Submitted by Bill Blain via Mint Partners,
Y'day was another less than convincing session. Indices off recent tops and Europe weaker. Treasuries tumbled then rallied part way back on less than stellar retail sales report. It rather feels like we are going through the motions with little conviction one way or another (even with today's mini-melt-up). Markets crave direction. So I'm reading the news and reports and waiting for the buy or sell signal.
What I'd like to see is the JGB curve bull-flatten to restore faith in Global easing and the asset grabathon. Don’t fight Kuroda – it will happen.. but when? That's the macro-trade. But the short-term trade may be to hedge some risk, like the Nikkei's recent gains (looks over-bought on RSIs), and think about how to hedge bursting bubble risks in the credit markets. (We're working with a number of funds at present on hedge ideas for hi-yield books and have found some particularly interesting ideas we'd be happy to share. Like all good things they are essentially simple approaches... and not too expensive!)
Or is there something bigger going-on just behind the horizon? A "No-See-Em" that is about to confirm a particular market direction? After all... the global economy is either growing, is set for growth, or this recession is becoming a long-term depression. Even the hordes of first year investment banking 101s know depression means long term low yields!
So let’s take a look at what's going on for signs of the hidden menace.. (if you can't be bothered with all the usual cynicism about new issues, Yoorp, banks and whatever, cut to the bottom paragraphs and tag the threat-line..)
First up is the new issue market, which goes on and on and on like a Duracell bunny. Even Petrobras launching an 11 bln deal failed to ignite much excitement - and don't call it emerging market debt.... its well and truly emerged. Much demand flowed from the fact index followers have to play the bonds rather than the usual factors driving new issues at the moment - yield at any cost! Belief in the credit? Please… that is so yesterday. When the new issue spigot turns off... widening new bonds will trigger wider spreads across all sectors. Pop.
(Most readers will be familiar with the Ukrainian Chicken Farm Moment theory of the new issue market... we have more signs it has arrived. Thanks to readers for informing me about S&P holding a conference on the Ukrainian credit markets in Kiev or the more serious news Chicken exports to former Russian states have been stopped to check for salmonella and listeriosus after complaints.. (I shall be doing Mastermind later this year with my specialist subject of the Ukrainian agribusiness sector..hey.. it’s a hobby...!))
Second: perhaps the menace comes from the financial sector..? How many other European banks are vulnerable to a Co-Op style collapse? The UK's venerable mutual bank finds itself short-capital to the tune of GBP 2 bln and relying on asset sales to raise the dosh. Oh dear. Confidence is truly buried on that one. The bank's secondary sub capital deals have gone stratospheric in yield terms, but who wants to buy 18% yielding 5-yr paper when the threat of subordinated bail-in is so apparent. With the Europhobic UK press telling us Spain is effectively equally bust... I ask again.. how many other banks are in a similar mess? And how easy for them to find capital in the face of a gridlocked European decision process? Pop.
Third: which neatly leads us to the hope Yoorp will pony up more dosh to recapitalise banks. Get real. It’s a national responsibility. Or maybe the threat comes from the the Euro minister gab-fest as tensions twixt Germany and France on treaties, austerity and bailouts reach a crescendo later this week. Fish slapping dance anyone? Nope.. I suspect we will have the usual lots of talk, less listening and the Eurocrats behind the scenes papering over the cracks.. Pop.
Unfortunately there are really IMPORTANT things to worry about...
I mentioned China exports a few times last week and got a deluge of "angry letters" from analysts across the street complaining they have been focused on the apparent inconsistencies in the data between China and Hong Kong for months. Our own macro-tactics strategist, the redoubtable Patrick Perret-Green, points out the trade statistics across the rest of China (ie excluding Hong Kong) show an equally disturbing picture... Even after smoothing the data to account for the New Year holiday, growth has barely touched 6.4% over last 6 months.
Patrick is not the only analyst who has long suspected Chinese numbers are like a take-away dinner.. leaves you hungry 30 mins later. He guesses that after stripping out the "inconsistencies", the brutal truth may be Chinese growth is as low as 5%... which highlights just how critical it is Japan acts a regional and global growth driver. The alternative will be one hell of mess. POP!
Patrick makes the point the market isn’t prepared for this..