US data this week is relatively sparse (as usual in a post payroll week) leaving little evidence over the next few days to progress the seasonality debate but after a long weekend of derisking in mind and now in reality, Europe is front-and-center once again. Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality - most specifically for Spain - that we described in glorious must read detail here). Divergence and decoupling remain sidelined also as Deutsche Banks' Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we've just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we'd expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.
The following chart from Bank of America captures the past three years of American "recovery" quite starkly: the US economy, as measured by the ISM has so far not double but triple dipped, and the result would have been far more pronounced had the Fed not stepped in after each of the prior two local maxima and injected trillions into the economy. Following peaks in mid 2010 and early 2011, we are "there" again - how long until the Fed has to jump in? And would it have already done so if it wasn't an election year? Which brings us to our question: third time is the charm? Or head and shoulders?
UK and EU markets played catch up at the open this morning following Friday’s miss in the US non-farm payroll report. This coupled with on-going concerns over Spain has resulted in further aggressive widening in the 10yr government bond yield spreads in Europe with the Spanish 10yr yield edging ever closer to the 6% level. As a result the USD has strengthened in the FX market in a moderate flight to quality with EUR/USD trading back firmly below the 1.3100 and cable falling toward the 1.5800 mark. There was some unconfirmed market talk this morning about an imminent press conference from the SNB which raised a few eyebrows given the recent move in EUR/CHF below the well publicised floor at 1.2000, however, further colour suggested an announcement would be linked to the naming of Jordan as the full-time head of the central bank when they hold their regular weekly meeting this Wednesday. Elsewhere it’s worth noting that the BoJ refrained from any additional monetary easing overnight voting unanimously to keep rates on hold as widely expected. Meanwhile, over in China the latest trade balance data recorded a USD 5.35bln surplus in March as import growth eased back from a 13-month peak.
- With a 2 Year delay, both FT and WSJ start covering the shadow banking system. For our ongoing coverage for the past 2.5 years see here.
- Trouble in shipping turns ocean into scrapheap (Telegraph)
- First-Quarter Home Prices Down 20.7% in Capital (China Daily)
- Bernanke Says Banks Need Bigger Capital Buffer (Reuters)
- Monti’s Overhaul Can’t Stop Pain From Spain: Euro Credit (Bloomberg)
- Spain Confronts Crisis Threat as Rajoy Seeks Deficit Cuts (Bloomberg)
- Japan’s Noda Announces Anti-Deflation Talks as BOJ Sets Policy (Bloomberg)
- White House makes case for Buffett Rule (CNN)
- Cameron to Make Historic Myanmar Trip (FT)
- 'Time for Closer Ties' With India (China Daily)
So far futures are broadly unchanged, following the release of a Chinese trade report which while showing a resumption in the trade surplus, on expectations of further trade deficit in March, showed it was primarily due to a slide in imports, not so much a rise up in exports, a fact which impacted the Aussie dollar subsequently. We already noted that in conjunction with the BOJ, this means that Asia's central banks will likely hold off on further easing, and defer to the Chairman, especially with food inflation in China still prevalent. Aside from that the traditional European weakness is back, where April Sentic Investors Confidence slid to -14.7 on expectations of -9.1: to be expected from a meaningless market-coincident indicator. Keep a close eye on PIIGS bonds where whack a mole is now firmly back as the LTRO benefit is long forgotten, 3 month half life and all that.
Disappointing the liquidity-starved masses, the BoJ wholeheartedly believes that this time it's different and their economy remains more or less flat and shows signs of picking up leaving hope for another massive LSAP (and a disappointed SocGen) having to wait for the Fed to pick up the pieces of a global slowdown. The BoJ maintained the size of its asset-purchase fund, credit-loan program, and ZIRP noting that, via Bloomberg:
- *BOJ SAYS NO ONE PROPOSED EXPANSION OF STIMULUS AT MEETING
It seems the Japanese are following China's lead (since China's economy posted a trade surplus on expectations of a deficit and following the biggest import surge since 1989, this means that the hard landing is delayed as the PBOC is far more concerned about the pockets of food inflation noted yesterday and as such will be far less willing to proceed with the easing everyone demands) and deferring to the Fed for the next global liquidity pump (remember its flow not stock so this is bad news for risk-on - as can be seen in AUDJPY, Oil, and Copper). Gold is so far enjoying this as one by one global central banks check to the Fed's check-raise expectations.
