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Buy Stocks, Buy Bonds, Buy Quality, Buy Trash

Tyler Durden's picture




 

It has gotten beyond ridiculous: a few short hours ago the yield on the 10 Year bond tumbled to a fresh low of 2.49% (and currently just off the lows at 2.50%), wiping out all of yesterday's "jump" on better than expected Durables and leading to renewed concerns about the terminal rate, deflation and how slow the US economy will truly grow. Amusingly, this happened just as US equity futures printed overnight highs. Doubly amusing: this also happened roughly at the same time as Spanish 10 Year yields dropped to a record low of 2.827%, or about 30 bps wider than the US (moments after Spain announced that loan creation in the country has once again resumed its downward trajectory and a tumble in retail deposits to levels not seen since 2008). Triply amusing: this also happened just about when Germany had yet another technically uncovered 30 Year Bund issuance, aka failed auction. So yes: nothing makes sense anymore which is precisely what one would expect in broken, rigged and centrally-planned markets (incidentally those scrambling to explain with events in bond world where one appears to buy bonds to hedge long equity exposure, are directed to the minute of the Japanese GPIF pension fund which announced it would buy junk-rated bonds to boost returns - good luck to Japanese pensioners).

Stocks in Europe initially opened higher following another strong performance on Wall Street which saw the E-Mini S&P futures hit yet another record high and the small-cap index Russell 2000 now outperforming the S&P 500 for the first time in over 2 months, with the Nikkei 225 up 0.2% during Asia-Pac trade. However, this move was consequently reversed following weakness in EM currencies (see below). The Italian MIB has outperformed throughout the session, being supported by Telecom Italia after their positive broker move at Goldman Sachs, which has consequently lifted the telecoms sector.

Turning to Asia, all major bourses across the region are trading firmer with the HSCEI (+1.3%) being the region’s best performer led by cyclicals. The sentiment is perhaps helped by a frontpage editorial in the China Securities Journal suggesting that the PBoC may continue with further “targeted easings” such as cuts to RRR for more banks, and bond purchases, in an effort to stabilise growth. Bloomberg is reporting that China’s State Council has recently approved plans for China Development Bank to issue securities at below-market rates to other state institutions which will allow CDB to better fund re-development projects.

In Japan, more questions are being raised about whether we see more BoJ stimulus at some point later this year. As we noted yesterday, a Reuters article from Monday suggested that the BoJ was quietly increasing its focus on how it will eventually exit from its current extraordinary monetary policy. In addition to this, the WSJ’s central bank-watcher Hilsenrath asked the question yesterday whether Governor Kuroda is awakening to the limits of monetary policy. Indeed, Kuroda was on the newswires last week urging the government to pursue structural reforms in an effort to lift potential growth, to complement monetary stimulus. There are more articles today suggesting that Abeadministration will be moving to bring forward corporate tax cuts as part of structural reforms - Bloomberg says that the Japanese ruling party has agreed that changes to corporate taxes will become party policy. The Nikkei is somewhat underperforming other bourses today at +0.3%, though it has had a very strong start to the week.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • EM concerns (Rand and Lira) reverse initial gains for European equities after yesterday’s record highs seen on Wall St.
  • Fixed income markets gained amid these EM concerns, with the move higher being exacerbated by a weak German jobs report, EU M3 money supply and dovish ECB comments.
  • Treasuries gain, 10Y yield dips below 2.50% level; week’s auctions continue with $13b 2Y FRN and $35b 5Y notes.
  • 5Y notes to be sold today yielding 1.550% in WI trading after being awarded at 1.732% in April
  • RBS plans to cut hundreds of U.S. jobs while shrinking its mortgage-trading business before stiffer capital rules are implemented
  • China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating  borrowers are struggling amid an economic slowdown
  • Bunds rally as euro zone M3 money supply rose 0.8% in April vs est. +1.1%; signals low inflation in euro area will probably persist if ECB doesn’t act quickly, Market Securities says
  • German unemployment unexpectedly increased for the first time in six months amid signs of a slowdown in Europe’s largest economy, with the number of people out of work rising a seasonally adjusted 23,937 to 2.905m in May
  • Bids at Germany’s auction of 30Y bonds fell short of EU2b maximum target; drew 2.25% average yield vs 2.53% on Feb 26
  • While the hesitant U.S. housing recovery has surprised and concerned Yellen and her colleagues at the Fed, it’s not clear how much they can do about it
  • Obama plans to use his commencement address today at West Point to present a foreign-policy vision that has been lacking, according to critics at home and abroad who cast the president as weak and ineffective
  • Defense secretary Hagel yesterday ordered the Pentagon to conduct a review of the U.S. military health care system; the House Veterans Affairs Committee is to hold a hearing at which VA officials are scheduled to testify on delays in the agency’s delivery of health care
  • Ukraine’s government said it will press on with military operations against pro-Russian rebel fighters after its forces retook Donetsk airport and inflicted “significant” losses on the separatists
  • Sovereign yields fall. Nikkei +0.2%, Shanghai +0.7% as Asian stocks rose. European equity markets lower, U.S. stock futures gain. WTI crude and copper higher; gold little changed

