Printing trumped the European recession until the spigots were either turned off or became ineffective. What else is that you can promise the markets after “limitless” and “uncapped” play out? With short rates at just above Zero, with everything promised now except the kitchen sink and with the economies in a major part of Europe falling into the abyss where is it that you think we are going besides down? I would argue that the central banks did what they could, delayed the inevitable but that it was always a question of when and not if before earnings turned grim and the markets reversed.
With all the hope slooshing around the world, it is likely no surprise that some risk-reward connections have 'broken' or become misaligned. In an effort to simplify the view of asset class risk and return, we present Morgan Stanley's Yield vs Volatility chart. It seems relatively plain to see that the Russell 2000 (and European stocks SX5E) are dramatically over-priced (under-'yielded') relative to their risk, while Asian and European High Yield credit (and to a lesser extent Asian and European Investment Grade Credit) are trading notably cheap relative to their volatility. So for all those performance chasing asset-allocators who remain fundamental bulls, buying European High Yield credit seems the best bang for your buck - instead of piling into more Russell 2000 beta...interestingly the S&P 500 appears 'fair' compared to risky sovereigns, global stocks, and global credits from a risk-reward perspective.
Andalusia Seeks Greater Bailout From Spain, Says Amount For Regional Bailout Fund Was "Underestimated"Submitted by Tyler Durden on 10/24/2012 09:14 -0400
The latest headline out of broke Europe, where Germany entering recession apparently benefits from a rising EURUSD even as Mario promises to print even more currency, is perfectly expected: the insolvent Spanish region of Andalusia has requested even more bailout aid. From Bloomberg:
- Spanish region of Andalusia says it is seeking more aid from Spain
- Andalusia Says Spain Must Help as Regions Shut Out of Markets
- Fund set up by central government to aid regions is only option
And what we have said all along:
- Amount for Spanish regions’ fund was “underestimated:” Andalusia spokesman says
No surprise Europe remains highly vulnerable to sudden sentiment shifts. How to stablise it? The usual smoke & mirrors are conveying what might or might not be good news on Greece [since denied]. The crisis in Europe may be contained, but it clearly isn't solved. "Europe is like an overweight dinosaur on a crash diet, that's got really really bad toothache with not a dentist in sight." But But But.. yesterday's ructions weren't just about the political shenanigans that pass for markets these days. There are deep undercurrents roiling these placid markets. All of which leads us to wondering what happens next? If this continues what hope for next year? Low low yields and global economic depression? Boy scout time...
Literally minutes ago we made it clear that the Greek FinMin is now officially lying on the tape, declaring his "hope" as a fact. It took Germany moments after our post to chime in and confirm that indeed, things are very, very serious, if the finance minister of a country is now blatantly lying. Via BBG
- GERMAN SPOKESMAN: NO BASIS FOR 2-YR GREEK EXTENSION REPORTS - DJ
And EURUSD spike on the rejection of the lie. In other news, the market is about as unmanipulated as the Mitt Romney flash smash yesterday.
After absorbing the latest PMI reports from Europe, as well as yet another disappointing German IFO survey which in turn was followed by a sharp rise in volatility, saw equity markets in Europe print lows of the day. However ever since, equities staged an impressive recovery and are now in positive territory, supported by investors looking to capitalise on oversold conditions and in part by short-positions being squeezed. The sharp and unpredictable mood swings resemble one suffering manic depression and it remains to be seen whether stocks will be able to hold onto gains. The move higher in stocks has been led by the tech sector, which has been one of the worst performing sectors over the recent weeks. Looking elsewhere, EUR underperformed its peers, largely driven by a lower EUR/GBP (by-product of deterioration in EU credit markets, as well as good sized buying by a UK bank in GBP/USD).
What better way to start the morning for EUR trading algobots (which at last check account for 50% of the volume and rising) than with a bout of total confusion over the Greek bailout (non) extension. On one hand we have the Greek FinMin Stournaras saying a two year grace period has been reached - something which the European core has said is not standalone, and which will need much more bailout cash, and on the other we once again have Germany flat out denying this report, saying the official Troika reports has not been completed, and that Greece is expected to show deviations from the fiscal plan. From Kathimerini: "Finance Minister Yannis Stournaras has informed journalists that there is an agreement between the Greek government and the troika on all aspects of the austerity and reform program and the coalition is likely to be in a position to submit the measures to Parliament by the end of the week. “The package has been sealed,” Stournaras is reported to have told journalists, less than 24 hours after coalition partners Democratic Left and PASOK expressed objections to some aspects of the measures." And yet, moments ago, headlines blast that GERMANY DEP FINMIN:TROIKA REPORT ON GREECE NOT YET FINISHED and GREEK REPORT TO SHOW DEVIANCE FROM AGREED GOALS, KAMPETER SAYS. Go figure it out.
