In the last week, both European and US equity markets have valiantly attempted to extend their rally into the stratosphere while the credit market has summarily dismissed this exuberance as 'oh those silly algo-driven momo monkeys'. Yesterday and today we have seen equities in both regions retrace aggressively to the much more realistic, liquidity spigot-lacking margin-compressing growth-slowing reality that credit has been pricing in.
We have previewed the phasing out of the LTRO effect previously here on several occasions. Now, courtesy of Art Cashin, everyone is aware that the eye of the European hurricane has officially passed, especially in the aftermath of this morning's horrendous Spanish bond auction, which shows that reality is back with a bang.
The Arabian Spring started after the self-immolation of a 26 year old fruit vendor in Tunisia to protest a life he could no longer live. Will the European Summer set off with a suicide as well? News are crossing that a few hours ago, a 77 year old Greek has killed himself in broad daylight on Athens' symbolic and inappropriately named Syntagma square to protest the "occupier government" and not wanting to be a burden to his child. As Kathimerini reports, "an elderly man committed suicide on Friday morning in Syntagma Square in Athens, in front of Parliament. Some reports said witnesses claimed the man shouted «I don't want to leave debts to my children,» before he shot himself in the head. According to Skai TV, witnesses said the man did not say anything. The incident occurred shortly before 9 a.m. when the square was full of people and commuters using Syntagma metro station. The man had positioned himself next to a big tree and was not in view of most people in the square. Two people who were sitting on a bench some 10 meters away have been questioned by the police." Will this latest tragedy provoke a groundswell popular response? We doubt it - alas the status quo appears set to continue chugging along as per usual, taking advantage of appathetic and welfare addicted societies around the world.
The Mario Draghi press conference, in which the Goldman alum will spin tall tales of recovery, is set to begin. Watch it live here. If there are any notable changes to ECB policy, which is not expected, we will be sure to note.
- ECB'S DRAGHI SAYS ECONOMIC OUTLOOK SUBJECT TO DOWNSIDE RISKS
- DRAGHI SAYS `DOWNSIDE RISKS' PREVAIL ON REGION'S GROWTH OUTLOOK
- DRAGHI SAYS ECB SEES INFLATION UPSIDE RISKS PREVAILING IN 2012
- DRAGHI SAYS NON-STANDARD MEASURES WILL NEED TIME TO SHOW IMPACT
- DRAGHI SAYS IMPORTANT FOR BANKS TO STRENGTHEN BALANCE SHEETS
- DRAGHI SAYS BANKS SHOULD RETAIN EARNINGS TO STRENGTHEN - And nationalize losses?
And... goldilocks. The ADP report, which was expected to print at 206K came just where it was expected, at 209K, almost magically so, in what is probably the closest number to consensus in a long time. The previous number was revised to 230K, which means this was the 2nd drop in 3 months, and the first drop of the 3 month rolling average in the past 6 months: peak private jobs? And while the ADP has historically been a horrendous predictor of the NFP headline, this gives no actionable hint to those wishing to trade the payroll data, which in turn means that if Bernanke wants to undo his "New QE" skepticism, the decision will have to wait until Friday when equities are closed.
More pain in Spain has been the theme so far in the European morning as poor auction results across three lines has resulted in significant widening in the 10-yr government bond yield spreads over benchmark bunds with the Spanish 10yr yield up some 24bps on the day. In combination with this the latest Germany Factory orders also fell short of analysts’ expectations and as such the lower open in bund futures following yesterday’s less than dovish FOMC minutes has been completed retracted and we now sit above last Friday’s high at 138.58.
Today's otherwise key news event - the ECB rate announcement (which just printed at unchanged as expected) and press conference, will be trivial. As such, everyone is set to ignore the latest update from Mario Draghi, who courtesy of a $1.3 trillion liquidity injection since December has now largely wasted all his liquidity dry powder, at least until Spanish and Italian bonds are trading back at 7%, some time in the next few months. The result is that people like Citi's Steven Englander are saying to ignore the ECB, and to focus solely on the ADP (which has a horrendous predictive track record of the actual NFP print) report, to be released at 8:15 am, as it may be the only tradable hint ahead of the NFP report which as noted before is coming out on Friday, which is an equity holiday, although futures and bonds will be trading at the time of the release. More importantly, since the Fed now responds to economic data points in real time, a big miss to the consensus print of 206K will likely set the market surging as it will mean the Fed doves are back in control. Paradoxically, a meat or big beat, will be very market negative, as it will justify the withdrawal of liquidity support for at least 3-4 months, when the election fight will be in full swing, and Obama would be quite happy for another boost to the S&P in advance of November, and the repeat of the debt ceiling fiasco.
No surprise in today's ECB announcement. The Press conference in 45 minutes is also expected to be largely a non-event, although we will be delighted to hear Mario's response to the quality of Europe's collateral backing the trillions in fresh discount window borrowings spent on buying up Spanish and Italian bonds, which are gradually going underwater.
Oh where to begin. The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480MM on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to "observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil." So who is exporting? Nobody knows, but everyone knows why the Aussie dollar plunged on the headline. The shock sent reverberations across Asian markets, which then spilled over into Europe. Things in Europe went from bad to worse, after Germany reported its February factory orders rose a modest 0.3% on expectations of a solid 1.5% rebound from the -1.8% drop in January. But the straw on the camel's back was Spain trying to raise €3.5 billion in bonds outside of the LTRO's maturity, where the results confirmed that it will be a long, hard summer for the Iberian country, which not only raised far less, or €2.6 billion, but the internals were quite atrocious, blowing up the entire Spanish bond curve, and sending Spanish CDS to the widest in over half a year.
There are many reasons why gold is still our favorite investment – from inflation fears and sovereign debt concerns to deeper, systemic economic problems. But let's be honest: It's been rising for over 11 years now, and only the imprudent would fail to think about when the run might end. Is it time to start eyeing the exit? In a word, no. Here's why. There's one indicator that clearly signals we're still in the bull market – and further, that we can expect prices to continue to rise. That indicator is negative real interest rates.