US Event Calendar

  • 7:00am: MBA Mortgage Applications (prior 0.9%) Supply
  • 11:00am: Fed to purchase $850m-$1.1b notes in 2036-2044 sector
  • 11:30am: U.S. to sell $25b 52W bills, $13b 2Y FRN in reopening, $45b 4W bills
  • 1:00pm: U.S. to sell $35b 5Y notes

EU & UK HEADLINES

EM concerns helped provide a bid-tone across fixed income markets which was then later exacerbated by a disappointing jobs report from Germany and Eurozone money supply which revealed a contraction in lending, with the future path of ECB policy remaining a prevalent theme in the markets. Also helping fixed income was the break of 2.5% to the downside in US 10y and month end and portfolio adjustments.

This morning also saw yet another technically uncovered auction by the Buba and comments from ECB’s Mersch who said the ECB is looking to its expand policy toolbox but it is up to the governing council to decide, adding narrowing the interest rate corridor for ECB's main policy rates could put constraints on money markets.

Prelim Barclays month end extensions show Pan-Euro Agg at +0.04y (Prev. +0.10y), Sterling-Agg at +0.06y (Prev. +0.02y)

US HEADLINES

Fed’s Lockhart (Non-Voter Dove) said yesterday that the timing of the first rate increase as six month after the end of QE is 'too mechanical' and could be on the 'short end' of a potentially longer time span. Lockhart added that added sees no increase until H2 2015. (RTRS)

Final Barclays month end extensions show US Treasury at +0.12y (Prelim +0.13y)

EQUITIES

Stocks in Europe initially opened higher following another strong performance on Wall Street which saw the E-Mini S&P futures hit yet another record high and the small-cap index Russell 2000 now outperforming the S&P 500 for the first time in over 2 months, with the Nikkei 225 up 0.2% during Asia-Pac trade. However, this move was consequently reversed following weakness in EM currencies (see below). The Italian MIB has outperformed throughout the session, being supported by Telecom Italia after their positive broker move at Goldman Sachs, which has consequently lifted the telecoms sector.

FX

EM currencies were the key focus as the Turkish Lira (TRY) took out stops through the 200DMA and South African Rand (ZAR) took out stops though the 50DMA. Recent losses in gold has hurt smaller cen. banks as they hold large amounts of their reserves in the yellow metal and the near USD 30 drop in gold yesterday will impact the countries current accounts. The Rand was under continued pressure following yesterday’s weak South African GDP as mining output is at its lowest since Q1 due to platinum strikes. The move in EM currencies consequently saw the USD index move above its 200DMA which weighed on the major pairs. Month end demand from the Bundesbank was also seen in EUR/GBP which pushed GBP/USD lower alongside more data showing mortgage lending falling in the UK.

* * *

DB's Jim Reid concludes the overnight event recap

Not for the first time this year the market is reverting back to being fairly subdued. It’s hard to find a big theme at the moment. Maybe we're waiting on next week's ECB meeting and payrolls to shake us out of our slumber. Having said this markets are happy with this outcome for now with the S&P 500 (+0.6%) closing at a record high again and Crossover (-10bps) closing within 8bps of its multi-year tights.