Many are eagerly awaiting Bernanke's opening speech at the 2012 Financial Markets Conference "The Devil’s in the Details" which just like last year had nothing in the prepared remarks about the market, or about current labor or inflation conditions. Instead, Bernanke speaks about (what we deem far more important) Shadow Banking, repos, money markets, and other things which the market does not care about at all. And since he will not address monetary policy at all in the prepared remarks, the only hope is if a random question at the Q&A will provoke him to tell the world if the NEW QE is coming. We are not holding our breath.
Despite a grumpy open in the major cash equity indices - which opened pretty much in line with where S&P futures had closed on Friday morning - equity indices provided some BTFD reassurance for any and everyone who wanted to get on TV today. In sad reality, a lot of this equity index performance was due to Apple's 2% rally off pre-open lows, as it made new highs and vol continued to push higher. Financials, Industrials, and Materials all underperformed on the day (and Utes outperformed but still lost 0.5%). The majors were hurt most once again but remain notably expensive still to their credit-market perspective. On an admittedly quiet volume day (with Europe closed), the credit market (especially HYG) underperformed equity's resilience open to close but an after-hours reality check dragged ES down to VWAP once again on notably above average trade size and volume for the day. VIX managed top almost reach 19%, leaked back under 18 before pushing back up to near its highs of the day by the close - breaking back above its 50DMA (as the Dow broke below its 50DMA but the S&P remains above). Treasuries shrugged off the equity resilience and stayed in very narrow range near their low yields as stocks diverged once again (until after hours). FX markets were very quiet with JPY crosses getting some action as EUR and AUD managed to drag the USD down a little. Commodities were mixed off Thursday's close with Copper the major loser and Gold outperforming. Oil managed a decent intraday recovery today most notably back over $102. The weakness after-hours in ES (the S&P 500 e-mini future) is worrisome as its lost the support of AAPL and its options. At the cash market close, ES peaked for the day at 1382.75 and has since drifted back all the way to 1374.25 - just shy of the day's lows.
The black swan is probably the most widely misunderstood philosophical term of this century. I tend to find it being thrown around to refer to anything surprising and negative. But that’s not how Taleb defined it. Taleb defined it very simply as any high impact surprise event. Of course, the definition of surprise is relative to the observer. To the lunatics at the NYT who push bilge about continuing American primacy, a meteoric decline in America’s standing (probably emerging from some of the fragilities I have identified in the global economic fabric) would be a black swan. It would also be a black swan to the sorry swathes of individuals who believe what they hear in the mainstream media, and from the lips of politicians (both Romney and Obama have recently paid lip service to the idea that America is far from decline). Such an event would not really be a black swan to me; I believe America and her allies will at best be a solid second in the global pecking order — behind the ASEAN group — by 2025, simply because ASEAN make a giant swathe of what we consume (and not vice verse), and producers have a historical tendency to assert authority over consumers. But black swans are not just events. They can also be non-events. To Harold Camping and his messianic followers who confidently predicted the apocalypse on the 21st of May 2011 (and every other true-believing false prophet) the non-event was a black swan. Surprising (to them at least) and high impact, because it surely changed the entire trajectory of their lives. (Camping still lives on Earth, rather than in Heaven as he supposedly expected). To true-believing environmentalists who warn of Malthusian catastrophe (i.e. crises triggered by overpopulation or resource depletion), history is studded with these black swan non-events.
Putting It Into Perspective: Bruno Iksil's $100 Billion Position Makes Him The Seventh Largest Bank Holding Company By CDS ExposureSubmitted by Tyler Durden on 04/09/2012 16:55 -0400
With the story of Bruno Iksil refusing to be swept under the rug (for now), we had the urge to show just how his position stacks up in comparison to the CDS holdings for all the bank holding companies tracked by the Office of the Currency Comptroller. Recall: "Iksil may have built a position totaling as much as $100 billion in contracts in one index, according to the market participants, who said they based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets." We used a log scale index although even in simple linear terms the story is quite straightforward: we are not sure what is worse - that one trader may have amassed a CDS position (with an associated VaR that is in the billions) which is greater than the combined holdings of all except for 6 banks (and is greater than the combined CDS exposure of a Wells Fargo among others), or that the top 5 banks together account for 96.5% of all CDS holdings? One thing we are certain of, is that JPMorgan's $71 trillion in assorted derivatives is all purely for hedging purposes. After all Dick Bove just said so.