Wednesday may be the new Tuesday (which halted its relentless and statistically impossible streak of 20 out of 20 up DJIA days last week), if only in terms of the overnight no news stock futures ramp, which today is back with a vengeance. In a session that was devoid of any news, the e-Mini is up enough to practically erase all of yesterday's losses. Whether this is due to a relatively calm Nikkei trading session, to no further surge (or collapse) in the USDJPY, or to the 10 Year trading flat inside 2.20% is unclear. What is clear is that the bipolar market swings from extreme to extreme on speculation about the largely irrelevant topic of whether the Fed will taper (because if it does, it will be very promptly followed by an untapering once risk assets around the world implode.)
Deutsche's Jim Reid had some observations on just this in his overnight note:
I think the recent bout of EM weakness will force the Fed to be very careful about tapering and in the end force them to prolong QE beyond the point they'd ideally like and beyond market expectations. The Fed has assumed responsibilities beyond the US economy over recent years and they will surely have to consider the impact their actions will have on the global economy and asset prices. It’s not just about the US economy in our opinion. while we agreed that the fundamentals continue to be worrying (I think in DM too), the Fed probably have it in their power to stabilise markets by easing off the tapering discussion. However this is unlikely to be immediate and volatile markets are likely in the days/weeks ahead until we have a bit more clarity on the Fed. As we've said a few times in recent quarters, markets are addicted to liquidity and it’s not going to be easy to wean them off this.
Ironically, the market is banging its head over a phenomenon - a taper - which we have seen on two prior occasions - the end of QE1 and QE2. What happened after, is best summarized by the chart below: gray areas indicate "tapering."
[21]
What is not shown is the surge in yields that accompanies the drop in equities. So there you have it.
There is little on the docket, with just MBA mortgage out and which just had a modest dead cat bounce rising 5.0% following last week's -11.5% ongoing crash. Which means the market will continue to swing from extreme to extreme on rumor, and on speculation if this particular
What little news there was is summarized in bulletin form courtesy of BBG:
- Treasuries steady as JPY falls vs USD overnight; 10Y notes yield 2.19% in WI trading before Treasury sells $21b in reopening. Stopout yield at that level would be highest since Oct. 2011; drew 1.81% in May.
- Bid-to-cover at yesterday’s 3Y auction was lowest since Dec. 2010; notes awarded at 0.581%, 0.4bps above 1pm WI, first tail by a 3Y since Aug 2010
- Bank of Japan Governor Kuroda’s conviction his April plan to double the nation’s monetary base will be enough to end deflation is confronting its biggest test with a sustained sell-off in stocks
- Traders are convinced the entire world is moving away from monetary stimulus, FTN economist Chris Low wrote in client note late yesterday
- U.K. jobless claims fell 8.6k to 1.51m in April, more than forecast
- Euro-area industrial production rose 0.4% in April, more than forecast, from revised 0.9% gain in March
- Traders at some of the world’s biggest banks manipulated benchmark forex rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice
- Greece became the first developed nation to be cut to emerging-market status by MSCI Inc. after the local stock index plunged 83 percent since 2007; Qatar and U.A.E. raised to EM, Morocco cut to frontier
- Sovereign yields mostly lower. Asian stocks lower, Nikkei -0.2%; China closed for holiday. European stock markets, U.S. equity index futures higher. WTI crude, metals fall
DB's Jim Reid recaps the balance of overnight news and sentiment:
It was another challenging day yesterday which has spilled over into the overnight session. EM equities in Indonesia (-1.4%), Thailand (- 0.9%) and Korea (-0.5%) are all trading lower. However, it’s the Nikkei (-1.2%) and TOPIX (-1.1%) which are again leading the losses in Asia, not helped by dollar-yen which remains near yesterday’s lows of 96. By sector, Japanese real estate stocks continue to do poorly following the BoJ’s decision yesterday not to expand J-REIT purchases. The TOPIX Real Estate index is down 2.3% as we type, and follows a 4.1% loss yesterday. The index is down more than 25% since early April. Banks (-1.7%) and insurance companies (-1.3%) are also leading the declines in Japanese equities this morning. On a more positive note for Abenomics (I think), Kyodo News is reporting that Apple has raised the prices of its Macbook Pro and iMacs in Japan by around 10% in response to the weaker yen. This follows price rises on its iPad and iPod range last month. Outside of Japan, markets are quieter with Hong Kong and China in public holiday mode. Asian credit is about 1-2bp wider, across both the corporate and sovereign markets, with flows more evenly balanced following yesterday’s sharp selloff. In currencies, AUDUSD (+0.4%) has
recovered most of yesterday’s losses to trade at 0.946.
Yesterday’s weakness in EM was fairly aggressive both in terms of its depth and width. The Brazilian real and South African rand touched four year lows against the USD dollar, at around the same time as 10yr yields in both countries hit YTD highs of 10.7% and 7.7% respectively. In EM equities, the MSCI EM index (-1.9%) recorded its second worst day performance of the year to date. Major indices in Mexico (-2%), Brazil (-3%) and South Africa (-3.4%) continued to weaken, which also weighed on sentiment in US equities (S&P500 -1.0%). In Turkey the ISE 100 index lost 1.8% as police moved to clear demonstrators from Taksim Square and its central bank announced a number of measures to support the lira. The Indian rupee fell its lowest level against the USD since Bloomberg records began in 1973. The weakness across the commodities complex including copper (-1.4%), gold (- 0.6%), nickel (-2.5%) only served to compound the worries in EM.
Returning to DM, it was interesting to see the interplay between UST yields and credit markets. 10yr UST yields traded all the way up to 2.29% at one stage yesterday, which coincided with the day’s wides for the European iTraxx and Crossover of +8bp and 27bp respectively. From there, UST yields rallied more than 10bp to close at 2.185% or a change of -3bp on the day, which together with short covering, helped spur a late rally in European credit. At the closing bell, European iTraxx and Crossover finished 5bp and 13bp wider on the day.
Looking at the day ahead, we have a relatively quiet 24 hours ahead data-wise with Euroarea IP, UK unemployment and US MBA mortgage applications the main data releases.