“Becalmed” is the word that Citigroup’s CFO used to describe the market yesterday at DB's big financial sector conference in NY and the numbers seem to back that up with the VIX index also near multiyear lows. This seems to be affecting the broader broker-dealer community and case-in-point was Citigroup’s warning also at our conference that trading revenues could be down by 20-25% y/y during Q2. Citi’s CFO said trading revenues are suffering because market participants are happy to “sit on the sidelines” referring to both equities and fixed income trading. This comes after JP Morgan made a similar warning earlier this month that it’s trading revenue could drop by around 20% y/y in the second quarter. JPMorgan’s head of investment banking Mr Pinto was quoted yesterday as saying that a pair of consensus wrong way trades including long USDJPY and short USTs had resulted in losses for many investors since the start of the year and hence has resulted in reduced risk appetite across the board. Despite the downbeat assessment from Citi and JPM, the S&P500 banks index was one of the better performers yesterday helped by a 3.4% gain in BofA who announced that it had resubmitted its capital plan to the Fed. The index notched up a 1.17% gain though it did show a small wobble following Citi’s comments.

Short USTs have definitely been one of the pain trades this year, with yields starting at 3.00% in January and reaching a low of 2.49% in the middle of this month. It’s also interesting to see price action we typically associate with riskoff (low treasury yields) occur while we have risk-on in equities (as we type S&P500 futures are reaching new highs of 1910). Even yesterday’s stronger than expected US housing, durable goods orders and PMIs couldn’t shake the price action in treasuries where 10yr yields closed 1.8bp lower at 2.51%. Taking a closer look at the data, US durable goods orders rose 0.8% (vs -0.7% expected) after the prior month was revised up +0.9% to +3.6%. However, this headline gain was mainly due to a +39.3% increase in defence orders. Ex transportation orders were up a modest +0.1% (though still above the 0.0% expected) after the prior month was revised up +0.9% to +2.9%. Core orders (non-defence capital goods orders ex aircraft) were down 1.2% (versus +4.7% previously and -0.3% expected). Outside of durables, the US Markit PMI rose to 58.6 which was its fastest rate since March 2012. US Case-Shiller home prices decelerated slightly in March but were still a little above consensus expectations. Prices are up +12.4% y/y (vs+11.8% expected) from +12.9% previously, while the MoM change was +1.2% vs. +0.8% prev and 0.7% expected. US consumer confidence for May rose to 83.0 from 81.7 previously (in line with expectations) with the labour components continuing to point upwards. The jobs plentiful component rose to a post-recession high (14.1 vs. 13.0 prev) and jobs hard-to-get fell (32.3 vs. 32.8 previous).

Turning to Asia, all major bourses across the region are trading firmer with the HSCEI (+1.3%) being the region’s best performer led by cyclicals. The sentiment is perhaps helped by a frontpage editorial in the China Securities Journal suggesting that the PBoC may continue with further “targeted easings” such as cuts to RRR for more banks, and bond purchases, in an effort to stabilise growth. Bloomberg is reporting that China’s State Council has recently approved plans for China Development Bank to issue securities at below-market rates to other state institutions which will allow CDB to better fund re-development projects.

In Japan, more questions are being raised about whether we see more BoJ stimulus at some point later this year. As we noted yesterday, a Reuters article from Monday suggested that the BoJ was quietly increasing its focus on how it will eventually exit from its current extraordinary monetary policy. In addition to this, the WSJ’s central bank-watcher Hilsenrath asked the question yesterday whether Governor Kuroda is awakening to the limits of monetary policy. Indeed, Kuroda was on the newswires last week urging the government to pursue structural reforms in an effort to lift potential growth, to complement monetary stimulus. There are more articles today suggesting that Abeadministration will be moving to bring forward corporate tax cuts as part of structural reforms - Bloomberg says that the Japanese ruling party has agreed that changes to corporate taxes will become party policy. The Nikkei is somewhat underperforming other bourses today at +0.3%, though it has had a very strong start to the week.

