seems to love.


Keep an eye on the fundamentals, ZH does an excellent job of that, but for fuck sakes don't trade (short) this market based on what you read on here, you'll go broke. 

macambaman's picture

Bounce based on unexpectedly strong fundamental lies.

writingsonthewall's picture


If you didn't hate them already - this tape will make sure you do.

The rest of you had better start putting your plans into action...

arcos's picture

For short term trading there is just ONE thing to do now: go long the S&P agressively.

Stock market will rise until WTI crude is approaching once again 98 to 99$. Then go short again.

urbanelf's picture

I have a liquidity injecetion for you.

It's in my pants.

Bangin7GramRocks's picture

How are you still stunned when this happens? It's only like the 80th time they have tricked the computers.

fonzannoon's picture

"NEW YORK—After fluctuating wildly this morning between $1 and $35, the price of money spiked to an unprecedented $90 a dollar in afternoon trading, plunging international financial markets into chaos. “Wall Street erupted into absolute pandemonium once the price of a dollar jumped past $50—if this keeps up, I wouldn’t be surprised if the dollar reached $275 or higher by the closing bell,” said CNBC analyst Marvin Kanisch, noting that the price of 20 dollars had soared well over $1,000 amid frenzied trading before plummeting back down to a more reasonable $430, while the price of five dollars remained steady at $5. “Everywhere you look, panicked investors are clamoring to exchange their dollars—which can only purchase about two cents apiece right now—for more stable dimes and quarters, which are trading at $18 and $32.25, respectively. And with the price of pennies falling below $140 an ounce, it’s easy to understand the sense of urgency. Bottom line: It’s a seller’s market.” With the skyrocketing dollar-to-dollar exchange rate prompting Americans to hoard as much money as possible, President Obama is expected to address the nation later today about easing America’s dependence on domestic currency.


fonzannoon's picture

ekm the simple path is, china's credit crunch throws off some big waves which temporarily knocks down the U.S recovery. The fed next move is to surprise everyone by actually increasing QE next month. Bonds rally, stocks rally.

The less traveled path is to continue to push out good data, painfully grind rates higher, and hope the economy responds, which, it won't.

I see no scenario where "It's over". Please lay out that scenario.

ekm's picture

The scenario is that one day, probably today or tomorrow or next week I don't know, the Fed will pull a PBOC by letting the market work and buy nothing


That would mean that 1 or more biggies will default hence firesale, hence 1000 dow point drop per day, 3 days in a row.


Eventually cooler heads always prevail and we are almost there if at all in the process of it right now.

fonzannoon's picture

I think the confusion here may be that your scenario is plausable, but is far from the definition of "over" that many on here await.

e-recep's picture

indeed. in such a scenario cash becomes king.

disabledvet's picture

Detroit. that's one of the biggest urban areas in the Western Hemisphere "laying in ruins" and it now stands as a testament to "hope and change." next stop Chicago itself. I'm expecting more of a fight but we'll see.

Non Passaran's picture

I wish, buy I doubt.
Let's revisit this 3 weeks from now.
I say we'll see indexes stabilize and even recover. If they don't I'll make money.

"Please do worry" :-)

fonzannoon's picture

I kind of agree. I just see a slow choppy ride down through the summer. Lower lows and lower highs.

walküre's picture

Chinese middle class is slowly exiting their system. Withdrawing large amounts from banks and if possible send overseas. They're far more concerned about government, central planning and loosing all their wealth than Americans or Europeans could be. They know they live in a communist country and that their wealth is subject to government theft if things go bad.

PBOC words mean sweet fuck all to the ordinary Chinese who is busy stashing away and out of sight from PBOC. Chinese economy is in bad shape. Exports to Europe and North America are cratering and demand in China is decreasing. Years and years of building ghost cities and ghost malls to give the illusion of a growing economy has not gone unnoticed by the Chinese people. You don't think they question all this propaganda and central planning, failed allocation of resources, corruption and so on? The smart ones were riding the coattails of this fake economy and have build or bought 2nd homes overseas where they can escape with their loot.

PBOC can say whatever it wants. It matters not when the people who had little faith to begin with are now preparing for the collapse of their system.

The liquidity issue is not due to a lack of PBOC intervention. It's due to a hypervigilant population who is exiting the system before the government takes it all.

gatorengineer's picture

If you have ever been to China outside of Shanghai, and a little in Beijing and Guangzhou, there is NO Chinese middleclass... one of the great myths.  There are haves and there are have nots...  the Chinese middleclass numbers less than 10 million.....

ekm's picture

I think it's more like 30 million, but still a drop in the ocean

ekm's picture

100% correct


Been there, done that

gatorengineer's picture

Couple of things, the market is rigged.....  Other than zero hedge, everyone is telling the sheeple to sell EVERY bond you have and buy Stocks... Bloomberg yesterday PM they had three folks on touting this....

They want and must have more sheeple into stocks....  they will have more people into equities, watch the pension funds rotate out of bonds and into equities....  Grandma MUST move her money into stocks NOW Dam it....

Three to six month window, stock see new highs....  When everyone is in then and only then do the big guys go short..

This is not the melt down you are looking for move along.... if it were they wouldnt have been able to levitate it 200 yesterday on no volume....

Watch the Kabuki theater, Obama to force the shutdown of coal, and put solar panels on Ghettoplex's..... its being orchestrated and not too subtly...


jubber's picture

HK futures now up over 650 points, is the FED now buying these as well?

fonzannoon's picture

You can go on cnbc website and listen to Marc "we are due for a massive correction" for the last 25% rally now tell you that the market is way oversold and will bounce back.

Vooter's picture

Everyone's a heroin addict now!

EclecticParrot's picture

Don't be fooled by the hexidecimals behind the curtain, this is just a ruse to get us up a pivot or two before the 10 o'clock econ releases so the algos can take 'distributions' til 12:45 before starting another Tuesday afternoon ramp.  If the housing and confidence numbers are strong, then it'll be because Bernankus must slam on the brakes; if the numbers are weak or middling, then it only proves an out-of-control Fed will kill this nascent recovery.  Of course, post 12:30, they'll say cooler heads prevailed, using the shorts they sucked in to sling us onward like a space capsule passing Jupiter's gravity  ("ah, gee, wrong index card, good news is now great news ...").

Racer's picture

No, no, no, no ZH, I have already told you, you are wrong, there is a reason, I saw all those butterflies just before the futures then followed and took off with them