Bloomberg has run a story, citing two anonymous central bank officials, stating the ECB may not be ready to finalise its plan to buy government bonds at the September 6th meeting. JPMorgan's European economists note that the story cites two reasons for this: (a) The Governing Council wish to wait until they have seen the German constitutional court ruling on September 12th before proceeding; and (b) The programme is still being worked on staff may not be able to finalize it by then. Critically, JPM, like us, regard (a) as something of a smokescreen. The idea that work “is not complete” may also be a euphemism for the fact agreement on the contours of the policy is proving elusive - which in turn contributes to the sense that opinion on the Governing Council is deeply divided, and hence its commitment to any policy intervening in markets will not run deep. That could undermine the effectiveness of policy interventions themselves - and no matter how many rumors you hear, you should focus on what you DO know - that a decision is delayed - and everything else is as useful as a personal guarantee from Samaras.
Despite the valiant attempts to create something from absolutely nothing in the last few minutes of the European week (to wit Hilsenrath's Bernanke story and ECB bond 'corridor' rumors), Europe fell back from its hope-ridden highs this week. Spanish 5Y CDS broke back above 500bps, as did its 10Y spread to Bunds - giving back 10 days of 'gains' - while the exuberant front-end closed the week basically unchanged (but 40bps higher in yield from Monday's best levels). For context, Spanish bond spreads remain well above the peak crisis levels of last November - having bounced perfectly off them on Monday. European stocks ended today with small gains but all red on the week with Spain's IBEX -3.4%. EURUSD gained 200pips on the week as Fed QE hope faded and we suspect the re-appearance of EU pain repatriated more EUR.
It is Friday, and the market is in danger of posting its first weekly loss in months. Which means it is time for everyone's favorite Fed mouthpiece, Jon Hilsenrath to hand over the podium to his true superior, Ben Bernanke, by posting the Chairsatan's response letter to Republican Darrel Issa in which he defends QE and leave in the following: "There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery." And just to make sure that as Hilsenrath is to the Fed, so Reuters is to the ECB, we get the following tried and now simply pathetic regurgitation of the Spiegel rumor from this Sunday (which was since denied at least two times for the simple reason that Germany will never agree to open-ended debt monetization until global stock markets are literally collapsing) via Reuters: "ECB considering setting yield band targets under new bond buying programme according to sources." Of course, neither Ben has said anything new, nor the ECB has said something that is on the margin either credible or actionable (recall that earlier today the ECB explicitly said its hands are tied until the Kardinals of Karlsruhe make their decision in 3 weeks), but the market doesn't care, and surges. Sadly for the programmed market ramp, the non-news was leaked too early, and should have been released at 3:30 pm at the earlier. Look for a full German denial shortly.
"It is rather amazing that a 2.8% yield on the long bond couldn't do the trick. By hook or by nook, it looks like the Fed is going to make an attempt to drive the rate down even further — but if that was the answer, wouldn't Switzerland, Japan and Germany be in major economic booms right now seeing as how low their 30-year bond yields are? Monetary policy in the U.S.A. is not the problem, so it is doubtful that it will be the solution. It all boils down to fiscal and regulatory policy and how the government can part the clouds of uncertainty — the Fed may be able at the margin to cushion the blow, but that's about it."
Next week will see a slew of key data releases across the Euro area. The week will kick off with the German Ifo for August due on Monday which Goldman expects to fall slightly, reflecting the softening in the August composite PMI. The business climate index has been signalling a further loss of momentum in the German economy, with both key dimensions - the assessment of current conditions and business expectations - deteriorating since May. The chart below shows how both components have evolved during the European debt crisis. The 'expectations' component appears to have been particularly affected by European developments. As far as the sectoral breakdown is concerned, the Ifo was still signalling rather robust domestic growth in construction, and in retail and wholesale goods, while the manufacturing sector seemed to have been adversely impacted by a weakening in external demand. The 'flash' reading of the August manufacturing PMI for Germany, however, seems to indicate that this could be changing. As the chart indicates, between the survey's mediocre perspective of the current situation and its negative expectations for the future - we have completed the circle and stand back at precarious Mid 2008 levels - and we know what came next.
It is often said a picture paints a thousand words; in the case of this chart, it paints more. Day in and day out, there is one inimitable indicator that if looked at will tell you everything you need to know about the day's market performance - volume. The last few weeks - post-Draghi, Post-Knight, stunned many with just how low volume can get; and implicitly just how much the battle-bots remain in charge. Clarifying this picture of low volume strength and high volume weakness, John Lohman has created the following chart - summarized thus: YTD, low volume days have seen the S&P 500 rise around 15% in aggregate, while high volume days have seen the S&P lose around 5% in aggregate. The linear nature of the low-volume move is simply remarkable - perhaps September will bring some real volume back, and now we know what that means for market direction.