One asset class we’re watching is gold (-2.16%) which suffered its biggest drop of the year yesterday and has fallen by about 9% since the 2014 highs in March. It’s broken out below its 200 day moving average as some of this year’s tailwinds such as geopolitical risks (for example in Ukraine) and weak US economic growth appear to be abating somewhat, while all the recent Fedspeak debating when and how the Fed will be winding back its policies is partly to blame as well. Seasonality is also working against the precious metal as May and June have been negative months over the last 3 years, not including the -2.1% performance seen so far this month. Dovish comments from the ECB’s Nowotny yesterday failed to boost gold. Nowotny commented that the central bank is in discussions over a rate cut and Draghi said overnight that he is confident that the ECB has the tools to deliver on its inflation target. All eyes on June 5th.

We have a lighter data docket today with Euroarea economic sentiment, German unemployment and US weekly mortgage applications. The monthly EC money and credit supply report will also be released today. Brazil’s BCB holds its policy meeting where most analysts expect the bank to hold the Selic rate constant

 

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Wed, 05/28/2014 - 06:47 | 4801192 negative rates
negative rates's picture

He'll do anything to keep things his way.

Wed, 05/28/2014 - 06:56 | 4801195 Doña K
Doña K's picture

It's maddening.

Maybe we can jst go 100% PM's and whatever happens. (physical that is)

Wed, 05/28/2014 - 07:19 | 4801215 GetZeeGold
GetZeeGold's picture

 

 

Is this peak insanity?

 

Perhaps a liitle bit more.....but we're pretty much there.

Wed, 05/28/2014 - 07:24 | 4801220 negative rates
negative rates's picture

It's prolly never been this insane ever, and that cover a very long time too, the bad news is that we always knew it would end this way.

Wed, 05/28/2014 - 07:44 | 4801258 Headbanger
Headbanger's picture

The real shame and danger now is the Fed and the Gubmint don't know what else to do to help the economy except print moar and moar "money"

They're in a sheer panic now  like somebody being caught in a burning room and they only keep pounding at a locked door to get out

Instead of turning around and going out the window to escape.

Wed, 05/28/2014 - 08:13 | 4801303 firstdivision
firstdivision's picture

I have one solution, set congressional pay to equal the average wage in their district.  Sit back and watch as they battle to actually create quality jobs in their districts.

Wed, 05/28/2014 - 10:16 | 4801605 BigJim
BigJim's picture

 Buy Stocks, Buy Bonds, Buy Quality, Buy Trash

Buy! Buy it all! Buy it now while you still can! The greatest bull-market in everything* is about to leave the station! Don't miss out on the wealth-creating opportunity of a lifetime! You owe it to your kids! Your neighbours! Yourself! Don't wait! Just buy!

*except gold and silver, of course... those are useless, counterparty-unladen shiny rocks that no one will ever buy again.

Wed, 05/28/2014 - 07:19 | 4801216 eddiebe
eddiebe's picture

I assume that's a rhetorical question.

Wed, 05/28/2014 - 10:17 | 4801573 Truthseeker2
Truthseeker2's picture

Before you "Buy Stocks, Buy Bonds, Buy Quality, Buy Trash"

Better read this first --->

Times Are About To Change ... And Change Fast!

 

Wed, 05/28/2014 - 07:59 | 4801274 stocktivity
stocktivity's picture

"Is this peak insanity?"

No...not the peak yet. It's still all Bullshit!!!

Wed, 05/28/2014 - 08:26 | 4801335 post turtle saver
post turtle saver's picture

I've made so much money trading counter to what ZH has said over the past couple of years... seriously, it's become comical

y'all are emotional investors... the goal is to make money, not shake impotent fists of rage at the sky

Wed, 05/28/2014 - 06:56 | 4801196 fonzannoon
fonzannoon's picture

it makes total sense that nirp is bullish. if you believe yields are heading lower than 2.5% is better than cash and div paying stocks look wonderful.  this works until credit starts blowing up, but that could be in 2030.

Wed, 05/28/2014 - 07:03 | 4801202 Sudden Debt
Sudden Debt's picture

Here in Belgium, we just found out, just after the elections that our debt which stands at 102% officially is actually 10% higher...

yeah...

oopss...

Wed, 05/28/2014 - 07:10 | 4801209 Haus-Targaryen
Haus-Targaryen's picture

You gotta pay for the American debt somehow. 