Unlcear if as on recent occasions, there will be 7,000 policemen protecting him: Mario Draghi travels to Berlin today to meet with key German parliament members involved in the eurozone crisis policy. This private meeting is the ECB president’s effort to defend his new bond buying plan as a legitimate instrument in its monetary policy arsenal. Germany’s legislative backing is critical for Draghi’s plan to buy up Spanish and other eurozone area government bonds. The Bundesbank president, Jens Weidmann, says the program is tantamount to financing governments by printing money, which is prohibited by the ECB’s founding treaty. ECB presidents normally give evidence to the European parliament but rarely if ever address national legislatures especially behind closed doors. This journey is highly unusual but a critical sell for Draghi. Today’s session will be followed by a press briefing at 4pm local time by Mr. Draghi and Bundestag leader Norbert Lammert.
- China May Forgo Easing as Economy Rebounds, Survey Shows (Bloomberg)... or as food and house inflation has never gone away
- China Edges Out U.S. as Top Foreign-Investment Draw Amid World Decline (WSJ)
- Fed to keep buying bonds despite firmer U.S. growth (Reuters)
- Bernanke Seen Attacking Jobless Rate With QE Until His Term Ends (Bloomberg)
- Mortgage applications plunge 12%, down for third week in a row (Dow Jones)
- Exchanges Retreat on Trading Tools - Fund Managers, Regulators Say Certain Orders Are Risky, Aid High-Speed Firms (WSJ)
- Europe Bank Chief to Defend Bond-Buying Plan (WSJ)
- Japan, China Envoys Met Last Week for Talks on Island Feud (Bloomberg)
- Goldman’s Pill Says ‘Guerrilla’ ECB to Impose Losses on Skeptics (BBG)
- Chance rise of an Obama defeat (FT)
- King Says BOE Is Ready to Add to QE If U.K. Recovery Fades (Bloomberg)
- Rajoy Sees Case for Slowing Spain’s Austerity as Economy Shrinks (BusinessWeek)
- Hong Kong Intervenes to Defend Peg as Upper Limit Tested (Bloomberg)
There were two major datapoints overnight: the first one came out early in the session, when the Chinese Flash HSBC PMI (not the official one), printed in contraction territory for a 12th consecutive month but jumped sufficiently to 3 month highs to give the algobots hope that China may be turning (it isn't: China, like the US has a major political event early November and all its data is more manipulated than ever). Regardless, this sent future rising to session highs until virtually yesterday's entire gap down was eliminated. The euphoria continued until several hours later we got composite European (as well as the most important German PMI data, and to far less relevant extent France, which always has been the dynamo in European economic growth), manufacturing and services PMI, both of which missed expectations or declined substantially, reaffirming that the German economy is getting dragged down more and more into recession even as continues funding the rescue of the periphery. As the chart from Markit below shows, German PMI is hinting at a solidly negative German GDP print, further confirmed by the German IFO business print which came at 100, a drop from 101.4 and below expectations of 101.6. Other secondary macroeconomic data was just as bad, which explains why futures are now well on their way to dropping back to their lows. Finally, today we get the FOMC statement, which will be much ado about nothing, and will merely serve as an appetizer to the December FOMC meeting, when Goldman (and Zero Hedge) now expected the Fed to expand unsterilized monthly monetization to increase from $40 billion to $85 billion (more on the shortly). Yet perhaps the biggest shift in mood has been coming out of our old friend Greece, where Troika negotiations, largely under the radar, are progressing from bad to worse, where the bond buyback plan was scuttled last night (as ZH reported sending Greek bonds 70 bps wider on the day and rising), and where the probability of another flash election, which can crash the precarious European balance in an instant, is rising with each passing day.
What is wrong with this market? The S&P 500, instead of grinding higher in the aftermath of QE3 actually hit its peak for the year the day after the policy announcement. Go figure. Maybe economic reality finally caught up with Mr. Market (there is a very fine line between "'resiliency" and "denial" — and keep in mind that the S&P 500 is still up 14% in a year in which profits are now contracting, not just slowing down)... On average, six weeks hence, the S&P 500 was up more than 9% after the policy announcement. It was all so novel! Tech on average was up over 11%, industrials were up 12%... ditto for Consumer Discretionary and Materials. The cyclicals flew off the shelves. But this time around. either Mr. Market is jaded or the laws of diminishing returns are setting in. Six weeks after the unveiling of QE3, the market is down 2%. This hasn't happened before. Every economic-sensitive sector is in the red, and even Financials — the one sector that should benefit from all the "sucking at the Fed teat" — have made no money for anybody!
Forget black swans, Nigel Farage is rapidly turning himself into the black sheep of the EU Parliament with his constant stream of truthiness and honest pragmatism. It seems the broadly nodding-donkeys that fill the chamber remain cognitively dissonant to any and everything in the real world - hanging instead on the next soundbite from Van Rompuy or Barroso on how well things are going, or how the crisis is 'almost' over. If only the Germans would bless them all with their money. In one his plainest-speaking rants, Farage provides clarity to his 'peers' on just exactly what the bailouts of Greece, Portugal, Ireland, and soon to be Spain and Italy are actually about - the "total subjugation of the states to a completely undemocratic structure in Brussels." Is it any wonder Samaras and crew - while happy to accept cash and make promises - are pulling away from yet another (this time is the last time) Troika-driven austerity push? "The euro-zone is in a very dark place; economically, socially, and politically."