Breaking news that the 5th Avenue and 34th street area in New York has been closed after 5 people were shot outside of the Empire state victim, including the gunman. According to police scanner reports, the perpetrator has been shot by NYPD ans is is DOA on scene, with EMS assistance requested.
The market was just starting to digest the schizophrenic Durable Goods data when chatter broke of the German FINMIN discussing a 'temporary' GRExit. In other words, just like Mario Draghi could transmogrify the twilight zone into reality during Merkel's vacation, and spread unfounded rumors that Europe is fine, now that the Chancellor has returned, the rumors take on the other side of the equation, and the mice no longer can play. This pushed S&P futures below overnight lows (down about 5pts from Dur Goods), EUR down 40 more pips (-75pips from close), and 10Y Treasury yields dropped 3bps (down 6bps from their overnight open). As we stand S&P 500 futures appear poised at an important trend-line tipping point in this move as Draghi's dreams are delayed to mid September and the world stops believing - as there is market talk also that Netherlands, Finland, Slovakia and Estonia are said to back the German plan.
and the Bain way...
Today's Durable Goods number was blistering, if only on the headline. Coming at $230.7 billion, it was up a whopping $9.4 billion or 4.2%, on expectations of a 2.5% increase. The reason for the surge: the volatile transportation segment, which rose 14.1% to $80.4 billion. This is entirely due to Boeing aircraft orders, which rose to 260 this year compared to 10% of that a year ago, which however, as Quantas reminded us yesterday, can and will be promptly reversed (see: "Boeing hit by 'biggest-ever 787 order cancellation'"). In other words next month will be a headline disaster. So what happened beneath the headline when excluding volatile series: well - Durable Goods ex-transportations decline -0.4% in July, missing expectations of a +0.5% print, with the June number revised down from -1.1% to -2.2%. It gets worse: Nondefense capital goods excluding aircraft tumbled in July, and imploded to -3.4%, crashing below expectations of a -0.2% print, with the previous print revised from -1.4% to -2.7%). This means that indeed the brief blip higher in economic activity in the summer was largely transitory and was purely a byproduct of seasonal adjustment. Expect cuts to Q3 GDP forecasts to commence imminently by the sellside lemmings.
Color us unsurprised; but the UK's Independent is reporting that American officials are worried that if the Troika decides Greece has not done enough to meet its deficit targets, it will withhold the money - triggering Greece's exit from the eurozone weeks before the presidential election. British government sources have suggested the Obama administration is urging eurozone Governments to hold off from taking any drastic action before then - fearing the resulting market destabilization could damage President Obama's re-election prospects. The Troika are expected to report in time for an 8 October meeting of eurozone finance ministers which will decide on whether to disburse Greece's next EUR31bn aid tranche, promised under the terms of the bailout for the country. European leaders are thought to be sympathetic to the Obama lobbying, fearing that, under pressure from his party in Congress, Mitt Romney would be a more isolationist president than Mr Obama. So once again GRExit is assured economically; but it is an entirely political decision.
There is a frequent tendency to over state the importance of the Fed and its policies and ignore the primary fundamentals driving the gold market which are what we have long termed the ‘MSGM’ fundamentals. As long as the MSGM fundamentals remain sound than there is little risk of gold and silver’s bull markets ending. What we term MSGM stands for macroeconomic, systemic, geopolitical and monetary risks. The precious metals medium and long term fundamentals remain bullish due to still significant macroeconomic, systemic, monetary and geopolitical risks. We caution that gold could see another sharp selloff and again test the support at €1,200/oz and $1,550/oz. If we get a sharp selloff in stock markets in the traditionally weak ‘Fall’ period, gold could also fall in the short term as speculators, hedge funds etc . liquidate positions en masse. To conclude, always keep an eye on the MSGM and fade the day to day noise in the markets.
Since the GOP presidential candidate still refuses to give any substantial details on how the republicans plan to grow the country, not to mention fund the budget deficit (even as various pageview hawking blogs concurrently try to give the impression that private equity prospectuses stamped with the "confidential" seal for purely regulatory reasons will somehow provide an insight into the Bain Capital CEO's taxpaying practices, confirming that "finance for the masses" may not be the best idea), those who wish to gain some insight into the actual workings of Romney's brain may have to resort with the following Op-Ed published overnight in the WSJ titled, "What I Learned at Bain Capital: My business experience taught me how to help companies grow—and what to do when trouble arises. When you see a problem, run toward it before the problem gets worse." Read it - it may well be the only public policy "prescription" out of the republican before the election.