Wed, 05/28/2014 - 07:30 | 4801217 GetZeeGold
GetZeeGold's picture

 

 

 

That's easy....we just raise taxes and force everyone to buy overpriced healthcare.

 

Oh....and we might need to "borrow" your 401K.

 

See.....all fixed!

Wed, 05/28/2014 - 08:08 | 4801288 Haus-Targaryen
Haus-Targaryen's picture

I glanced at the USSA's debt clock. 

In 4 years -- its projected according to current trends the average tax payer will have an average for $482 in savings, whereas the average american CITIZEN will have almost $200k in debt.  We'll have $20 trillion in debt, and student loans will be over $4 trillion (el oh el). 

They're definitely coming after retirement funds and anything else one can print and/or not nail down.

Odds of deflation followed by hyperinflation in the next 4 years -- 100%.

Wed, 05/28/2014 - 08:28 | 4801346 AdvancingTime
AdvancingTime's picture

Many people think debt is no big deal. A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects. Joining the idea of a mirage and contagion with the reality of collapsing debt forms an interesting subject.

It is important to remember all debts and obligations do not come due at the same time. Also, it must be noted when a bill is not paid or defaults it often starts a long and drawn out legal battle, this collection process that may extend years without harsh consequences. This my friends is the reality of modern life in America and much of the world. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/05/debt-mirage-always-moving-into-di...

Wed, 05/28/2014 - 08:36 | 4801357 Grouchy Marx
Grouchy Marx's picture

Bullish!

Just look at all the other countries that have as much debt and are chugging along fine! 

Keynsian policy vindicated! I'm going to pour myself another glass of wine. 

Wed, 05/28/2014 - 09:32 | 4801492 Againstthelie
Againstthelie's picture

After the elections? Then everything is working as it should.

 

Has any politician or newspaper in Belgium already asked, what the tremendous US debt buying is about?

Wed, 05/28/2014 - 07:09 | 4801206 MWizard
MWizard's picture

3 ways to become a frustrated trader. 1. Try to become a perfect trader. 2. Try to never lose. 3. Plan to make a specific amount of money in a specific period of time. Using any of these method will make you frustrated but you can do it only on your own risk. https://www.youtube.com/watch?v=e6fZYR8_j5I 

Wed, 05/28/2014 - 08:25 | 4801332 AdvancingTime
AdvancingTime's picture

This is one big circle jerk. Those in charge are still in charge, at least for now.

Wed, 05/28/2014 - 07:21 | 4801219 RealityCheque
RealityCheque's picture

Circling the drain. It gets faster and faster, more and more confusing, then.... its gone.

Peak insanity? Hopefully, because I can't picture it being any more ultra-fucked than it already is.

Wed, 05/28/2014 - 07:35 | 4801240 buzzsaw99
buzzsaw99's picture

it all makes perfect sense [/no sarcasm intended]

Wed, 05/28/2014 - 08:23 | 4801327 AdvancingTime
AdvancingTime's picture

I consider this more proof in a manipulated world that few people really understand the economy. The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality.

Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations. All this can become quite abstract. Economist predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control  economic cycles better than in the past. More on how few people really understand this very important part of our lives in the article below.

http://brucewilds.blogspot.com/2014/03/few-people-really-understand-econ...

Wed, 05/28/2014 - 08:32 | 4801353 NoWayJose
NoWayJose's picture

If the Japanese GPIF actually has money to buy a tangible asset like junk bonds, then Japan is actually a LOT better off than the US because it means that Japan actually collected the retirement money and held it aside. The US has taken the Social Security money and left nothing but IOUs - not even having any tangible value such as US Treasuries or even junk bonds. So those Japanese pensioners may not be so bad off in comparison.

Wed, 05/28/2014 - 12:22 | 4802183 scraping_by
scraping_by's picture

Dunno if I'd call a junk bond a tangible asset. It's more like going down to the sports parlor and laying down a wager on a sub .500 team because they're playing another sub .500 team.

A tangible asset has always been something that, if everything goes tits up, could be sold at the dispersal auction for a few pennies on the dollar. Junk bonds are junior to the guy who delivers Jimmy Johns.

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